PROSPECTUS
2,300,000 Shares
[PINNACLE LOGO GRAPHIC HERE]
Common Stock
Of the 2,300,000 shares of Common Stock offered hereby, 2,000,000 are
being sold by Pinnacle Systems, Inc. ("Pinnacle" or the "Company") and 300,000
are being sold by the Selling Shareholders. The Company will not receive any of
the proceeds from the sale of shares by the Selling Shareholders. See
"Principal and Selling Shareholders."
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol PCLE. On November 20, 1997, the last reported sale price for the
Common Stock was $26.00 per share. See "Price Range of Common Stock."
------------
The shares offered hereby involve a high degree of risk.
See "Risk Factors" commencing on page 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount (1) Company (2) Shareholders
<S> <C> <C> <C> <C>
Per Share ...... $ 25.00 $ 1.31 $ 23.69 $ 23.69
Total (3) ...... $57,500,000 $3,013,000 $47,380,000 $ 7,107,000
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $450,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 345,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount, and Proceeds to Company will be
$66,125,000, $3,464,950 and $55,553,050, respectively. See "Underwriting."
------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be made
available for delivery on or about November 26, 1997, at the office of the
agent of Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
VOLPE BROWN WHELAN & COMPANY
November 21, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's Regional Offices at Seven World Trade Center, 13th Floor,
New York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be
obtained from the Public Reference Section of the Commission, at 450 Fifth
Street, Judiciary Plaza, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants, such as
the Company, that file electronically with the Commission. The address of the
site is http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq
National Market. Reports, proxy statements and other information concerning the
Company can also be inspected at the National Association of Securities
Dealers, Inc., 1735 K Street N.W., Washington, D.C. 20002.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended ("the Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. Copies of the Registration
Statement, including all exhibits thereto, may be obtained from the
Commission's principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission, or may be examined without charge at the offices
of the Commission described above.
INFORMATION INCORPORATED BY REFERENCE
The following documents previously filed by the Company with the
Commission pursuant to the Exchange Act are incorporated herein by reference in
this Prospectus: (i) Annual Report on Form 10-K for the year ended June 30,
1997; (ii) the Current Report on Form 8-K filed on September 12, 1997 and
amended on October 28, 1997; (iii) Quarterly Report on Form 10-Q for the
quarter ended September 26, 1997; (iv) the description of the Company's Common
Stock contained in its Registration Statement on Form 8-A filed under the
Exchange Act with the Commission and which became effective on September 8,
1994; and (v) the description of the Company's Preferred Share Purchase Rights
contained in its Registration Statement on Form 8-A under the Exchange Act
filed with the Commission and which became effective on February 17, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of securities contemplated hereby shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person, a copy of any and all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference therein). Requests for such copies should be directed
to: Chief Financial Officer, Pinnacle Systems, Inc., 280 North Bernardo Avenue,
Mountain View, California 94043; telephone number (650) 237-1600.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document that also is or is deemed to be
incorporated by reference herein modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors."
The Company
Pinnacle Systems, Inc. ("Pinnacle" or the "Company") designs,
manufactures, markets and supports computer-based video post-production
products to serve the broadcast, desktop and consumer markets. The Company's
products incorporate specialized real time video processing technologies to
perform a variety of video post-production functions such as the addition of
special effects, graphics and titles to multiple streams of live or recorded
video material. To address the broadcast market, the Company offers high
performance, specialized Windows NT-based solutions for high-end,
post-production and broadcast on-air applications. For the desktop market, the
Company provides real time video manipulation tools to support both linear, or
tape-based, and non-linear, or computer-based, editing environments. To address
the consumer market, the Company offers low cost, easy to use video editing
solutions that allow consumers to edit their home videos using a personal
computer, camcorder and VCR.
Historically, the video production industry has focused on providing
program material for broadcast television and advertising using expensive,
dedicated video production equipment linked together in a complex system to
form a video "editing suite." Recently, new and expanding channels of video
content distribution, including cable television, direct satellite broadcast,
video rentals, the Internet, CD-ROM, DVD and video-on-demand, have led to a
rapid increase in demand for video content for a wide variety of additional
applications that require less expensive and easier to use editing approaches.
In response to this demand, computer-based video solutions combining personal
computers with specialized video processing technology have emerged to provide
video quality comparable to that of traditional editing suites at significantly
lower cost. As a result, computer-based video solutions are increasingly
replacing the traditional editing suites. In addition, the popularity of
camcorders, VCRs and personal computers has fueled the growth of an emerging
consumer market for low cost video production products.
Pinnacle's goal is to become the leading supplier of computer-based video
post-production products to the broadcast, desktop and consumer markets. To
achieve this goal, the Company plans to expand and leverage its core
technologies, establish an industry standard video processing platform, develop
and expand its worldwide sales and distribution organization, and pursue
opportunities to acquire complementary businesses, products and technologies.
In its efforts to achieve its goal, the Company recently made three
aquisitions. In June 1996, the Company acquired the VideoDirector product line
from Gold Disk, Inc. ("Gold Disk") which allowed the Company to enter the
consumer video editing market. In April 1997, the Company purchased the Deko
titling systems product line and technology from Digital GraphiX, Inc.
("Digital Graphix") which provided the Company with powerful Windows NT-based
text and graphics tools for the broadcast market. Finally, in August 1997, the
Company acquired the Digital Video Group (the "Miro Acquisition") from miro
Computer Products AG ("Miro") and began selling the miroVideo product line. The
Miro Acquisition expanded the scope of the Company's products to encompass
certain COmpression/DECompression ("CODEC") technology required to control and
transfer video into and out of the computer ("video capture").
The Company is organized into separate business groups to serve the
broadcast, desktop and consumer markets. The Company believes this
organizational structure enables it to effectively address the different
product requirements, more rapidly implement its core technologies, more
effectively manage distribution channels and anticipate and respond to changes
in each of these markets. By focusing on computer-based video solutions and
offering products targeted specifically for the broadcast, desktop and consumer
markets, the Company believes that it is well-positioned to grow and capitalize
on changes in the video production industry.
The Company was incorporated in California in 1986 and maintains its
executive offices at 280 North Bernardo Avenue, Mountain View, California
94043. Its telephone number is (650) 237-1600. "Pinnacle Systems" and
"VideoDirector" are registered trademarks of the Company and the Company
believes that all of its product names, other than Alladin, are trademarks of
the Company. This Prospectus also includes names and marks of companies other
than the Company.
3
<PAGE>
<TABLE>
The Offering
<S> <C>
Common Stock offered by the Company ............... 2,000,000 shares
Common Stock offered by the Selling Shareholders ... 300,000 shares
Common Stock to be outstanding after the offering 9,580,152 shares (1)
Use of proceeds .................................... For working capital and other
general corporate purposes
Nasdaq National Market symbol ..................... PCLE
</TABLE>
<TABLE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<CAPTION>
Three Months Ended
Fiscal Year Ended June 30, September 30,
--------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1996 1997
-------- --------- --------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales .............................. $7,331 $10,230 $22,193 $46,151 $ 37,482 $11,443 $ 16,514
Gross profit ........................... 3,515 5,173 10,902 22,297 13,485 5,447 8,778
Operating income (loss) (2) ............ (532) (474) 2,069 2,073 (15,357) 207 (16,746)
Net income (loss) (2) .................. (816) (566) 2,240 3,684 (14,935) 612 (16,347)
Net income (loss) per share (2)(3) ...... $(0.21) $ 0.44 $ 0.48 $ (2.02) $ 0.08 $ (2.21)
Shares used to compute net
income (loss) per share (3) ............ 2,745 5,110 7,689 7,402 7,823 7,402
</TABLE>
September 30, 1997
-------------------------------
Actual As Adjusted (4)
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Consolidated Balance Sheet Data:
Working capital .................. $ 42,308 $ 89,238
Total assets (5) .................. 80,717 127,647
Retained earnings (deficit) ...... (28,952) (28,952)
Shareholders' equity ............ 51,446 98,376
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(1) Based upon shares of Common Stock outstanding as of September 30, 1997.
Excludes (i) 2,006,984 shares of Common Stock issuable upon exercise of
options outstanding as of September 30, 1997, (ii) 851,717 shares of
Common Stock reserved for future issuance under the Company's stock plans
and (iii) any shares that may be issued in connection with the earnout
provisions of the Miro Acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 6 of
Notes to Consolidated Financial Statements.
(2) Includes costs associated with acquisitions of approximately $4.0 million,
$5.2 million and $17.4 million for the fiscal years ended June 30, 1996
and 1997 and the three months ended September 30, 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(3) See Notes 1 and 6 of Notes to Consolidated Financial Statements.
(4) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 2,000,000 shares of Common Stock offered by the Company hereby. See
"Capitalization."
(5) Subsequent to September 30, 1997, the Company's total assets were reduced
by $15.2 million in connection with the payment of the cash consideration
associated with the Miro Acquisition.
--------------------
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting."
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in the Prospectus. The following risk factors
should be considered carefully in addition to the other information contained
or incorporated by reference in this Prospectus before purchasing the shares of
Common Stock offered hereby.
Significant Fluctuations in Operating Results. The Company's quarterly and
annual operating results have in the past varied significantly and are expected
to vary significantly in the future as a result of a number of factors,
including the timing of significant orders from and shipments to major OEM
customers, in particular Avid Technology, Inc. ("Avid"), the timing and market
acceptance of new products or technological advances by the Company and its
competitors, the Company's success in developing, introducing and shipping new
products, such as the recently announced ReelTime product, the mix of
distribution channels through which the Company's products are sold, changes in
pricing policies by the Company and its competitors, the accuracy of the
Company's and resellers' forecasts of end user demand, the timing and amount of
any inventory write downs, the ability of the Company to obtain sufficient
supplies of the major subassemblies used in its products from its
subcontractors, the ability of the Company and its subcontractors to obtain
sufficient supplies of sole or limited source components for the Company's
products, the timing and level of product returns, particularly from the
consumer distribution channels, foreign currency fluctuations, costs associated
with the acquisition of other companies, businesses or products, the ability of
the Company to integrate acquired companies, businesses or products, such as
the product line acquired from Miro, and general economic conditions, both
domestically and internationally. The Company's operating expense levels are
based, in part, on its expectations of future revenue and, as a result, net
income would be disproportionately affected by a shortfall in net sales. For
example, in the quarter ended December 31, 1996, the Company's net sales
decreased significantly from the prior quarter as a result of a decline in
sales across all product lines, the most significant of which was a decline in
sales of desktop products to OEMs, in particular Avid. As a result of the
decrease in net sales, the Company incurred a significant loss during that
quarter.
The Company also experiences significant fluctuations in orders and sales
due to seasonal fluctuations, the timing of major trade shows and the sale of
consumer products in anticipation of the holiday season. Sales usually slow
down during the summer months, especially in Europe. The Company attends a
number of annual trade shows which can influence the order pattern of products,
including the National Association of Broadcasters ("NAB") convention held in
April, the International Broadcasters Convention ("IBC") held in September and
the COMDEX exhibition held in November. Due to these factors and the potential
quarterly fluctuations in operating results, the Company believes that
quarter-to-quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
See "--Concentration of Sales to OEMs" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risks Associated with Recent Acquisitions; Potential Future
Acquisitions. In August 1997, the Company completed the Miro Acquisition. In
addition, the Company purchased the Deko product line and technology from
Digital Graphix in April 1997 and the VideoDirector product line from Gold Disk
in June 1996. The integration of acquired groups and product lines is typically
difficult, time consuming and subject to a number of inherent risks. The
integration of product lines requires the coordination of the research and
development, manufacturing, sales, marketing and service efforts between the
acquired groups and the Company. Such combinations require substantial
attention from management. The diversion of the attention of management and any
difficulties encountered in the transition process could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the process of assimilating and managing acquisitions
could cause the interruption of, or a loss of momentum in, the existing
activities of the Company's business, which could have a material adverse
effect on the Company. There can be no assurance that the Company will realize
the anticipated benefits of any of its acquisitions. See "--No Assurance that
Company Can Manage Growth" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In the case of the Miro Acquisition, the difficulties of assimilation may
be increased by the need to coordinate geographically separate organizations,
integrate personnel with disparate business backgrounds and
5
<PAGE>
languages and combine two different corporate cultures. Because the Miro
Acquisition occurred so recently, the Company has had limited experience
managing the Digital Video Group. The Miro Acquisition could cause existing and
potential customers of the Company to delay or cancel orders for products due
to concerns and uncertainty over product integration and support. Such a delay
or cancellation of orders could have a material adverse effect on the Company's
business, financial condition and results of operations, particularly because
of the increased fixed operating expenses that will be incurred as a result of
the Miro Acquisition. In addition to the $17.4 million in acquisition related
costs incurred in the quarter ended September 30, 1997, the Company expects to
incur additional expenses associated with the integration of the Miro
Acquisition. As a result of the foregoing, there can be no assurance that the
Miro Acquisition will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Future acquisitions by the Company may result in the diversion of
management's attention from the day-to-day operations of the Company's business
and may include numerous other risks, including difficulties in the integration
of the operations, products and personnel of the acquired companies. Future
acquisitions by the Company have the potential to result in dilutive issuances
of equity securities, the incurrence of debt and amortization expenses related
to goodwill and other intangible assets. While there are currently no such
acquisitions planned or being negotiated, Company management frequently
evaluates the strategic opportunities available to it and may in the near- or
long-term pursue acquisitions of complementary businesses, products or
technologies.
Risks Associated with the Consumer Market. The Company entered the
consumer market with the purchase of the VideoDirector product line in June
1996 and began shipping the Company's first internally developed consumer
product, the VideoDirector Studio 200, in March 1997. In addition, in August
1997 the Company acquired certain of Miro's consumer products, as well Miro's
European sales organization. The Company anticipates expending considerable
resources to develop, market and sell products into the consumer market. The
Company has limited experience marketing and selling products through the
consumer distribution channels. To be successful in this market, the Company
must establish and maintain effective consumer distribution channels including
distributors, electronic retail stores and telephone and Internet orders.
Because the VideoDirector Studio 200 must be used with a personal computer, a
camcorder and a VCR, none of which is supplied by the Company, consumer
acceptance will be adversely affected to the extent end users experience
difficulties installing and using the VideoDirector Studio 200 with these other
electronic components. In addition, the Company faces additional or increased
risks associated with inventory obsolescence and inventory returns as products
sold into the consumer channel typically provide stock rotation and price
protection rights to the reseller. There can be no assurance that the consumer
video market will continue to develop, or that the Company can successfully
compete against current and future competitors in this market. The failure of
the Company to successfully develop, introduce and sell products in this market
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Dependence on Resellers; Absence of
Direct Sales Force; Expansion of Distribution Channels."
Concentration of Sales to OEMs. The Company has been highly dependent on
sales of its Alladin and Genie products to OEMs, in particular Avid. This
concentration of sales subjects the Company to a number of risks, in particular
the risk that its operating results will vary on a quarter-to-quarter basis as
a result of variations in the ordering patterns of OEM customers. The Company's
results of operations have in the past and could in the future be materially
adversely affected by the failure of anticipated orders to materialize, by
deferrals or cancellations of orders, or if overall OEM demand were to decline.
For example, since sales to Avid began in fiscal 1996, quarterly sales to Avid
have fluctuated substantially from a high of $5.9 million to a low of $1.0
million, and the Company anticipates that such fluctuations may continue. If
sales to OEM customers, in particular Avid, were to decrease, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Technological Change and Obsolescence; Risks Associated with Development
and Introduction of New Products. The video post-production equipment industry
is characterized by rapidly changing technology, evolving industry standards
and frequent new product introductions. The introduction of products embodying
new technologies or the emergence of new industry standards can render existing
products obsolete or unmarketable. The development of new, technologically
advanced products is a complex and uncertain process
6
<PAGE>
requiring high levels of innovation, as well as accurate anticipation of
technological and market trends. The Company is critically dependent on the
successful introduction, market acceptance, manufacture and sale of new
products that offer its customers additional features and enhanced performance
at competitive prices. These products include those that the Company has
recently introduced, such as the VideoDirector Studio 200 which began shipping
in March 1997, and DVExtreme and Lightning, each of which began shipping in
June 1997, as well as products that have not yet been commercially launched,
such as ReelTime, and the products that the Company has recently acquired, such
as the Miro products. Once a new product is developed, the Company must rapidly
commence volume production, a process that requires accurate forecasting of
customer requirements and the attainment of acceptable manufacturing costs. The
introduction of new or enhanced products also requires the Company to manage
the transition from older, displaced products in order to minimize disruption
in customer ordering patterns, avoid excessive levels of older product
inventories and ensure that adequate supplies of new products can be delivered
to meet customer demand. For example, the introduction of DVExtreme and
Lightning has resulted in a significant decline in sales of Prizm and Flashfile
and a write down of inventory. The Company has experienced delays in the
shipment of new products in the past, and these delays adversely affected sales
of existing products and results of operations. Delays in the introduction or
shipment of new or enhanced products, the inability of the Company to timely
develop and introduce such new products, the failure of such products to gain
significant market acceptance or problems associated with new product
transitions could adversely affect the Company's business, financial condition
and results of operations, particularly on a quarterly basis. In addition, as
is typical with any new product introduction, quality and reliability problems
may arise and any such problems could result in reduced bookings, manufacturing
rework costs, delays in collecting accounts receivable, additional service
warranty costs and a limitation on market acceptance of the product. See
"Business--Products."
Competition. The market for the Company's products is highly competitive.
The Company anticipates increased competition in each of the broadcast, desktop
and consumer video production markets, particularly since the industry is
undergoing a period of consolidation. Competition for the Company's broadcast
products is generally based on product performance, breadth of product line,
service and support, market presence and price. The Company's competitors in
the broadcast market include companies with substantially greater financial,
technical, marketing, sales and customer support resources, greater name
recognition and larger installed customer bases than the Company. In addition,
these competitors have established relationships with current and potential
customers of the Company and some offer a wide variety of video equipment which
can be bundled in certain large system sales. In the desktop market, the
Company faces competition from traditional video suppliers, providers of
desktop editing solutions, video software applications, and others. In
addition, suppliers of video manipulation software may develop products which
compete directly with those of the Company. The consumer market in which
VideoDirector Studio 200 and the miroVideo products compete is an emerging
market and the sources of competition are not yet well defined. There are
several established video companies that are currently offering products or
solutions that compete directly or indirectly with the Company's consumer
products by providing some or all of the same features and video editing
capabilities. In addition, the Company expects that existing manufacturers and
new market entrants will develop new, higher performance, lower cost consumer
video products that may compete directly with the Company's consumer products.
The Company expects that potential competition in this market is likely to come
from existing video editing companies, software application companies, or new
entrants into the market, many of which have the financial resources and
marketing and technical ability to develop products for the consumer video
market. Increased competition in any of these markets could result in price
reductions, reduced margins and loss of market share, any of which could
materially and adversely affect the Company's business, financial condition and
results of operations. See "Business--Competition."
Dependence on Contract Manufacturers and Single or Limited Source
Suppliers. The Company relies on subcontractors to manufacture its consumer
products and the major subassemblies of its broadcast and desktop products. The
Company and its manufacturing subcontractors are dependent upon single or
limited source suppliers for a number of components and parts used in the
Company's products, including certain key integrated circuits. The Company's
strategy to rely on subcontractors and single source suppliers involves a
number of significant risks, including the loss of control over the
manufacturing process, the potential absence of adequate capacity, potential
delays in lead times, the unavailability of certain process technologies and
7
<PAGE>
reduced control over delivery schedules, manufacturing yields, quality and
costs. The Company and its subcontractors have in the past experienced delays
in receiving adequate supplies of sole source components. In the event that any
significant subcontractor or single or limited source suppliers were to become
unable or unwilling to continue to manufacture these subassemblies or provide
critical components in required volumes, the Company would have to identify and
qualify acceptable replacements or redesign its products with different
components. No assurance can be given that any additional sources would be
available to the Company or that product redesign would be feasible on a timely
basis or at acceptable costs. Also, because of the reliance on these single or
limited source components, the Company may be subject to increases in component
costs, which could have an adverse effect on the Company's business financial
condition and results of operations. Any extended interruption in the supply of
or increase in the cost of the products, subassemblies or components
manufactured by third party subcontractors or suppliers could materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business--Manufacturing and Suppliers."
Dependence on Resellers; Absence of Direct Sales Force; Expansion of
Distribution Channels. The Company distributes its products primarily through a
network of dealers, OEMs, retailers and other resellers. Accordingly, the
Company is dependent upon these resellers to assist in promoting market
acceptance of its products. There can be no assurance that these dealers, OEMs
and retailers will devote the resources necessary to provide effective sales
and marketing support to the Company. The Company's dealers and retailers are
generally not contractually committed to make future purchases of the Company's
products and therefore could discontinue carrying the Company's products in
favor of a competitor's product or for any other reason. Because the Company
sells a significant portion of its products through dealers and retailers, it
is difficult to ascertain current demand for existing products and anticipated
demand for newly introduced products such as DVExtreme, Lightning,
VideoDirector Studio 200 and ReelTime regardless of the level of dealer
inventory for the Company's products. Moreover, initial orders for a new
product may be caused by the interest of dealers in having the latest product
on hand for potential future sale to end users. As a result, initial stocking
orders for a new product, such as DVExtreme, Lightning, VideoDirector Studio
200 and ReelTime, may not be indicative of long-term end user demand. In
addition, the Company is dependent upon the continued viability and financial
stability of these dealers and retailers, some of which are small organizations
with limited capital. The Company believes that its future growth and success
will continue to depend in large part upon its dealer and retail channels.
Accordingly, if a significant number of its dealers and/or retailers were to
experience financial difficulties, or otherwise become unable or unwilling to
promote, sell or pay for the Company's products, the Company's results of
operations could be adversely affected.
Recently, as the Company has increased its consumer products offerings,
the Company has expanded its distribution network to include several consumer
channels, including large distributors of products to computer software and
hardware retailers, which in turn sell products to end users. The Company also
sells its consumer products directly to some retailers. The Company's
agreements with retailers and distributors generally obligate the Company to
provide price protection to such retailers and distributors and, while the
agreements limit the conditions under which product can be returned to the
Company, there can be no assurance that the Company will not be faced with
significant product returns or price protection obligations. In the event the
Company experiences significant product returns or price protection
obligations, the Company's business, financial condition and results of
operations could be materially adversely affected. There can be no assurance
that the distributors or retailers will continue to stock and sell the
Company's consumer products. Moreover, distribution channels for consumer
retail products have been characterized by rapid change and financial
difficulties of distributors. The termination of one or more of the Company's
relationships with retailers or retail distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations. To the extent that the Company successfully establishes and expands
its retail distribution channels, its agreements or arrangements are unlikely
to be exclusive and retailers and retail distributors are likely to carry
competing products. In connection with the Miro Acquisition, the Company
acquired Miro's European sales organization. There can be no assurance that the
Company will successfully integrate its existing sales organization with that
acquired in the Miro Acquisition or that the Company will be able to utilize
and manage the Miro sales organization effectively. In addition, there can be
no assurance that the dealers, OEMs, distributors and retailers who comprise
the Miro distribution network will continue their relationship with the
Company.
8
<PAGE>
Any of the foregoing events could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--Risks
Associated with the Consumer Market" and "Business--Marketing, Sales and
Service."
Dependence on Key Personnel. The Company's success depends in part upon
the continued service of its senior management and key technical personnel.
None of the Company's senior management or key technical personnel is bound by
an employment agreement or is the subject of key man life insurance. The
Company's success is also dependent upon its ability to attract and retain
qualified technical and managerial personnel. Significant competition exists
for such personnel and there can be no assurance that the Company can retain
its key technical and managerial employees or that it will be able to attract,
assimilate and retain such other highly-qualified technical and managerial
personnel as may be required in the future. There can be no assurance that
employees will not leave the Company and subsequently compete against the
Company, or that contractors will not perform services for competitors of the
Company. If the Company is unable to retain key personnel, its business,
financial condition and results of operations could be adversely affected.
Dependence on Proprietary Technology. The Company's ability to compete
successfully and achieve future revenue growth will depend, in part, on its
ability to protect its proprietary technology and operate without infringing
the rights of others. The Company relies on a combination of patent, copyright,
trademark and trade secret laws and other intellectual property protection
methods to protect its proprietary technology. In addition, the Company
generally enters into confidentiality and nondisclosure agreements with its
employees and OEM customers and limits access to and distribution of its
proprietary technology. The Company currently holds two United States patents
covering certain aspects of its technologies for digital video effects and has
an application pending for a third patent. There can be no assurance that the
Company's pending patent application or any future patent applications will be
allowed or that issued patents will provide the Company with a competitive
advantage. In addition, there can be no assurance that others will not
independently develop substantially equivalent intellectual property or
otherwise gain access to the Company's trade secrets or intellectual property,
or disclose such intellectual property or trade secrets, or that the Company
can meaningfully protect its intellectual property. A failure by the Company to
meaningfully protect its intellectual property could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Proprietary Rights and Licenses."
Risks of Third-Party Claims of Infringement. There has been substantial
litigation regarding patent, trademark and other intellectual property rights
involving technology companies. In the future, litigation may be necessary to
enforce any patents issued to the Company, to protect its trade secrets,
trademarks and other intellectual property rights owned by the Company, or to
defend the Company against claimed infringement. Any such litigation could be
costly and may result in a diversion of management's attention, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determination in such litigation
could result in the loss of the Company's proprietary rights, subject the
Company to significant liabilities, require the Company to seek licenses from
third parties or prevent the Company from manufacturing or selling its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the course of its
business, the Company has in the past and may in the future receive
communications asserting that the Company's products infringe patents or other
intellectual property rights of third parties. The Company's policy is to
investigate the factual basis of such communications and to negotiate licenses
where appropriate. There can be no assurance that such communications can be
settled on commercially reasonable terms or that they will not result in
protracted and costly litigation. While it may be necessary or desirable in the
future to obtain licenses relating to one or more of its products, or relating
to current or future technologies, there can be no assurance that the Company
will be able to do so on commercially reasonable terms or at all.
International Sales Risks. Sales of the Company's products outside of
North America represented approximately 46.5%, 38.7% and 39.7% of the Company's
net sales in fiscal 1995, 1996 and 1997, respectively and 47.6% for the three
months ended September 30, 1997. The Company expects that international sales
will continue to represent a significant portion of its net sales, particularly
in light of the Miro Acquisition. The Company makes foreign currency
denominated sales in many countries, exposing itself to risks associated with
currency exchange fluctuations. Although the dollar amount of such foreign
currency denominated sales was nominal during fiscal 1997, the Company will
increase the amount of sales denominated in foreign currency
9
<PAGE>
during fiscal 1998, especially for sales of consumer products into Europe.
International sales and operations may also be subject to risks such as the
imposition of governmental controls, export license requirements, restrictions
on the export of critical technology, generally longer receivable collection
periods, political instability, trade restrictions, changes in tariffs,
difficulties in staffing and managing international operations, potential
insolvency of international dealers and difficulty in collecting accounts
receivable. There can be no assurance that these factors will not have an
adverse effect on the Company's future international sales and, consequently,
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
No Assurance that Company Can Manage Growth. The Company has in the past
experienced rapid growth and may grow at a rapid pace in the future. Such
growth could cause significant strain on management and other resources. The
Company's ability to manage its growth effectively will require it to continue
to improve and expand its management, operational and financial systems and
controls. As a result of recent acquisitions, the Company has increased the
number of its employees substantially, which increases the difficulty in
managing the Company, particularly as employees are now geographically
dispersed in North America and Europe. If the Company's management is unable to
manage growth effectively, the Company's ability to retain key personnel and
its business, financial condition and results of operations could be adversely
affected. See "--Risks Associated with Recent Acquisitions; Potential Future
Acquisitions" and "--Dependence on Key Personnel."
Management Discretion over Proceeds of the Offering. The Company currently
has no specific plan for substantially all of the proceeds of the offering. As
a consequence, the Company's management will have discretion to allocate
substantially all of the proceeds of the offering to uses which shareholders
may not deem desirable, and there can be no assurance that the proceeds can or
will be invested to yield a significant return. The Company will have
significant cash and cash equivalent balances upon completion of the offering,
substantially all of which will be invested in short-term, interest bearing,
investment grade securities for an indefinite period of time. See "Use of
Proceeds."
Certain Charter and Bylaws Provisions Could Delay or Prevent Corporate
Take-Over; Shareholder Rights Plan. Certain provisions of the Company's
Articles of Incorporation and Bylaws may have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company. The Board of Directors has the
authority to issue up to 5,000,000 shares of undesignated Preferred Stock and
to determine the rights, preferences, privileges and restrictions of such
shares without any further vote or action by the shareholders. The issuance of
Preferred Stock under certain circumstances could have the effect of delaying
or preventing a change in control of the Company. In December 1996, the Board
of Directors of the Company adopted a shareholder rights plan (the "Rights
Plan"), pursuant to which, the Board declared a dividend of one Preferred Share
Purchase Right per share of Common Stock (the "Rights"). The Rights entitle
holders to purchase from the Company one one-thousandth of a share of Series A
Participating Preferred Stock at an exercise price of $65.00 (subject to
adjustment). The Rights become exercisable upon the occurrence of certain
events, including the announcement of a tender offer or exchange offer for a
specified percentage of the Company's Common Stock or the acquisition of a
specified percentage of the Company's Common Stock by a third party. The
exercise of the Rights could have the effect of delaying, deferring or
preventing a change in control of the Company, including, without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. In December 1996, in
connection with the adoption of the Rights Plan, the Board of Directors
designated 25,000 shares of Preferred Stock as Series A Participating Preferred
Stock although none of such shares have been issued. The Preferred Stock could
be issued with voting, liquidation, dividend and other rights superior to those
of the holders of Common Stock. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock.
Possible Volatility of Stock Price. The trading price of the Company's
Common Stock has in the past been and could in the future be subject to
significant fluctuations in response to quarterly variations in the Company's
operating results, announcements regarding the operating results of the
Company's OEM customers, announcements of technological innovations or new
products by the Company, its OEM customers or competitors or other events. In
the past, the Company's revenues and results of operations have been below the
expectations of public market securities analysts or investors, resulting in
significant fluctuations in the
10
<PAGE>
market price of the Company's Common Stock. It is likely that the Company's
future quarterly revenues or results of operations from time to time will not
meet the expectations of such analysts or investors, which could have an
adverse effect on the market price of the Company's Common Stock. Moreover,
stock markets have from time to time experienced extreme price and volume
fluctuations which have particularly affected the market prices for high
technology companies and which have often been unrelated to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political and market conditions, may adversely affect the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's stock, securities class action
litigation has occurred against the issuing company. There can be no assurance
that such litigation will not occur in the future with respect to the Company.
Such litigation could result in substantial costs and would at a minimum divert
management's attention and resources, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to significant liabilities. See "Price Range of Common Stock."
Shares Eligible for Future Sale. Upon the completion of this offering, the
Company will have outstanding 9,580,152 shares of Common Stock, of which
9,435,541 shares will be freely tradable without restriction.
The Company's executive officers and directors have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock during the 90 day period following
the effective date of the Registration Statement of which this Prospectus is a
part, other than the sale of up to 37,375 shares of Common Stock in the
aggregate, currently held, hereafter acquired upon the exercise of options
currently held by the executive officers or directors, or hereafter acquired by
such individuals under the Company's 1994 Employee Stock Purchase Plan.
Thereafter, all shares can be sold in the public market subject in certain
instances to volume and other restrictions of Rule 144 under the Securities
Act. The lock-up agreements may be released at any time as to all or any
portion of the shares subject to such agreements at the sole discretion of
Hambrecht & Quist LLC. In addition, upon completion of this offering, there
will be outstanding options to purchase a total of approximately 2,006,984
shares of the Company's Common Stock under the Company's stock option plans.
Sales of substantial amounts of such shares in the public market or the
prospect of such sales could adversely affect the market price of the Company's
Common Stock. The Company has agreed, subject to certain exceptions in the
Underwriting Agreement, that without the prior written consent of Hambrecht &
Quist LLC, it will not issue, offer, sell, grant options to purchase or
otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable with the Company's Common Stock or
other equity securities for a period of 90 days after the first date that any
shares of Common Stock are released for sale in the offering. See
"Underwriting."
FORWARD LOOKING INFORMATION
This Prospectus, including the information incorporated by reference
herein, contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the risk factors set forth above. Reference is made in particular to
the discussion set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report on Form
10-K for the fiscal year ended June 30, 1997 and the Quarterly Report on 10-Q
for the period ended September 26, 1997, incorporated herein by reference. In
connection with forward-looking statements which appear or are incorporated by
reference herein, prospective purchasers of the Common Stock offered hereby
should carefully consider the factors set forth in this Prospectus under "Risk
Factors."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $46,930,000
($55,103,050 if the Underwriters' over-allotment option is exercised in full).
Although the Company currently has no specific plan for substantially all of
the net proceeds of the offering, the Company believes that the availability of
substantial financial resources is important to the Company's ability to
compete. The principal reasons for the offering are to improve the Company's
financial position and to provide the Company with additional financial
flexibility to take advantage of business opportunities as they may arise,
particularly after using approximately $24.8 million in cash in connection with
acquisitions in the past two years. The Company intends to use the net proceeds
of the offering for working capital and general corporate purposes, including
the financing of accounts receivable and inventories. The amounts actually
expended for such purposes will vary significantly depending on a number of
factors, including future sales growth, the amount of cash flow from operations
and the timing of new product introductions. The Company may use a portion of
such net proceeds for strategic acquisitions of other businesses, products and
technologies that are complementary to those of the Company, although no such
acquisitions are planned or being negotiated as of the date of this Prospectus,
and no portion of the net proceeds has been allocated for any specific
acquisition. Pending such uses, the net proceeds will be invested in
short-term, interest bearing, investment grade securities. The Company will not
receive any proceeds from the sale of Common Stock by the Selling Shareholders.
See "Principal and Selling Shareholders."
<TABLE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol PCLE. The following table sets forth, for the fiscal periods
indicated, the range of high and low sale prices per share of the Common Stock
as reported by the Nasdaq National Market.
<CAPTION>
High Low
----------- ----------
<S> <C> <C>
Fiscal Year Ended June 30, 1996
First Quarter .................................... $ 33.500 $ 22.250
Second Quarter ................................. 35.500 23.000
Third Quarter .................................... 25.500 14.500
Fourth Quarter ................................. 29.500 16.500
Fiscal Year Ended June 30, 1997
First Quarter .................................... 21.250 9.250
Second Quarter ................................. 13.875 8.875
Third Quarter .................................... 15.250 9.250
Fourth Quarter ................................. 19.000 12.500
Fiscal Year Ending June 30, 1998
First Quarter .................................... 31.750 17.125
Second Quarter (through November 20, 1997) ...... 33.500 23.813
</TABLE>
On November 20, 1997, the reported last sale price of the Common Stock on
the Nasdaq National Market was $26.00 per share. As of September 30, 1997,
there were approximately 73 stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The
Company currently expects that it will retain its future earnings for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.
12
<PAGE>
<TABLE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1997 and as adjusted to give effect to the receipt of the net
proceeds from the sale of 2,000,000 shares of Common Stock offered by the
Company hereby. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the related Notes thereto included
elsewhere in this Prospectus.
<CAPTION>
September 30, 1997
----------------------------
As
Actual Adjusted
------------ -------------
(in thousands except share
amounts)
<S> <C> <C>
Long-term debt ................................................... $ 475 $ 475
--------- ----------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized, none
issued and outstanding ....................................... -- --
Common Stock, no par value; 15,000,000 shares authorized,
7,580,152 shares issued and outstanding; 9,580,152 shares issued
and outstanding as adjusted (1) .............................. 80,342 127,272
Foreign currency translation ................................. 56 56
Retained earnings (deficit) .................................... (28,952) (28,952)
--------- ----------
Total shareholders' equity ................................. 51,446 98,376
--------- ----------
Total capitalization ....................................... $ 51,921 $ 98,851
========= ==========
<FN>
- ---------------------
(1) Excludes (i) 2,006,984 shares of Common Stock issuable upon exercise of
options outstanding as of September 30, 1997, (ii) 851,717 shares of
Common Stock reserved for future issuance under the Company's stock plans
and (iii) any shares that may be issued in connection with the earnout
provisions of the Miro Acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 6 of
Notes to Consolidated Financial Statements.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The consolidated statement of operations data for
the fiscal years ended June 30, 1995, 1996 and 1997 and the consolidated
balance sheet data as of June 30, 1996 and 1997 are derived from the
consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, and are included elsewhere in this Prospectus. The consolidated
statement of operations data for the fiscal years ended June 30, 1993 and 1994
and the consolidated balance sheet data as of June 30, 1993, 1994 and 1995 are
derived from financial statements of the Company audited by KPMG Peat Marwick
LLP that are not included herein. The balance sheet data as of September 30,
1997 and the statement of operations data for the three months ended September
30, 1996 and 1997 are derived from unaudited financial statements incorporated
by reference herein. The unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of its financial position and
results of operations for these periods. Operating results for the three months
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 1998. The data presented below
should be read in conjunction with the Consolidated Financial Statements,
related Notes and other financial information included elsewhere in this
Prospectus and incorporated herein by reference.
<CAPTION>
Three Months
Ended
Fiscal Year Ended June 30, September 30,
--------------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1996 1997
------------- -------------- ---------- ---------- ------------ --------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales ........................ $ 7,331 $ 10,230 $ 22,193 $46,151 $ 37,482 $11,443 $ 16,514
Cost of sales ..................... 3,816 5,057 11,291 23,854 23,997 5,996 7,736
-------- --------- -------- -------- ---------- ------- ----------
Gross profit ..................... 3,515 5,173 10,902 22,297 13,485 5,447 8,778
-------- --------- -------- -------- ---------- ------- ----------
Operating expenses:
Engineering and product
development ..................... 1,447 1,806 2,405 5,140 7,579 1,782 2,072
Sales and marketing ............ 2,054 3,274 5,340 8,907 12,667 2,694 5,221
General and administrative ...... 546 567 1,088 2,186 3,702 764 1,271
In process research and
development .................. - - - 3,991 4,894 - 16,960
-------- --------- -------- -------- ---------- ------- ----------
Total operating expenses ...... 4,047 5,647 8,833 20,224 28,842 5,240 25,524
-------- --------- -------- -------- ---------- ------- ----------
Operating income (loss) ......... (532) (474) 2,069 2,073 (15,357) 207 (16,746)
Interest income, net ............ (282) (90) 738 3,345 2,867 763 552
-------- --------- -------- -------- ---------- ------- ----------
Income (loss) before income taxes (814) (564) 2,807 5,418 (12,490) 970 (16,194)
Income tax benefit (expense) ...... (2) (2) (567) (1,734) (2,445) (358) (153)
-------- --------- -------- -------- ---------- ------- ----------
Net income (loss) ............... $ (816) $ (566) $ 2,240 $ 3,684 $ (14,935) $ 612 $ (16,347)
======== ========= ======== ======== ========== ======= ==========
Net income (loss) per share (1) ... $ (0.21) $ 0.44 $ 0.48 $ (2.02) $ 0.08 $ (2.21)
========= ======== ======== ========== ======= ==========
Shares used to compute net income
(loss) per share (1) ............ 2,745 5,110 7,689 7,402 7,823 7,402
</TABLE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ---------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital .................. $ 275 $ 2,647 $ 26,588 $ 72,337 $ 57,662
Total assets ..................... 3,731 5,904 32,724 84,561 70,007
Long-term debt .................. - - - - 475
Retained earnings (deficit) ...... (3,028) (3,594) (1,354) 2,330 (12,605)
Shareholders' equity ............ 677 3,125 27,743 80,198 62,711
</TABLE>
September 30,
-------------------------------------
1997 (2)
-------------------------------------
Consolidated Balance Sheet Data:
Working capital .................. $42,308
Total assets ..................... 80,717
Long-term debt .................. 475
Retained earnings (deficit) ...... (28,952)
Shareholders' equity ............ 51,446
- ---------------------
(1) See Notes 1 and 6 of Notes to Consolidated Financial Statements.
(2) Subsequent to September 30, 1997, the Company's total assets were reduced
by $15.2 million in connection with the payment of the cash consideration
associated with the Miro Acquisition.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussion in this Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
Overview
The Company designs, manufactures, markets and supports computer-based
video post-production products to serve the broadcast, desktop and consumer
markets. The Company's products incorporate specialized real time video
processing technologies to perform a variety of video post-production functions
such as the addition of special effects, graphics and titles to multiple
streams of live or recorded video material. The Company's strategy is to
leverage its existing market and technological position to continue to provide
innovative, real time, computer-based solutions to the broadcast, desktop and
consumer video post-production markets.
Broadcast Market
The broadcast market generally requires very high technical performance
such as real time 10-bit processing, control of multiple channels of live video
and specialized filtering and interpolation. From the Company's inception in
1986 until 1994, substantially all of the Company's revenues were derived from
the sale of products into the broadcast market. The primary broadcast products
sold during fiscal 1997 were the Prizm and Flashfile family of products. In
June 1997, the Company commenced shipment of DVExtreme and Lightning, two new
Windows NT-based products designed to serve the broadcast market. The
introduction of DVExtreme and Lightning has resulted in a significant decline
in sales of Prizm and Flashfile. The broadcast market accounted for
approximately 25.4%, 26.1% and 43.3% of net sales in the years ended June 30,
1997, 1996 and 1995, respectively, and for approximately 31.0% and 18.8% of net
sales in the three month periods ended September 30, 1997 and 1996,
respectively.
Desktop Market
The Company's desktop products are designed to provide high quality real
time video manipulation capabilities for computer-based video post-production
systems at significantly lower price points than broadcast products. The
Company's first desktop product, Alladin, commenced shipment in June 1994. The
Company further expanded the desktop product line with the introduction of
Genie in June 1996. The desktop market accounted for approximately 59.8%, 73.5%
and 56.7% of net sales in the fiscal years ending June 30, 1997, 1996 and 1995,
respectively and for approximately 34.0% and 73.2% of net sales in the three
month periods ended September 30, 1997 and 1996, respectively.
Consumer Market
The Company's consumer products provide video editing solutions which
allow consumers to edit their home videos using a personal computer, camcorder
and VCR. The Company's consumer products are sold at significantly lower price
points than the Company's desktop products and are sold as software packages or
as computer add-on products. The Company entered the consumer video editing
market by acquiring the VideoDirector product line from Gold Disk in June 1996,
and commenced shipment of its first internally developed consumer editing
product, the VideoDirector Studio 200, in March 1997. Additionally, in August
1997 the Company completed the Miro Acquisition and began selling the miroVideo
product line. The consumer market accounted for approximately 14.8% and 0.4% of
net sales in the fiscal years ending June 30, 1997 and 1996, respectively and
for approximately 35.0% and 8.0% of net sales in the three month periods ended
September 30, 1997 and 1996, respectively.
15
<PAGE>
Expanding Product Line
In April 1997, the Company purchased the Deko titling systems product line
and technology from Digital Graphix. Deko, in conjunction with DVExtreme and
Lightning, furthers the Company's strategy of offering an interconnected family
of Windows NT-based video production systems for the broadcast market. The
Company paid approximately $5.3 million in cash and assumed liabilities of
approximately $978,000 for the purchase of the Deko products, technology and
assets. The Company recorded an in process research and development charge of
approximately $4.9 million and incurred approximately $315,000 in expenses
related to the integration of the Deko product line into the Company.
To further the Company's strategy of providing an expanded line of easy to
use computer-based video production products, in August 1997 the Company
acquired the Digital Video Group from Miro. The Company paid approximately
$15.2 million in cash, issued 203,565 shares of Common Stock valued at $4.4
million and assumed liabilities of approximately $2.7 million. The Company
anticipates that it will incur additional costs in connection with the
integration of the Digital Video Group. In addition, as a result of the Miro
Acquisition the Company will incur increased fixed operating expenses. The
Company charged approximately $17.0 million of the purchase price as in process
research and development and $465,000 as other non-recurring costs in the
quarter ended September 30, 1997. The terms of the acquisition also include an
earnout provision in which Miro will receive additional consideration equal to
50.0% of sales generated in excess of $37.0 million during the first twelve
full months following the acquisition as long as operating profits related to
such sales exceed 3% of sales, increasing to 85.0% of sales for those sales
which exceed $59.0 million during the same twelve month period. Any earnout
payments will be paid in Common Stock of the Company.
The Company distributes and sells its products to end users through the
combination of independent domestic and international dealers, retail
distributors, OEMs, retailers and, to a lesser extent, a direct sales force.
Sales to dealers, distributors and OEMs are at a discount to the published list
prices. Generally, products sold to OEMs are integrated into systems sold by
the OEMs to their customers. The amount of discount, and consequently the
Company's gross profit, varies depending on the product and the channel of
distribution through which it is sold, the volume of product purchased and
other factors.
<TABLE>
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data as a percentage of net sales:
<CAPTION>
Percentage of Net Sales
-----------------------------------------------------------
Three Months
Ended
Fiscal Year Ended June 30, September 30,
---------------------------------- ----------------------
1995 1996 1997 1996 1997
-------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales .............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................ 50.9 51.7 64.0 52.4 46.8
------ ------ --------- ------ ----------
Gross profit ........................... 49.1 48.3 36.0 47.6 53.2
Operating expenses:
Engineering and product development ... 10.8 11.1 20.2 15.6 12.6
Sales and marketing .................. 24.1 19.3 33.8 23.5 31.6
General and administrative ............ 4.9 4.7 9.9 6.7 7.7
In process research and development ... -- 8.7 13.1 -- 102.7
------ ------ --------- ------ ----------
Total operating expenses ............ 39.8 43.8 77.0 45.8 154.6
------ ------ --------- ------ ----------
Operating income (loss) ............... 9.3 4.5 (41.0) 1.8 (101.4)
Interest income, net .................. 3.3 7.2 7.7 6.7 3.3
------ ------ --------- ------ ----------
Income (loss) before income taxes ...... 12.6 11.7 (33.3) 8.5 (98.1)
Income tax benefit (expense) ......... (2.6) (3.8) (6.5) (3.1) (0.9)
------ ------ --------- ------ ----------
Net income (loss) ..................... 10.0% 7.9% (39.8)% 5.4% (99.0)%
====== ====== ========= ====== ==========
</TABLE>
16
<PAGE>
Comparison of Three Months Ended September 30, 1997 and 1996
Net Sales. The Company's net sales increased by 44.3% to $16.5 million in
the three month period ended September 30, 1997 from $11.4 million in the three
month period ended September 30, 1996. The increase was attributable to an
increase in sales of both consumer and broadcast products partially offset by a
decrease in sales of desktop products. The increase in consumer sales resulted
from sales in the last month of the quarter of products acquired in the Miro
Acquisition and sales of the VideoDirector Studio 200, which commenced shipment
in March 1997. In addition, broadcast sales increased as a result of increasing
sales of DVExtreme and Lightning, which were first shipped in June 1997, and
Deko, which was acquired in April 1997. These increases were partially offset
by a decrease in sales of desktop products to OEMs, in particular to Media100,
Inc. ("Media100"). Sales to Avid were approximately 17.9% and 27.2% of the
Company's net sales for the three month periods ended September 30, 1997 and
1996, respectively. Sales to Media100 were 1.4% and 12.8% of sales in the three
month periods ended September 30, 1997, and 1996, respectively. Sales outside
of North America were approximately 47.6% and 36.2% of the Company's net sales
in the three month periods ended September 30, 1997 and 1996, respectively.
Cost of Sales. Cost of sales consists primarily of costs related to the
acquisition of components and subassemblies, labor and overhead associated with
procurement, assembly and testing of finished products, warehousing, shipping
and warranty costs. Gross profit as a percentage of net sales was 53.2% and
47.6% in the three month periods ended September 30, 1997 and 1996,
respectively. The increase in the three month period ended September 30, 1997
was due primarily to an increase in sales of higher margin broadcast products,
partially offset by sales of VideoDirector and VideoDirector Studio 200, lines
which generally yield lower margins.
Engineering and Product Development. Engineering and product development
expenses increased by 16.3% to $2.1 million in the three month period ended
September 30, 1997 from $1.8 million in the three month period ended September
30, 1996. The increase was primarily attributable to increased expenditures in
connection with the continued expansion of the Company's engineering design
teams, in particular the engineering design group based in Braunschweig,
Germany acquired in connection with the Miro Acquisition. Engineering and
product development expenses as a percentage of net sales were 12.6% and 15.6%
in the three month periods ended September 30, 1997 and 1996, respectively. The
Company expects to continue to allocate significant resources to engineering
and product development efforts, including the Deko engineering team located in
Paramus, New Jersey and the Miro engineering team located in Braunschweig,
Germany.
Sales and Marketing. Sales and marketing expenses include compensation and
benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show and advertising expenses and professional
fees for marketing services. Sales and marketing expenses increased by 93.8% to
$5.2 million in the three month period ended September 30, 1997 from $2.7
million in the three month period ended September 30, 1996. The increase in
sales and marketing expenses was primarily attributable to promotional costs
for the introduction of several new broadcast and consumer products, as well as
the hiring of sales and marketing personnel in connection with the Miro
Acquisition. Sales and marketing expenses as a percentage of net sales were
31.6% and 23.5% in the three month period ended September 30, 1997 and 1996,
respectively. The Company expects to continue to allocate significant resources
to sales and marketing.
General and Administrative. General and administrative expenses increased
by 66.4% to $1.3 million in the three month period ended September 30, 1997
compared to $764,000 in the three month period ended September 30, 1996.
General and administrative expenses as a percentage of net sales were 7.7% and
6.7%, respectively. The increase resulted from the inclusion in general and
administrative expenses in the three month period ended September 30, 1997 of
$465,000 of nonrecurring costs associated with the Miro Acquisition. In
addition, general and administrative expenses in the three month period ended
September 30, 1996 included approximately $122,000 related to the Company's
relocation to new facilities in Mountain View, California.
In Process Research and Development. During the three month period ended
September 30, 1997, the Company recorded an in process research and development
charge of approximately $17.0 million relating to the Miro Acquisition.
17
<PAGE>
Interest Income, Net. Net interest income decreased 27.7% to $552,000 in
the three month period ended September 30, 1997 from $763,000 in the three
month period ended September 30, 1996. The decrease was due to a decline in
cash and marketable securities as well as a decline in investment yields.
Income Tax Benefit (Expense). The Company recorded provisions for income
taxes of $153,000 and $358,000 for the three month periods ended September 30,
1997 and 1996, respectively. As of June 30, 1997, the Company has federal and
state net operating loss carryforwards of $3.1 million and $1.3 million,
respectively, which expire from 2002 to 2012. The Company also has federal
research and experimentation and alternative minimum tax credit carryforwards
of $886,000 which expire between 2006 and 2012, and state research and
experimentation credit carryforwards of $339,000 which have no expiration
provision.
Comparison of Years Ended June 30, 1997 and 1996
Net Sales. The Company's net sales decreased by 18.8% to $37.5 million in
fiscal 1997 from $46.2 million in fiscal 1996. The decrease was attributable to
a decline in sales of both broadcast and desktop products, partially offset by
an increase in sales of consumer products. The most significant decline in
sales was of desktop products to OEMs, in particular Avid. Sales to Avid were
approximately 26.4% and 43.3% of the Company's net sales for the years ended
June 30, 1997 and 1996, respectively. Sales outside of North America were
approximately 39.7% and 38.7% of the Company's net sales in fiscal 1997 and
1996, respectively.
Cost of Sales. Gross profit as a percentage of net sales was 36.0% and
48.3% in fiscal 1997 and 1996, respectively. The decrease in gross profit
percentage is due primarily to a significant charge to cost of sales totaling
$4.0 million relating primarily to inventory write downs.
Engineering and Product Development. Engineering and product development
expenses increased by 47.5% to $7.6 million in fiscal 1997 from $5.1 million in
fiscal 1996. The increases were primarily attributable to increased
expenditures in connection with the continued expansion of the Company's
engineering design teams and product development costs for DVExtreme, Lightning
and VideoDirector Studio 200. Engineering and product development expenses as a
percentage of net sales were 20.2% and 11.1% in fiscal 1997 and 1996,
respectively.
Sales and Marketing. Sales and marketing expenses increased by 42.2% to
$12.7 million in fiscal 1997 from $8.9 million in fiscal 1996. The increase in
sales and marketing expenses was primarily attributable to promotional costs
for the introduction of several new broadcast and consumer video products.
Sales and marketing expenses as a percentage of net sales were 33.8% and 19.3%
in fiscal 1997 and 1996, respectively.
General and Administrative. General and administrative expenses increased
by 69.4% to $3.7 million in fiscal 1997 compared to $2.2 million in fiscal
1996. General and administrative expenses as a percentage of net sales were
9.9% and 4.7%, respectively. Included in general and administrative expenses in
fiscal 1997 were $315,000 of non-recurring spending related to the acquisition
of the Deko group, and approximately $500,000 relating to the disposal of
leasehold improvements and other capital equipment, moving costs and rent
overlap incurred as a result of the move to the Company's new facility in
Mountain View, California.
In Process Research and Development. In April 1997, the Company purchased
the Deko titling systems product line and technology from Digital Graphix. The
Company paid $5.3 million in cash and assumed liabilities of $978,000. The
assets acquired primarily included inventory and other tangible property of
$593,000; intangible assets including the Deko brand name, work force-in-place,
and source code technology totaling $762,000; and in process research and
development of $4.9 million. The in process research and development was
recorded as an expense during the fourth quarter of fiscal 1997. The intangible
assets and purchased software are being amortized over a seven year period. In
June 1996, the Company purchased certain assets for $4.6 million from Gold
Disk, a developer and marketer of software products for video editing and
assembly. The assets acquired primarily included tangible assets of $240,000,
intangible assets including the VideoDirector brand name, user list and source
code technology totaling $342,000, and in process research and development of
$4.0 million. The in process research and development were recorded as an
expense during the fourth quarter of 1996. The intangible assets are being
amortized over a three year period.
Interest Income, Net. Net interest income decreased 14.3% to $2.9 million
in fiscal 1997 from $3.3 million in fiscal 1996. The decrease was due to a
decline in cash and marketable securities as well as a decline in investment
yields.
18
<PAGE>
Income Tax Benefit (Expense). The Company recorded provisions for income
taxes of $2.4 million and $1.7 million for the fiscal years ended 1997 and
1996, respectively. Included in income tax expense for the year ended June 30,
1997 is a charge of $3.2 million resulting from the establishment of a
valuation allowance against the Company's deferred tax asset due to significant
operating losses in the year and the introduction of new products for which
market acceptance is uncertain. As of June 30, 1997, the Company has federal
and state net operating loss carryforwards of $3.1 million and $1.3 million,
respectively, which expire from 2002 to 2012. The Company also has federal
research and experimentation and alternative minimum tax credit carryforwards
of $886,000 which expire between 2006 and 2012, and state research and
experimentation credit carryforwards of $339,000 which have no expiration
provision.
Comparison of Years Ended June 30, 1996 and 1995
Net Sales. The Company's net sales increased by 108.0% in fiscal 1996 from
$22.2 million in fiscal 1995. The increase in net sales were primarily
attributable to the Alladin product, particularly to Avid. Sales outside of
North America were approximately 38.7% and 46.5% of the Company's net sales in
fiscal 1996 and 1995, respectively. The decrease in sales outside of North
America was primarily attributable to the significant increase in sales of
Alladin to Avid's North American facility.
Cost of Sales. Gross profit as a percentage of net sales was 48.3% and
49.1% in fiscal 1996 and 1995, respectively. The decrease in gross profits
percentage of net sales was due primarily to an increase in sales to OEM
customers, which typically carry a lower gross profit percentage, partially
offset by increased efficiency due to higher production volumes.
Engineering and Product Development. Engineering and product development
expenses increased by 113.7% to $5.1 million in fiscal 1996 from $2.4 million
in fiscal 1995. The increase in each period was primarily attributable to
increased expenditures in connection with the continued expansion of the
Company's design engineering team. Engineering and product development expenses
as a percentage of net sales were 11.1% and 10.8% in fiscal 1996 and 1995,
respectively.
Sales and Marketing. Sales and marketing expenses increased by 67.9% to
$8.9 million in fiscal 1996 from $5.3 million in fiscal 1995. The increase in
sales and marketing expenses was primarily attributable to increased
expenditures related to the continued promotion of Alladin, including
expenditures for trade shows, advertising, professional fees for marketing
services and increases in the number of sales and marketing personnel. Sales
and marketing expenses as a percentage of net sales were 19.3% and 24.1% in
fiscal 1996 and 1995, respectively. The decrease of sales and marketing as a
percentage of net sales was due primarily to the increase in sales through the
OEM distribution channel, in particular through Avid, which requires less
direct sales and marketing expenditures by the Company.
General and Administrative. General and administrative expenses increased
by 100.9% to $2.2 million in fiscal 1996 from $1.1 million in fiscal 1995.
General and administrative expenses as a percentage of net sales were 4.7% and
4.9% in fiscal 1996 and 1995, respectively. The increase in general and
administrative expenses in each period resulted from an increase in
expenditures related to the overall growth of the Company's operations
including the Company's expanded facility in fiscal 1995 and increased
administrative costs associated with being a public company.
In Process Research and Development. In June 1996, the Company purchased
certain assets for $4.6 million from Gold Disk, a developer and marketer of
software products for video editing and assembly. The assets acquired primarily
included tangible assets of $240,000, intangible assets including the
VideoDirector brand name, user list and source code technology totaling
$342,000, and in process research and development of $4.0 million. The
intangible assets are being amortized over a three year period.
Interest Income, Net. Net Interest income increased to $3.3 million in
fiscal 1996 from $738,000 in fiscal 1995. The increase was due to interest
earned on the investment of cash proceeds received from the Company's public
offerings in November 1994 and July 1995.
Income Tax Benefit (Expense). The Company recorded provisions for income
taxes of $1.7 million and $567,000 for the fiscal year ended 1996 and 1995,
respectively, at effective rates of 32.0% and 20.2%, respectively. The
Company's general business credit carryforwards were estimated to be
approximately $300,000 for federal tax purposes, expiring in various amounts
from 2006 through 2011.
19
<PAGE>
<TABLE>
Quarterly Results of Operations
The following table presents unaudited quarterly results in dollar amounts
and as a percentage of net sales for the last eight quarters. The information
has been prepared by the Company on a basis consistent with the Company's
audited financial statements and includes all adjustments, consisting only of
normal recurring adjustments, which management considers necessary for a fair
presentation of the information for the periods presented.
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
Fiscal 1996
--------------------------------------------------------------------
Dec. 31, March 31, June 30,
1995 1996 1996
------------------- ----------------------- ------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales ........................ $11,845 $12,766 $ 12,219
Cost of sales ..................... 6,139 6,574 6,330
------- ------- ---------
Gross profit ..................... 5,706 6,192 5,889
Operating expenses:
Engineering and product
development ..................... 1,279 1,396 1,533
Sales and marketing ............... 2,179 2,369 2,483
General and administrative ...... 609 607 529
In process research and
development ..................... -- -- 3,991
------- ------- ---------
Total operating expenses . 4,067 4,372 8,536
------- ------- ---------
Operating income (loss) ............ 1,639 1,820 (2,647)
Interest income, net ............... 927 879 858
------- ------- ---------
Income (loss) before income
taxes ........................... 2,566 2,699 (1,789)
Income tax benefit (expense) ...... (834) (877) 656
------- ------- ---------
Net income (loss) .................. $ 1,732 $ 1,822 $ (1,133)
======= ======= =========
Percentage of Net Sales
-------------------------------------------------------------------
Net sales ........................ 100.0% 100.0% 100.0%
Cost of sales ..................... 51.8 51.5 51.8
------- ------- ---------
Gross profit ..................... 48.2 48.5 48.2
Operating expenses:
Engineering and product
development ..................... 10.8 10.9 12.6
Sales and marketing ............... 18.4 18.6 20.3
General and administrative ...... 5.2 4.8 4.3
In process research and
development ..................... -- -- 32.7
------- ------- ---------
Total operating expenses . 34.4 34.3 69.9
------- ------- ---------
Operating income (loss) ............ 13.8 14.2 (21.7)
Interest income, net ............... 7.8 6.9 7.1
------- ------- ---------
Income (loss) before income
taxes ........................... 21.6 21.1 (14.6)
Income tax benefit (expense) ...... (7.0) (6.9) 5.3
------- ------- ---------
Net income (loss) . ............... 14.6% 14.2% (9.3)%
================= ===================== ======================
<CAPTION>
Fiscal 1997
--------------------------------------------------------------------
Sept. 30, Dec. 31, March 31,
1996 1996 1997
------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Net sales ........................ $11,443 $ 5,345 $ 8,265
Cost of sales ..................... 5,996 7,328 4,709
------- ----------- ---------
Gross profit ..................... 5,447 (1,983) 3,556
Operating expenses:
Engineering and product
development ..................... 1,782 2,063 1,894
Sales and marketing ............... 2,694 2,514 3,077
General and administrative ...... 764 1,426 623
In process research and
development ..................... -- -- --
------- ----------- ---------
Total operating expenses . 5,240 6,003 5,594
------- ----------- ---------
Operating income (loss) ............ 207 (7,986) (2,038)
Interest income, net ............... 763 729 719
------- ----------- ---------
Income (loss) before income
taxes ........................... 970 (7,257) (1,319)
Income tax benefit (expense) ...... (358) (2,087) --
------- ----------- ---------
Net income (loss) .................. $ 612 $ (9,344) $ (1,319)
======= =========== =========
Percentage of Net Sales
-------------------------------------------------------------------
Net sales ........................ 100.0% 100.0% 100.0%
Cost of sales ..................... 52.4 137.1 57.0
------- ----------- ---------
Gross profit ..................... 47.6 (37.1) 43.0
Operating expenses:
Engineering and product
development ..................... 15.6 38.6 22.9
Sales and marketing ............... 23.5 47.0 37.3
General and administrative ...... 6.7 26.7 7.5
In process research and
development ..................... -- -- --
------- ----------- ---------
Total operating expenses . 45.8 112.3 67.7
------- ----------- ---------
Operating income (loss) ............ 1.8 (149.4) (24.7)
Interest income, net ............... 6.7 13.6 8.7
------- ----------- ---------
Income (loss) before income
taxes ........................... 8.5 (135.8) (16.0)
Income tax benefit (expense) ...... (3.1) (39.0) --
------- ----------- ---------
Net income (loss) . ............... 5.4% (174.8)% (16.0)%
================= ====================== =====================
<CAPTION>
Fiscal 1998
------------------------
June 30, Sept. 30,
1997 1997
----------------------- ------------------------
<S> <C> <C>
Net sales ........................ $ 12,430 $ 16,514
Cost of sales ..................... 5,964 7,736
--------- ----------
Gross profit ..................... 6,466 8,778
Operating expenses:
Engineering and product
development ..................... 1,840 2,072
Sales and marketing ............... 4,382 5,221
General and administrative ...... 889 1,271
In process research and
development ..................... 4,894 16,960
--------- ----------
Total operating expenses . 12,005 25,524
--------- ----------
Operating income (loss) ............ (5,539) (16,746)
Interest income, net ............... 656 552
--------- ----------
Income (loss) before income
taxes ........................... (4,883) (16,194)
Income tax benefit (expense) ...... -- (153)
--------- ----------
Net income (loss) .................. $ (4,883) $ (16,347)
========= ==========
Percentage of Net Sales
------------------------------------
Net sales ........................ 100.0% 100.0%
Cost of sales ..................... 48.0 46.8
--------- ----------
Gross profit ..................... 52.0 53.2
Operating expenses:
Engineering and product
development ..................... 14.8 12.6
Sales and marketing ............... 35.3 31.6
General and administrative ...... 7.2 7.7
In process research and
development ..................... 39.3 102.7
--------- ----------
Total operating expenses . 96.6 154.6
--------- ----------
Operating income (loss) ............ (44.6) (101.4)
Interest income, net ............... 5.3 3.3
--------- ----------
Income (loss) before income
taxes ........................... (39.3) (98.1)
Income tax benefit (expense) ...... -- (0.9)
--------- ----------
Net income (loss) . ............... (39.3)% (99.0)%
===================== ======================
</TABLE>
20
<PAGE>
The Company's quarterly and annual operating results have in the past
varied significantly and are expected to vary significantly in the future as a
result of a number of factors, including the timing of significant orders from
and shipments to major OEM customers, in particular Avid, the timing and market
acceptance of new products or technological advances by the Company and its
competitors, the Company's success in developing, introducing and shipping new
products, such as the recently announced ReelTime product, the mix of
distribution channels through which the Company's products are sold, changes in
pricing policies by the Company and its competitors, the accuracy of the
Company's and resellers' forecasts of end user demand, the timing and amount of
inventory write downs, the ability of the Company to obtain sufficient supplies
of the major subassemblies used in its products from its subcontractors, the
ability of the Company and its subcontractors to obtain sufficient supplies of
sole or limited source components for the Company's products, the timing and
level of product returns, particularly from the consumer distribution channels,
foreign currency fluctuations, costs associated with the acquisition of other
companies, businesses or products, the ability of the Company to integrate
acquired companies, businesses or products, such as the product line acquired
from Miro, and general economic conditions, both domestically and
internationally. The Company's operating expense levels are based, in part, on
its expectations of future revenue and, as a result, net income would be
disproportionately affected by a shortfall in net sales. For example, in the
quarter ended December 31, 1996, the Company's net sales decreased
significantly from the prior quarter as a result of a decline in sales across
all product lines, the most significant of which was a decline in sales of
desktop products to OEMs, in particular Avid. As a result of the decrease in
net sales, the Company incurred a significant loss during that quarter.
The Company also experiences significant fluctuations in orders and sales
due to seasonal fluctuations, the timing of major trade shows and the sale of
consumer products in anticipation of the holiday season. Sales usually slow
down during the summer months, especially in Europe. The Company attends a
number of annual trade shows which can influence the order pattern of products,
including the NAB convention held in April, the IBC show held in September and
the COMDEX exhibition held in November. Due to these factors and the potential
quarterly fluctuations in operating results, the Company believes that
quarter-to-quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
Liquidity and Capital Resources
The Company completed its initial and follow-on public offerings in
November 1994 and July 1995, raising approximately $65.5 million in cash, net
of offering expenses.
The Company's operating activities used $86,000 during the three months
ended September 30, 1997. The cash used by operating activities was the result
of the net loss of $16.4 million as adjusted by the acquired research and
development charge of $17.0 million, depreciation and amortization of $648,000,
and partially offset by net increases in the components of working capital,
primarily accounts receivable.
The Company's operating activities used $1.6 million in fiscal 1997,
provided $879,000 in fiscal 1996 and used $658,000 in fiscal 1995,
respectively. The cash used by operating activities during fiscal 1997 was the
result of the net loss of $14.9 million as adjusted by the acquired research
and development charge of $4.9 million, an increase in the valuation allowance
on deferred tax assets of $3.2 million, depreciation and amortization of $1.6
million, and a loss on disposal of property and equipment of $448,000,
partially offset by net decreases in the components of working capital,
primarily inventory. In fiscal 1996, cash provided by operating activities was
the result of net income as adjusted by the acquired research and development
charge of $4.0 million, depreciation and amortization of $736,000 and tax
benefits from the exercise of stock options of $3.7 million, partially offset
by an increase in deferred tax assets of $3.2 million and net increases in the
components of working capital.
During fiscal 1997, $3.9 million was invested in property and equipment,
compared to $1.8 million in fiscal 1996. The increase over the prior year is
primarily related to leasehold improvements, furniture and equipment for the
new Mountain View, California facility. The Company expects to continue to
purchase property and equipment at a reduced rate following the completion of
improvements to the Mountain View facility. Such capital expenditures will be
financed from working capital.
In January 1997, the Company's Board of Directors authorized a stock
repurchase program pursuant to which the Company was authorized to purchase up
to 750,000 shares of its Common Stock on the open market.
21
<PAGE>
Through September 30, 1997, the Company had repurchased and retired
approximately 317,000 shares of its Common Stock in the open market at an
average purchase price of $11.43 for a total cost of $3,627,000. The stock
repurchase program was rescinded in October 1997.
In April 1997, the Company purchased the Deko product line and technology
from Digital Graphix. The Company paid approximately $5.3 million in cash and
assumed liabilities of $978,000 to consummate the transaction.
In August 1997, the Company acquired the Digital Video Group from Miro. In
the purchase, the Company paid approximately $15.2 million in cash, issued
203,565 shares of Common Stock, valued at $4.4 million, and assumed liabilities
of approximately $2.7 million. The Company will also pay additional
consideration in the form of additional shares of Common Stock if certain
revenue and profitability objectives are achieved during the first twelve
months following the Miro Acquisition.
As of September 30, 1997, the Company had working capital of approximately
$42.3 million, including $28.6 million in cash and cash equivalents and $19.3
million in marketable securities. In October 1997, the Company paid
approximately $15.2 million in cash to Miro in accordance with the Miro
Acquisition. The Company believes that the proceeds of this offering, together
with the existing cash and cash equivalent balances, marketable securities and
anticipated cash flow from operations, will be sufficient to support the
Company's working capital requirements for the foreseeable future.
Inflationary Impact
Since the inception of operations, inflation has not significantly
affected the operations results of the Company. However, inflation and changing
interest rates have had a significant effect on the economy in general and
therefore could affect the operating results of the Company in the future.
22
<PAGE>
BUSINESS
Pinnacle Systems, Inc. designs, manufactures, markets and supports
computer-based video post-production products to serve the broadcast, desktop
and consumer markets. The Company's products incorporate specialized real time
video processing technologies to perform a variety of video post-production
functions such as the addition of special effects, graphics and titles to
multiple streams of live or recorded video material. To address the broadcast
market, the Company offers high performance, specialized Windows NT-based
solutions for high-end, post-production and broadcast on-air applications. For
the desktop market, the Company provides real time video manipulation tools to
support both linear, or tape-based, and non-linear, or computer-based, editing
environments. To address the consumer market, the Company offers low cost, easy
to use video editing solutions that allow consumers to edit their home videos
using a personal computer, camcorder and VCR. Used in conjunction with standard
computer platforms, these technologies provide
high quality, cost effective, computer-based video processing solutions for the
post-production market.
In addition, the Company recently has expanded the scope of its products to
encompass certain COmpression/DECompression ("CODEC") technology required to
control and transfer video into and out of the computer ("video capture"). By
combining the Company's real time video processing technology, video capture
technology and application program interface ("API"), the Company intends to
provide a complete video processing platform that supports a variety of video
editing software applications.
Industry Background
The development of a video program involves three distinct processes:
pre-production, which involves planning and preparation for the recording of
the video program; production, which involves the acquisition (shooting) of
video material; and post-production, which involves the organization of raw
video segments acquired in the production phase into a cohesive and appealing
program (editing). During the post-production phase, elements such as titles,
graphics and transitions between video segments are incorporated to enhance the
overall quality and impact of a video program.
Historically, the video production industry has focused on providing
program material for broadcast television and advertising. Recently, new and
expanding channels of video content distribution, including cable television,
direct satellite broadcast, video rentals, the Internet, CD-ROM, DVD and
video-on-demand have led to a rapid increase in demand for video content for a
wide variety of additional applications that require less expensive and easier
to use editing approaches. New commercial and industrial applications for this
market include multimedia entertainment, video games, music videos, special
event videos, education and training and corporate communications. In addition,
the popularity of camcorders, VCRs and personal computers has fueled the growth
of an emerging consumer market for low cost video production technology that
enables consumers to create and edit home videos. These expanding channels of
video content distribution and new applications are driving demand for video
production tools.
To create high quality video programs for broadcast television and
advertising, producers have traditionally used expensive, dedicated video
production equipment linked together in a complex interconnected system to form
a video "editing suite." Typical editing suites incorporate video recorders,
switchers, digital video effects systems, still image management systems,
character generators, electronic paint systems and other products, often
provided by multiple manufacturers. These editing suites require highly skilled
personnel to operate and maintain.
More recently, computer-based video solutions combining personal computers
with specialized video processing technology can now provide video quality
comparable to that of traditional editing suites at significantly lower cost.
As a result, these computer-based video solutions are increasingly replacing
the traditional editing suites. In addition, such solutions are often easier to
use since they utilize common graphical user interfaces. The lower cost and
ease of use of computer-based video tools enables large numbers of creative
individuals, previously untrained in video production, to produce professional
quality video programming. A complete computer-based video solution generally
includes four components: a computer, specialized audio and video processing
hardware, an associated API and specific editing applications. These components
have often been supplied by a single vendor. However, as the computer-based
video industry develops, it is shifting toward Windows NT-based open
architecture solutions.
23
<PAGE>
As a result of these changes, the broadcast market is transitioning to
computer-based solutions, the desktop market is expanding rapidly and, more
recently, a consumer market has begun to emerge. These changes have created
opportunities for companies that focus on computer-based solutions for the
video production industry.
The Pinnacle Approach
The Company designs, manufactures, markets and supports computer-based
video post-production products to serve the broadcast, desktop and consumer
markets. The Company's products are based on its proprietary video manipulation
technology and offer the following benefits:
Sophisticated Video Manipulations. Pinnacle's products provide advanced
video manipulation capabilities, such as special effects, graphics and titles.
Videographers constantly seek effects to give their programs a new look and to
allow them to differentiate and enhance their end product.
Real Time Interactivity. Pinnacle's products allow users to select an
effect and instantly see the result. This real time interactivity gives users
the flexibility to try many different effects and fine-tune the resulting
content.
Open Systems. Pinnacle's products conform to generally accepted industry
standards for video input/output and control, allowing interoperability with a
wide variety of video processing and storage equipment. Furthermore, the
Company has developed and published, and is encouraging others to adopt, open
interface specifications for video input/output products, manipulation and
control for computer-based video post-production.
Ease of Use. Pinnacle's products include menu-driven interfaces for
selecting and controlling the various video manipulation functions. This
reduces technical obstacles to the operation of the system, permitting the user
to focus on the artistic aspects of the post-production process.
Favorable Price/Performance Ratio. Pinnacle's products have a favorable
price/performance ratio, in part because the Company uses the same proprietary
components across its product lines. This enables it to reduce material costs
and take advantage of higher unit volumes. The Company intends to continue
lowering the cost of its products by further integrating its video manipulation
and video capture technologies into application specific integrated circuits
("ASICs").
The Company is organized into separate business groups to serve the
broadcast, desktop and consumer markets. The Company believes this
organizational structure enables it to address effectively different product
requirements, more rapidly implement its core technologies, more effectively
manage different distribution channels and anticipate and respond to changes in
each of these markets.
Company Strategy
Pinnacle's goal is to become the leading supplier of computer-based video
post-production products to the broadcast, desktop and consumer markets. To
pursue its goal, the Company intends to implement the following strategies:
Expand and Leverage Core Technologies. The Company intends to expand its
core software and hardware technological base through both internal development
and acquisitions. For example, the Company has developed proprietary real time
video manipulation technology and acquired video capture technology in the Miro
Acquisition. The Company uses a modular approach to product development which
allows it to leverage its investment in research and development across
multiple product designs and minimize time to market.
Establish Industry Standard Video Processing Platform. The Company
believes that as the desktop market continues to move toward an open
architecture environment, companies will either provide an open architecture
video processing platform or develop end user editing applications. The
Company's strategy is to establish an industry standard video processing
platform compatible with a broad range of applications. The platform technology
will combine real time video manipulation, video capture technology and a
unified API.
Develop and Expand Worldwide Sales and Distribution Organization. The
Company has developed a worldwide sales and distribution organization that it
believes is a strategic advantage in the rapidly changing video post-production
industry. The Company's sales organization focuses on a variety of distribution
channels, including OEMs, resellers, distributors and retail stores. In
connection with the Miro Acquisition, the Company
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<PAGE>
added Miro's European consumer sales organization and distribution
relationships which complement the Company's existing sales organization. In
addition, the Company intends to continue to develop strong strategic
relationships with key OEMs and resellers.
Acquire Complementary Businesses, Products and Technologies. The Company
has grown and intends to continue to grow both internally as well as through
the acquisition of complementary businesses, product lines or technologies. The
Company frequently evaluates strategic acquisition opportunities that could
enhance the Company's existing product offerings or provide an avenue for
developing new complementary product lines. The Company believes that the video
production industry is in a period of consolidation and that strategic
acquisition opportunities may arise.
25
<PAGE>
<TABLE>
Products
The Company offers three families of video products aimed at the broadcast
market: the DVExtreme family, the Lightning family and the Deko family. For the
desktop market, the Company offers the Alladin and Genie families of products
and recently introduced the ReelTime product family. The Company anticipates
that the commercial launch of ReelTime will begin in the second half of fiscal
1998. The Company entered the consumer market through the acquisition of the
VideoDirector product line from Gold Disk in June 1996 and in March 1997
commenced shipment of its first internally developed consumer product, the
VideoDirector Studio 200. In August 1997, the Company acquired certain consumer
products in connection with the Miro Acquisition. The Company currently offers
the following products to address video post-production needs for the
broadcast, desktop and consumer markets:
<CAPTION>
- --------------------------- ----------------- ---------------------- ----------------------------
Date of First
Shipment by Representative U.S.
Product Pinnacle List Price Range (1) Product Features
- --------------------------- ----------------- ---------------------- ----------------------------
<S> <C> <C> <C>
Broadcast Market
- --------------------------- ----------------- ---------------------- ----------------------------
DVExtreme Family June 1997 $44,990-$63,990 Real time, multi-channel
special effects
- --------------------------- ----------------- ---------------------- ----------------------------
Lightning Family June 1997 $25,990-$31,780 Image management and
on-air playout
- --------------------------- ----------------- ---------------------- ----------------------------
Deko Family April 1997 (2) $26,900-$31,900 Titling and character
generation
- --------------------------- ----------------- ---------------------- ----------------------------
Desktop Market
- --------------------------- ----------------- ---------------------- ----------------------------
Alladin Family June 1994 $10,490-$12,490 Real time special effects
- --------------------------- ----------------- ---------------------- ----------------------------
Genie Family June 1996 $ 5,990 Real time special effects
- --------------------------- ----------------- ---------------------- ----------------------------
ReelTime Family Fiscal 1998 (3) $ 4,995 Dual stream video and
audio capture with real
time special effects
- --------------------------- ----------------- ---------------------- ----------------------------
Consumer Market
- --------------------------- ----------------- ---------------------- ----------------------------
VideoDirector Studio 200 March 1997 $ 249 Plug and play (external)
video editing
- --------------------------- ----------------- ---------------------- ----------------------------
miroVideo DC-10 Family August 1997 (4) $ 299 Single stream video capture
and playback
- --------------------------- ----------------- ---------------------- ----------------------------
miroVideo DC-20 Family August 1997 (4) $ 599 Single stream video capture
and playback
- --------------------------- ----------------- ---------------------- ----------------------------
miroVideo DC-30 Family August 1997 (4) $ 999-$1,299 Single stream video capture
and playback with audio
- --------------------------- ----------------- ---------------------- ----------------------------
<FN>
(1) Prices as of September 30, 1997. Actual end user prices may vary
significantly due to discounts, customer selected options and
configurations. Prices in currencies other than the U.S. dollar may vary.
(2) Date product family was acquired by the Company from Digital Graphix.
(3) The Company anticipates that the commercial shipments of ReelTime will
begin in the second half of fiscal 1998. See "Risk Factors--Technological
Change and Obsolescence; Risks Associated with Development and
Introduction of New Products."
(4) Date product families were acquired by the Company from Miro.
- --------------------------- ----------------- ---------------------- ----------------------------
</FN>
</TABLE>
Broadcast Market
For the broadcast market the Company currently offers products that
provide real time digital effects, still image management and storage and real
time video character generation. These products generally include proprietary
hardware and software and specialized control panels and/or keyboards for rapid
operations, especially for on-air applications. The primary broadcast products
sold during fiscal 1997 were the Prizm and Flashfile family of products. In
June 1997, the Company commenced shipment of two new product families,
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<PAGE>
DVExtreme and Lightning, which are designed to address the markets previously
addressed by Prizm and Flashfile, respectively. In April 1997, the Company
completed the acquisition of the Deko titling and character generation product
line from Digital Graphix. These three new product families comprise the
Company's new suite of high performance real time Windows NT-based products
designed for broadcast and high-end, post-production applications.
DVExtreme Family. DVExtreme is the Company's newest high performance, real
time digital video effects system for broadcast and high-end, post-production
customers which seek to incorporate unique special effects into their
programming. The DVExtreme family replaced the Company's Prizm family of
products which was first introduced in 1990. DVExtreme, a Windows NT-based,
multi-channel system, can simultaneously manipulate up to three channels of
live video and can generate real time effects such as four-corner page peels
and turns with highlights and shadows, water ripples, ball effects, wave
patterns and other effects. It also includes the Company's ParticalFX and
PainterlyFX technologies which enable the creation of video textures and
paint-look effects. Because it is based on Windows NT, it can be connected to a
standard computer network to facilitate file transfers in a broadcast facility.
Lightning Family. Lightning is the Company's new high performance,
networkable image management system designed for broadcast and high-end,
post-production applications such as news and sports programs. The Lightning
family is the successor to the Company's Flashfile family of products which was
first introduced in 1992. Lightning is a Windows NT-based system that can
accommodate up to three channels of video, plus additional virtual channels for
previewing. It has internal storage capacity for over 10,000 images, and an
interface to external disks for expanded storage needs. Lightning can also
perform digital video effects on captured video images.
Deko Family. The Deko family of products is designed to provide high
performance titling and character generation for broadcast and on-air
applications. Deko is a Windows NT-based system that includes powerful text and
graphics tools such as real time text scrolling, text manipulation, font
enhancement, multiple layers for text composition and supports a wide range of
standard and international character fonts. The products support a large
variety of file formats to import backgrounds, textures and images.
Desktop Market
The Company's desktop products are designed to provide high quality, real
time video manipulation capabilities for computer-based video post-production
systems. They are generally offered at significantly lower price points than
traditional editing suites and are integrated into the computer by a value
added reseller, an OEM, or the end user. The Company has two existing desktop
product lines, the Alladin and Genie families, and expects to commence shipment
of a third desktop family, ReelTime, in the second half of fiscal 1998.
Alladin Family. The Alladin product family is designed to provide high
quality, real time video manipulation capabilities for desktop video
post-production. It allows the user to manipulate and process up to four
simultaneous streams of live video supplied from either videotape or computer
disk. It provides a variety of video effects including dissolves, compositing
of live video with text or graphics, transparency, clipping of a live image,
sizing, rotation with perspective, 3D positioning and warping. The Alladin
connects through an external port to a standard personal computer.
Genie Family. The Genie family of products offers a complete set of
professional quality, real time 3D digital effects, switching, character
generation, paint and still storage on a single personal computer interface
("PCI") board. While offering much of the functionality of Alladin, Genie does
so at a much lower price point and is installed in the computer rather than
connecting through an external port. GeniePlus integrates into linear desktop
editing environments and includes input/output and software allowing the user
to process up to two simultaneous streams of live video. In addition, a
non-linear version of Genie is sold to OEM vendors who integrate and sell it
with their non-linear editing products.
ReelTime Family. ReelTime is a dual stream video and audio capture and
playback card with real time special effects. ReelTime will support the Adobe
Premiere editing software. Additionally, ReelTime's open architecture is
intended to support a wide variety of third-party video applications. ReelTime
features real time transitions, along with real time chroma, luma and linear
keying, titling, and a scalable architecture that supports the Company's Genie
RT option. The Genie RT option incorporates the Pinnacle Genie add-in card
27
<PAGE>
and enables picture-in-picture motion and real time 3D effects, including page
turns, ripples, spheres and hourglasses. The Company expects to begin shipping
ReelTime in the second half of fiscal 1998.
Consumer Market
The Company's consumer products provide video editing and video capture
and playback solutions. Its consumer video editing solutions allow consumers to
edit their home videos using a personal computer, camcorder and VCR. The
Company's consumer products are sold at lower price points than the Company's
other products and are sold as software packages and computer add-on products.
The Company entered the consumer video editing market through the acquisition
of the VideoDirector product line from Gold Disk in June 1996. In March 1997,
the Company commenced shipment of its first internally developed consumer
editing product, the VideoDirector Studio 200. In August 1997, the Company
acquired the Digital Video Product line from Miro, which includes products
featuring video capture and playback.
VideoDirector Studio 200. VideoDirector Studio 200 enables basic video
editing and the addition of special effects titles and graphics to home videos.
Connecting to an external port, the product is easy to install and requires
only limited hard disk storage space. The Company has recently introduced
German and French versions of VideoDirector Studio 200 and expects Spanish and
Italian versions to be available by the end of 1997. These foreign language
versions are being shipped and distributed through the European sales
organization that the Company acquired in the Miro Acquisition. In August 1997,
Fujitsu Personal System, Ltd. commenced shipment of a Japanese product
incorporating VideoDirector Studio 200 technology.
MiroVideo Products. The Company recently acquired Miro's Digital Video
Products Group which includes three product families featuring different single
stream video capture PCI-bus cards. These cards capture, compress and
decompress video signals and store and retrieve such compressed video signals
from a standard computer. The miroVideo cards are differentiated on the basis
of functionality and price. The miroVideo DC-10 is a video capture card for
consumers and hobbyists. The miroVideo DC-20 is a video capture card for
multimedia content developers. The miroVideo DC-30 is a full-featured, single
stream card with high bandwidth audio and video capture and playback capability
for professional videographers.
Technology
The Company is a technological leader in video capture and real time video
manipulation. The National Academy of Television Arts and Sciences' Outstanding
Technical Achievement EMMY award has been awarded to the Company on three
occasions. In 1990, the Company received an EMMY for pioneering the concept of
the video workstation. In 1994, the Company received an EMMY for developing
technology which allows real time mapping of live video onto animated 3D
surfaces and, in 1997, the Company received an EMMY for utilization of real
time video manipulation technology in non-linear editing applications. In
addition, the technology that the Company acquired from Digital Graphix was
awarded two EMMYs prior to its acquisition by the Company.
Many of the Company's products share a common internal architecture. This
design approach allows the Company to leverage its research and development
expenditures by utilizing similar hardware and software modules in multiple
products. The Company's video manipulation architecture is fundamental to the
performance and capabilities of the Company's products. As a result of the Miro
Acquisition, the Company has acquired video capture technology which allows
high quality live video and audio to be captured and played back from a
standard personal computer.
All of the Company's products use or work with a standard personal
computer for control of video manipulation functions. In all products targeting
the broadcast market, the control microprocessor is embedded within the
product. The desktop and consumer products are inserted into or connect
externally to a personal computer. The use of industry standard microprocessors
offers three main advantages over traditional video products: lower software
development costs due to the availability of powerful off-the-shelf software
development tools; lower product manufacturing costs due to the low costs of
standard microprocessors; and the ability to integrate third party software
such as networking or 3D rendering software to provide additional
functionality.
Essentially all real time video manipulation must be performed on
uncompressed video data. Since uncompressed digital video rates are too high to
be processed by a microprocessor in real time, video signals
28
<PAGE>
are internally distributed over a separate high-speed digital video bus ("DVB")
and processed using the Company's proprietary real time video manipulation
hardware. The video data on the DVB is processed in the standard digital
component format which fully complies with the highest digital component video
standards of the International Radio Consultation Committee, an organization
which develops and publishes standards for international telecommunication
systems.
The software in the Company's video capture and video manipulation
products is divided into two layers: the user interface application and the
API. The user interface application is different and has been optimized for
each product family. The API is, for the most part, common to most of the
Company's products and incorporates all the proprietary low level routines
which allow the Company's products to perform high quality, real time video
manipulations. This software architecture has three main advantages: real time
video manipulation algorithms that are complex and difficult to develop can be
used in multiple products; the user interface can be tailored to meet specific
user requirements; and applications can be quickly ported to the Company's
products using the API.
The Company's core technical expertise is in real time digital video
processing, video capture technology, real time software algorithms, video
input/output, advanced user interfaces and software control of commercially
available camcorders and VCRs.
Real Time Digital Video Processing. The Company has devoted significant
resources to the development of proprietary technology for real time video
processing, including high speed digital filters, image transformation buffers,
plane and perspective addressing, and non-linear image manipulation. The
Company has patented technology related to real time mapping of live video onto
multiple, complex, animated 3D shapes and surfaces. This technology includes a
proprietary data compression algorithm that compresses the address information
and allows decompression of this data in real time.
CODEC Technology. The Company has devoted significant resources to
developing and acquiring hardware and software for real time video capture.
This technology includes audio/video effects synchronization methodologies,
compression algorithms, drivers and software for real time playback from disks.
Real Time Software Algorithms. The digital video manipulation functions of
the Company's products use common core software that perform complex
computations in real time under user control. The Company has developed certain
algorithms that enable the high speed computation of multiple complex equations
which are required for real time video effects.
Video Input/Output. The Company has developed technology for video input
and output of composite analog, component analog and component digital video
data streams. All of the Company's products work with NTSC and PAL video
standards. In addition, the Company has developed interfaces to support
input/output of video streams stored on computer disks.
User Interface Design. The Company has extensive experience in the design
of graphical user interfaces for video control and manipulation. The Company
uses interactive, menu-driven user interfaces to control video manipulation
functions.
Camcorder and VCR Control. With the acquisition of the VideoDirector
product line in June 1996, the Company obtained software code which enables a
computer to control most commercially available camcorders and VCRs.
The Company has historically devoted a significant portion of its
resources to engineering and product development programs and expects to
continue to allocate significant resources to these efforts. In addition, the
Company has acquired certain products and technologies which have aided the
Company's ability to more rapidly develop and market new products, such as the
VideoDirector Studio 200. The Company's future operating results will depend to
a considerable extent on its ability to continually develop, acquire, introduce
and deliver new hardware and software products that offer its customers
additional features and enhanced performance at competitive prices. Delays in
the introduction or shipment of new or enhanced products, the inability of the
Company to timely develop and introduce such new products, the failure of such
products to gain market acceptance or problems associated with product
transitions could adversely affect the Company's business, financial condition
and results of operations, particularly on a quarterly basis. See "Risk
Factors--Technological Change and Obsolescence; Risks Associated with
Development and Introduction of New Products."
29
<PAGE>
As of September 30, 1997, the Company had 85 people engaged in engineering
and product development. The Company's engineering and product development
expenses (excluding purchased in process research and development) in fiscal
1995, 1996 and 1997 were $2.4 million, $5.1 million and $7.6 million,
respectively, and represented 10.8%, 11.1% and 20.2%, respectively, of net
sales. For the three months ended September 30, 1997, the Company's engineering
and product development expenses (excluding purchased in process research and
development) were $2.1 million, representing 12.6% of net sales.
Customers
End users of the Company's products, none of whom accounted for a material
amount of the Company's net sales during any period, range from individual
users to major corporate and government entities, video production and
broadcast facilities worldwide. The Company's broadcast customers include
domestic and international television and cable networks, local broadcasters
and program creators. The Company's desktop customers include corporations
seeking to develop internal video post-production capabilities, wedding and
special events videographers and small production houses serving cable and
commercial video markets.
Marketing, Sales and Service
Marketing
The Company's marketing efforts are targeted at users of broadcast and
desktop post-production suites, and at home video editing enthusiasts. In order
to increase awareness of its products, the Company attends a number of trade
shows, the major ones being the NAB show and the COMDEX exhibition, both in the
United States, and the IBC show in Europe. The Company uses targeted direct
mail campaigns and advertisements in trade and computer publications for most
of its product lines. The Company also participates in joint marketing
activities with its OEM partners and with other desktop video companies. The
Company plans to expand its desktop joint marketing activities.
Sales
The Company maintains a sales management organization, consisting of
regional sales managers in the United States and international territories. The
regional sales managers are primarily responsible for supporting independent
dealers and making direct sales in geographic regions without dealer coverage
or to customers that prefer to transact directly with the Company.
The Company sells its broadcast and desktop products to end users through
an established domestic and international network of independent dealers that
specialize in selling video production equipment and through direct sales. The
independent dealers are selected for their ability to provide effective field
sales and technical support to the Company's customers. Dealers generally carry
the Company's products as demonstration units, advise customers on system
configuration and installation and perform ongoing post-sales customer support.
The Company believes that many end users depend on the technical support
offered by independent dealers in making product purchase decisions.
The Company also sells and distributes its desktop products to OEMs that
incorporate the Company's products into their video editing products and resell
these products to other resellers and end users. These OEMs generally purchase
the Company's products and are responsible for conducting their own marketing,
sales and support activities. The Company attempts to identify and align itself
with OEMs that are market share and technology leaders in the Company's target
markets. In particular, the Company is dependent on sales of Alladin and Genie
to Avid, which is a leading supplier of digital, non-linear video and audio
editing systems for the professional video and film editing market. Sales to
Avid accounted for approximately 43.3% of net sales in fiscal 1996, 26.4% of
sales in fiscal 1997 and 17.9% of sales in the three month period ended
September 30, 1997. No customer accounted for more than 10.0% of the Company's
net sales during fiscal 1995. The concentration of the net sales to a single
OEM customer subjects the Company to a number of risks, in particular the risk
that its operating results will vary on a quarter-to-quarter basis as a result
of variations in the ordering patterns of the OEM customer. The Company's
dependence upon these resellers could have a material adverse effect on the
Company's results of operations. See "Risk Factors--Concentration of Sales to
OEMs," "--Dependence on Resellers; Absence of Direct Sales Force; Expansion of
Distribution Channels" and "--Competition."
30
<PAGE>
The Company's consumer products are sold through different channels than
the Company's other products. The VideoDirector Studio 200 product is sold
primarily through large distributors, such as Ingram Micro Inc., and large
computer and electronic retailers, such as CompUSA, ComputerCity, Egghead
Software, Circuit City, Best Buy and The Good Guys. In addition, certain of the
miroVideo products are sold through the same retailers as the VideoDirector 200
product. The Company acquired Miro's European sales organization in connection
with the Miro Acquisition. VideoDirector and miroVideo products are also sold
via direct telemarketing, mail order and over the Internet. The consumer market
is characterized by longer payment terms and higher sales returns than the
Company's broadcast and desktop markets. There can be no assurance that
computer retailers will continue to stock and sell the Company's VideoDirector
and miroVideo products. If a significant number of computer retailers were to
discontinue selling VideoDirector and miroVideo products, the Company's results
of operations would be adversely affected. Sales to the consumer market entail
a number of risks including the limited experience of the Company in this
market, inventory obsolescence, product returns and potential price protection
obligations. See "Risk Factors--Risks Associated with the Consumer Market" and
"--Dependence on Resellers; Absence of Direct Sales Force; Expansion of
Distribution Channels."
Sales outside of North America represented approximately 46.5%, 38.7% and
39.7% of the Company's net sales for fiscal 1995, 1996 and 1997, respectively
and 47.6% for the three month period ended September 30, 1997. The Company
expects that sales outside of the United States will continue to account for a
significant portion of its net sales, particularly in light of the Miro
Acquisition. The Company makes foreign currency denominated sales in many
countries exposing itself to risks associated with foreign currency
fluctuations. Although the dollar amount of such foreign currency denominated
sales was nominal during fiscal 1997, the Company will increase the amount of
sales denominated in foreign currency during fiscal 1998, especially for sales
of consumer products into Europe. International sales and operations may also
be subject to risks such as the imposition of governmental controls, export
license requirements, restrictions on the export of critical technology,
generally longer receivable collection periods, political instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
international operations, potential insolvency of international dealers and
difficulty in collecting accounts receivable. There can be no assurance that
these factors will not have an adverse effect on the Company's future
international sales and, consequently, on the Company's business, financial
condition and results of operations. See "Risk Factors--International Sales
Risks."
Service and Support
The Company believes that its ability to provide customer service and
support is an important element in the marketing of its products. Its customer
service and support operation also provides the Company with a means of
understanding customer requirements for future product enhancements. The
Company maintains an in-house repair facility and also provides telephone
access to its technical support staff. The Company's technical support
engineers not only provide assistance in diagnosing problems, but also work
closely with customers to address system integration issues and to assist
customers in increasing the efficiency and productivity of their systems. The
Company supports its customers in Europe and Asia primarily through its
international dealers. The Company typically warrants its products against
defects in materials and workmanship for varying periods depending on the
product and the nature of the purchaser. The Company believes its warranties
are similar to those offered by other video production equipment suppliers. To
date, the Company has not encountered any significant product maintenance
problems.
Competition
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over
the life of a product. Competition is fragmented with several hundred
manufacturers supplying a variety of products to this market. The Company
anticipates increased competition in the video post-production equipment market
from both existing manufacturers and new market entrants. Increased competition
could result in price reductions, reduced margins and loss of market share, any
of which could materially and adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors. See "Risk Factors--Competition."
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<PAGE>
Competition for the Company's broadcast products is generally based on
product performance, breadth of product line, service and support, market
presence and price. The Company's principal competitors in this market include
The Grass Valley Group, Inc. (a subsidiary of Tektronix, Inc.) ("Grass Valley
Group"), Leitch Video Limited, Matsushita Electric Industrial Co. Ltd.
("Matsushita"), Quantel Ltd. (a division of Carlton Communications Plc)
("Quantel"), Scitex Video (a division of Scitex Corporation Ltd.) ("Scitex")
and Sony Corporation ("Sony"), each of which has substantially greater
financial, technical, marketing, sales and customer support resources, greater
name recognition and larger installed customer bases than the Company. In
addition, these companies have established relationships with current and
potential customers of the Company. Some of the Company's competitors also
offer a wide variety of video equipment, including professional video tape
recorders, video cameras and other related equipment. In some cases, these
competitors may have a competitive advantage based upon their ability to bundle
their equipment in certain large system sales.
The Company's competition in the desktop and consumer markets comes from a
number of groups of video companies such as traditional video equipment
suppliers, providers of desktop editing solutions, video software application
companies or others. Suppliers of traditional video equipment such as Grass
Valley Group, Matsushita, Quantel, Scitex and Sony have the financial resources
and technical know-how to develop high quality, real time video manipulation
products for the desktop video market. Suppliers of desktop video editing
systems or components such as Avid, Digital Processing Systems Inc., Fast
Multimedia, Iomega Corp., Matrox Electronics Systems, Ltd., Media100,
Truevision, Inc. and Scitex, many of which have established desktop video
distribution channels, experience in marketing video products and significant
financial resources, may acquire or develop video manipulation products for the
desktop video market. The consumer market in which VideoDirector Studio 200 and
the miroVideo products compete is an emerging market and the sources of
competition are not yet well defined. There are several established video
companies that are currently offering products or solutions that compete
directly or indirectly with the Company's consumer products by providing some
or all of the same features and video editing capabilities. In addition, the
Company expects that existing manufacturers and new market entrants will
develop new, higher performance, lower cost consumer video products that may
compete directly with the Company's consumer products. Suppliers of video
manipulation software such as Adobe Systems, Inc. ("Adobe") or SoftImage, a
subsidiary of Microsoft Corporation, may develop products which compete
directly with the Company's products. In addition, the Company may face
competition from other computer companies that lack experience in the video
production industry but that have substantial resources to acquire or develop
technology and products for the video production market. There can be no
assurance that any of these companies will not enter into the video production
market or that the Company could successfully compete against them if they did.
Manufacturing and Suppliers
The Company's manufacturing operations, located at its Mountain View,
California facility, consist primarily of testing printed circuit assemblies,
final product assembly, configuration and testing, quality assurance and
shipping for the Company's broadcast and desktop products. Manufacturing of the
Company's consumer products is performed by an independent subcontractor and
products are generally shipped directly to the distributor or retailer. Each of
the Company's products undergoes quality inspection and testing at the board
level and final assembly stage. The Company manages its materials with a
software system that integrates purchasing, inventory control and cost
accounting.
The Company relies on independent subcontractors who manufacture to the
Company's specifications its consumer products and major subassemblies used in
the Company's broadcast and desktop products. This approach allows the Company
to concentrate its manufacturing resources on areas where it believes it can
add the most value, such as product testing and final assembly, and reduces the
fixed costs of owning and operating a full scale manufacturing facility. The
Company has manufacturing agreements with Quadrus, a division of Bell
Microproducts, Inc., for the manufacture of major subassemblies used in its
broadcast and desktop products, and with other subcontractors for the
manufacture of the Company's consumer products. In addition, the Company
subcontracts manufacturing related to the miroVideo products to Ihlemann GmbH
and Streiff & Helmold GmbH, both of which are located in Braunschweig, Germany,
and which performed the same manufacturing for Miro. The Company's reliance on
subcontractors to manufacture products and major subassemblies involves a
number of significant risks including the loss of control over the
manufacturing
32
<PAGE>
process, the potential absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control
over delivery schedules, manufacturing yields, quality and costs. In the event
that any significant subcontractor were to become unable or unwilling to
continue to manufacture these products or subassemblies in required volumes,
the Company's business, financial condition and results of operations would be
materially adversely affected.
To the extent possible, the Company and its manufacturing subcontractors
use standard parts and components available from multiple vendors. However, the
Company and its subcontractors are dependent upon single or limited source
suppliers for a number of key components and parts used in its products,
including integrated circuits manufactured by Altera Corporation, AuraVision
Corporation, LSI Logic Corp., Philips Electronics, Inc., Raytheon Corporation
and Zoran Corporation, boards and modules manufactured by Adaptec, Inc., Sony
and Truevision, Inc., field programmable gate arrays manufactured by Altera
Corporation, serial RAM memory modules manufactured by Hitachi, Ltd. and
software applications from Adobe and Ulead Systems, Inc. The Company's
manufacturing subcontractors generally purchase these single or limited source
components pursuant to purchase orders placed from time to time in the ordinary
course of business, do not carry significant inventories of these components
and have no guaranteed supply arrangements with such suppliers. In addition,
the availability of many of these components to the Company's manufacturing
subcontractors is dependent in part on the Company's ability to provide its
manufacturers, and their ability to provide suppliers, with accurate forecasts
of its future requirements. The Company and its manufacturing subcontractors
endeavor to maintain ongoing communication with their suppliers to guard
against interruptions in supply. The Company and its subcontractors have in the
past experienced delays in receiving adequate supplies of single source
components. Also, because of the reliance on these single or limited source
components, the Company may be subject to increases in component costs which
could have an adverse effect on the Company's results of operations. Any
extended interruption or reduction in the future supply of any key components
currently obtained from a single or limited source could have a significant
adverse effect on the Company's business, financial condition and results of
operations in any given period. "Risk Factors--Dependence on Contract
Manufacturers and Single or Limited Source Suppliers."
The Company's broadcast and desktop customers generally order on an
as-needed basis. The Company typically ships its products within 30 to 60 days
of receipt of an order, depending on customer requirements, although certain
customers, including OEMs, may place substantial orders with the expectation
that shipments will be staged over several months. A substantial majority of
product shipments in a period relate to orders received in that period, and
accordingly, the Company generally operates with a limited backlog of orders.
The absence of a significant historical backlog means that quarterly results
are difficult to predict and delays in product delivery and in the closing of
sales near the end of a quarter can cause quarterly revenues to fall below
anticipated levels. In addition, customers may cancel or reschedule orders
without significant penalty and the prices of products may be adjusted between
the time the purchase order is booked into backlog and the time the product is
shipped to the customer. As a result of these factors, the Company believes
that the backlog of orders as of any particular date is not necessarily
indicative of the Company's actual sales for any future period. See "Risk
Factors--Significant Fluctuations in Operating Results."
Proprietary Rights and Licenses
The Company's ability to compete successfully and achieve future revenue
growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company
relies on a combination of patent, copyright, trademark and trade secret laws
and other intellectual property protection methods to protect its proprietary
technology. In addition, the Company generally enters into confidentiality and
nondisclosure agreements with its employees and OEM customers and limits access
to and distribution of its proprietary technology. The Company currently holds
two United States patents covering certain aspects of its technologies for
digital video effects and has an application pending for a third patent.
Although the Company intends to pursue a policy of obtaining patents for
appropriate inventions, the Company believes that the success of its business
will depend primarily on the innovative skills, technical expertise and
marketing abilities of its personnel, rather than upon the ownership of
patents. Certain technology used in the Company's products is licensed from
third parties on a royalty-bearing basis. Such royalties to date have not
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<PAGE>
been, and are not expected to be, material. Generally, such agreements grant to
the Company nonexclusive, worldwide rights with respect to the subject
technology and terminate only upon a material breach by the Company.
In the course of its business, the Company may receive and in the past has
received communications asserting that the Company's products infringe patents
or other intellectual property rights of third parties. The Company's policy is
to investigate the factual basis of such communications and to negotiate
licenses where appropriate. While it may be necessary or desirable in the
future to obtain licenses relating to one or more of its products, or relating
to current or future technologies, there can be no assurance that the Company
will be able to do so on commercially reasonable terms or at all. There can be
no assurance that such communications can be settled on commercially reasonable
terms or that they will not result in protracted and costly litigation.
There has been substantial industry litigation regarding patent, trademark
and other intellectual property rights involving technology companies. In the
future, litigation may be necessary to enforce any patents issued to the
Company, to protect its trade secrets, trademarks and other intellectual
property rights owned by the Company, or to defend the Company against claimed
infringement. Any such litigation could be costly and a diversion of
management's attention, either of which could have material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Risks of Third-Party Claims of Infringement" and
"--Dependence on Proprietary Technology."
Employees
As of September 30, 1997, the Company had 282 full-time employees,
including 85 engaged in engineering and product development activities, 48 in
manufacturing, 133 in marketing and sales and 16 in administration and finance.
The Company believes that its future success will depend, in part, on its
continuing ability to attract, retain and motivate qualified technical,
marketing and managerial personnel. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced work stoppages. In Germany, certain of the Company's employees are
represented by statutory worker councils, which are representative bodies to
which employees appoint representatives. In general, the employer is required
to seek the approval and/or advice of the worker council before making certain
significant decisions affecting the employees and the business. The Company
believes that its relations with its employees are good.
Facilities
The Company's principal administrative, marketing, manufacturing and
product development facility is located in Mountain View, California. This
facility occupies approximately 106,500 square feet pursuant to a lease which
commenced August 15, 1996 and which will terminate December 31, 2003. The
Company has also entered into an agreement to sublease approximately 26,500 of
the Mountain View, California facility to Network Computing Devices. That
sublease agreement is currently scheduled to terminate on August 31, 1998. In
connection with the Miro Acquisition, the Company leased a portion of Miro's
facility in Braunschweig, Germany, which consists of approximately 30,000
square feet. The Braunschweig lease expires in August 1998.
In addition, the Company occupies sales and customer support facilities in
Uxbridge, United Kingdom; Singapore; Tokyo, Japan; Nijmegen, Netherlands and
Paris, France. The Company also has two small engineering development
facilities outside of California, one in Gainesville, Florida, and one in
Paramus, New Jersey.
34
<PAGE>
<TABLE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their ages as of
September 30, 1997 are as follows:
<CAPTION>
Name Age Position
- -------------------------- ----- --------------------------------------------------------
<S> <C> <C>
Mark Sanders ............ 54 President, Chief Executive Officer and Director
Ajay Chopra ............ 40 Chairman of the Board, Vice President, General Manager,
Desktop Products
Arthur Chadwick ......... 40 Vice President, Finance and Administration and
Chief Financial Officer
George Blinn ............ 49 Vice President, General Manager, Pinnacle Systems GmbH
Pat Burns ............... 50 Vice President, Corporate Marketing and Domestic Sales
Brian Conner ............ 51 Vice President, Sales, Europe, Africa and Middle East
Tavy Hughes ............ 42 Vice President, Manufacturing
William Loesch ......... 43 Vice President, General Manager, Consumer Products
William Ludwig ......... 49 Vice President, Sales, Latin America and Asia
Keith Trickett ......... 57 Vice President, General Manager, Deko Products
Robert Wilson ............ 43 Vice President, General Manager, Broadcast Products
John Lewis (1) ......... 61 Director
Nyal McMullin (2) ...... 71 Director
Glenn Penisten (2) ...... 65 Director
Charles Vaughn (1) ...... 59 Director
<FN>
- ---------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
</FN>
</TABLE>
There is no family relationship between any director or executive officer
of the Company.
Mr. Sanders has served as President, Chief Executive Officer and a
director of the Company since January 1990. From 1988 to 1990, Mr. Sanders was
an independent business consultant. Prior to that time, Mr. Sanders served in a
variety of management positions, most recently as Vice President and General
Manager of the Recording Systems Division, of Ampex Incorporated, a
manufacturer of video broadcast equipment.
Mr. Chopra, a founder of the Company, has served as Chairman of the Board
of Directors since January 1990, and has served as a director of the Company
since its inception in May 1986. Mr. Chopra has served as Vice President,
General Manager, Desktop Products since April 1997. He previously served as
Chief Technology Officer from June 1996 to April 1997, Vice President of
Engineering from January 1990 to June 1996, and President and Chief Executive
Officer of the Company from its inception to January 1990.
Mr. Chadwick has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since January 1989. From February 1987
to January 1989 he served as Plant Manager, Gould Semiconductor, Philippines, a
semiconductor company.
Mr. Blinn has served as Vice President, General Manager, Pinnacle Systems
GmbH since August 1997. Prior to joining the Company, Mr. Blinn was the Chief
Financial Officer of Miro from December 1996 to August 1997. From January 1993
to December 1996, Mr. Blinn was an independent business consultant. From
January 1987 to December 1992, Mr. Blinn served as a General Manager of Hitachi
Data Systems GmbH, a mainframe computer distributor.
Mr. Burns has served as Vice President, North American Sales and Corporate
Marketing of the Company since December 1996. From March 1996 to November 1996,
Mr. Burns served as a marketing and strategy consultant to software developers
in the film and video markets. From April 1995 to February 1996, he served as
Vice President and General Manager of Video and Graphics products at Radius,
Inc., a graphics company. From May 1994 to April 1995, Mr. Burns served as Vice
President and General Manager of Chyron's West
35
<PAGE>
Coast operations. From April 1993 to May 1994, Mr. Burns served as Director of
International Marketing for VeriFone, Inc., a financial transaction company.
From November 1991 through January 1993, Mr. Burns was Vice President of
Macrovision, Inc., a video encryption company.
Mr. Conner has served as Vice President, Sales of the Company and General
Manager of Pinnacle Systems Ltd., the Company's sales subsidiary covering
Europe, Africa and the Middle East, since February 1995. From January 1993 to
February 1995, Mr. Conner was a founder and served as President of BCA Inc., an
independent European sales representative company. From January 1991 to January
1993, Mr. Conner served as General Manager of European, African and Middle East
Sales of Videomedia, Inc., a manufacturer of video editing systems. Prior to
that, Mr. Conner was Managing Director of Videomedia Europe Ltd., a European
sales representative.
Ms. Hughes has served as Vice President, Manufacturing of the Company
since January 1995, Director of Manufacturing from April 1994 to January 1995
and a Manager from September 1993 until April 1994. From July 1991 to September
1993, Ms. Hughes served as an independent business consultant. From 1985 to
June 1991, Ms. Hughes served as Manufacturing Manager of Alta Group, Inc., a
manufacturer of digital video post-production equipment.
Mr. Loesch has served as Vice President, General Manager, Consumer
Products since April 1997. Prior to that Mr. Loesch served as Vice President,
New Business Development of the Company from May 1994 to April 1997. From July
1993 to May 1994, Mr. Loesch served as an independent business consultant. From
June 1990 to November 1992, Mr. Loesch co-founded and served as President of
SHOgraphics Inc., a 3D graphics systems company, and from November 1992 until
July 1993 served as its Executive Vice President and Chief Technical Officer.
From 1989 to June 1990, Mr. Loesch was an independent business consultant.
Prior to that time, Mr. Loesch co-founded and served as Chief Executive Officer
and President of IKOS Systems, Inc., a computer aided engineering company.
Mr. Ludwig has served as Vice President, Latin American and Asia Sales of
the Company since July 1996. From January 1996 to June 1996, Mr. Ludwig served
as Director of Sales for Americas/Pacific Region for FAST Electronics, a video
equipment manufacturer. From 1985 until January 1996, Mr. Ludwig served in
several executive sales positions with Abekas Video Systems, a video equipment
manufacturer, including International Sales Director for Americas/Pacific
Region.
Mr. Trickett has served as Vice President, Deko Products since April 1997.
Prior to that, Mr. Trickett served as the President and CEO of Digital Graphix
from November 1994 until the recent acquisition of its Deko product by Pinnacle
in April 1997. Mr. Trickett was President of Montage Group Ltd., a video
company, from August 1993 to September 1994, and before that spent nine years
with Techexport Inc. and an Executive Director and Vice President of Strategic
Planning, and European Operations.
Mr. Wilson has served as Vice President, Broadcast Products since April
1997. From May 1994 to April 1997, Mr. Wilson served as Executive Vice
President, Chief Operating Officer and Chief Financial officer of Accom, Inc.,
a video company. Mr. Wilson has served on the board of directors at Accom since
April 1995. From March 1991 to April 1994, Mr. Wilson served as President and
Chief Executive Officer of The Grass Valley Group (a subsidiary of Tektronix,
Inc.), which provides video systems to the high-end production, post-production
and broadcast market.
Mr. Lewis has served as a director of the Company since December 1995. Mr.
Lewis has been Chairman of the Board of Amdahl Corporation, a developer of high
performance computer systems, since 1987 and was reelected President and Chief
Executive Officer of Amdahl in March 1996. He previously served as President of
Amdahl from 1977 until 1987, and was Amdahl's Chief Executive Officer from 1983
until 1992. He is a director of Cypress Semiconductor Corporation, Vitesse
Semiconductor Corporation and Infinity Financial Technology, Inc.
Mr. McMullin has served as a director of the Company since May 1989. Mr.
McMullin has been a special limited partner of El Dorado Ventures, a venture
capital investment firm, since 1987.
Mr. Penisten has served as a director of the Company since October 1986.
Mr. Penisten has been General Partner of Alpha Venture Partners, a venture
capital investment firm, since 1985, and serves on the Board of
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<PAGE>
Directors of IKOS, a software and hardware developer to support integrated
circuits and ASIC-based electronic systems, Bell Microproducts, Inc., a
distributor of semiconductor products and a contract manufacturer, and
Superconductor Technologies, Inc., a developer of products utilizing
superconductivity materials, and serves as Chairman of the Board of Network
Peripherals, Inc., a developer of integrated high performance network
solutions. Mr. Penisten was Chairman of the American Electronics Association in
1982.
Mr. Vaughan has served as a director since June 1986. Mr. Vaughan has been
a partner of VLCO Investments, a private investment firm that he founded, since
1985. During the period of May 1989 to January 1992 he served in various
positions at Homestead Financial Corporation and its subsidiaries, including
Executive Vice President and Chief Operating Officer of this diversified
financial services company.
37
<PAGE>
<TABLE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of September 30, 1997 as
to (i) each person who is known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company,
(iii) the Company's Chief Executive Officer and each of the four most highly
compensated executive officers of the Company, (iv) the Selling Shareholders
and (v) all directors and executive officers as a group.
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Five Percent Shareholders, Prior to Offering (1) Shares After Offering (1)
the Selling Shareholders, Directors and --------------------- Being --------------------
Certain Executive Officers Number Percent Offered Number Percent
- ---------------------------------------------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
The Capital Group Companies, Inc. (2) ............ 565,000 7.5 -- 565,000 5.9
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
Franklin Resources, Inc. (3) ..................... 543,650 7.2 -- 543,650 5.7
Templeton Global Advisors Limited
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Blvd.
San Mateo, California 94404
J. P. Morgan & Co. Incorporated (4) ............... 440,510 5.8 -- 440,510 4.6
60 Wall Street
New York, New York 10260
PaineWebber Group Inc. (5) ........................ 415,100 5.5 -- 415,510 4.3
1285 Avenue of the Americas
New York, New York 10019-6028
Wilke/Thompson Capital Management, Inc. (6) ...... 393,400 5.2 -- 393,400 4.1
3800 Norwest Center
90 S. 7th Street
Minneapolis, Minnesota 55402
miro Computer Products AG ........................ 203,565 2.7 203,565 0 --
Carl-Miele--Str. 4
38112 Braunschweig, Germany
Mark L. Sanders (7) .............................. 256,800 3.3 44,935 211,865 2.2
Ajay Chopra (8) ................................. 150,658 2.0 20,000 130,658 1.4
Charles J. Vaughan (9) ........................... 49,285 * -- 49,285 *
Glenn E. Penisten (10) ........................... 46,339 * -- 46,339 *
William Loesch (11) .............................. 42,315 * 5,000 37,315 *
Arthur D. Chadwick (12) ........................... 42,105 * 5,000 37,105 *
Nyal D. McMullin (13) ........................... 26,516 * 5,000 21,516 *
Brian Conner (14) ................................. 21,625 * 5,000 16,625 *
Robert Wilson (15) .............................. 11,250 * 5,000 6,250 *
William Ludwig (16) .............................. 6,809 * 2,500 4,309 *
Keith Trickett (17) .............................. 4,800 * 4,000 800 *
John Lewis (18) .................................... 2,500 * -- 2,500 *
All directors and executive officers as a group
(15 persons) (19) .............................. 691,312 8.6 96,435 594,877 5.9
<FN>
- ---------------------
* Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option. Applicable
percentage of ownership is based on 7,580,152 shares of Common Stock
outstanding as of September 30, 1997 together with applicable options for
such shareholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, and includes voting
and investment power with respect to shares. Shares of Common Stock
subject to options currently exercisable or exercisable within 60 days
38
<PAGE>
after September 30, 1997 are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(2) Reflects ownership as reported on Schedule 13G dated August 8, 1997 filed
with the Securities and Exchange Commission by The Capital Group
Companies, Inc. ("Capital Group") and Capital Guardian Trust, a
wholly-owned subsidiary of Capital Group. Of the shares reported, Capital
Guardian Trust has sole dispositive power as to 515,000 of the shares and
sole voting power as to 315,000 of such shares. The Company does not have
any knowledge as to where voting and dispositive power with respect to
such remaining shares reside.
(3) Reflects ownership as reported on Schedule 13G dated February 12, 1997
filed with the Securities and Exchange Commission by Franklin Resources,
Inc. ("FRI"), Charles B. Johnson, Rupert H. Johnson, Jr. and Templeton
Global Advisors Limited. Templeton Global Advisors Limited has sole voting
and dispositive power as to 442,500 of the shares. Templeton Investment
Management Limited, an advisory subsidiary of FRI, has sole voting and
dispositive power as to 81,750 of the shares. Templeton Investment
Management (Australia) Limited, an advisory subsidiary of FRI, has sole
voting and dispositive power as to 19,400 of the shares. The address for
Templeton Global Advisors Limited is Lyford Cay, P.O. Box N-7759, Nassau,
Bahamas.
(4) Reflects ownership as reported on Schedule 13G dated January 1, 1997 filed
with the Securities and Exchange Commission by J.P. Morgan & Co.
Incorporated ("J.P. Morgan"). J.P. Morgan has sole dispositive power as to
all of these shares and sole voting power as to 234,900 of such shares.
The Company does not have knowledge as to where voting power with respect
to the remaining shares resides.
(5) Reflects ownership as reported on Schedule 13G dated February 14, 1997
filed with the Securities and Exchange Commission by PaineWebber Group
Inc. ("PaineWebber"). PaineWebber has sole dispositive power as to all of
these shares and sole voting power as to 396,300 of these shares. The
Company does not have knowledge as to where voting power with respect to
the remaining shares reside or with whom dispositive power is shared.
(6) Reflects ownership as reported on Schedule 13G dated January 21, 1997 filed
with the Securities and Exchange Commission by Wilke/Thomson Capital
Management, Inc. ("Wilke/Thompson"). Wilke/Thompson has sole voting and
dispositive power as to all of such shares.
(7) Includes 240,769 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 51,959 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(8) Includes 53,020 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 30,980 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(9) Includes 3,750 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 2,500 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(10) Includes 3,750 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 2,500 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(11) Includes 42,187 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 46,813 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(12) Includes 21,495 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual
39
<PAGE>
also holds options to acquire an additional 34,105 shares of Common Stock
which options are not currently exercisable and will not be exercisable
within 60 days of September 30, 1997.
(13) Includes 11,250 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 2,500 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(14) Includes 21,625 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 22,375 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(15) Includes 11,250 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 33,750 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(16) Includes 5,333 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 16,667 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(17) Includes 4,000 Shares of Common Stock that may be acquired upon exercise
of stock options which are presently execisable or will become exercisable
within 60 days of September 30, 1997. Such individual also holds options
to acquire an additional 26,000 shares of Common Stock which options are
not currently exercisable and will not be exercisable within 60 days of
September 30, 1997.
(18) Includes 2,500 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Such individual also
holds options to acquire an additional 3,750 shares of Common Stock which
options are not currently exercisable and will not be exercisable within
60 days of September 30, 1997.
(19) Includes 450,266 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997.
</FN>
</TABLE>
40
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement,
Hambrecht & Quist LLC, Piper Jaffray Inc. and Volpe Brown Whelan & Company, LLC
(the "Underwriters") have severally agreed to purchase from the Company and the
Selling Shareholders the following respective number of shares of Common Stock:
Number of
Name Shares
------------------------------------------ ----------
Hambrecht & Quist LLC .................. 1,150,000
Piper Jaffray Inc. ..................... 690,000
Volpe Brown Whelan & Company, LLC ...... 460,000
----------
Total ................................. 2,300,000
==========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $.72
per share. The Underwriters may allow and such dealers may reallow a concession
not in excess of $.10 per share to certain other dealers. After the public
offering of the shares, the offering price and other selling terms may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no
later than 30 days after the date of this Prospectus, to purchase up to 345,000
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the above table bears to the total number of shares of Common Stock offered
hereby. The Company will be obligated, pursuant to the option, to sell such
shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted
by the Underwriters and subject to prior sale and to withdrawal, cancellation
or modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company's executive officers and directors have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock during the 90 day period following
the effective date of the Registration Statement of which this Prospectus is a
part, other than the sale of up to 37,375 shares of Common Stock in the
aggregate, currently held, hereafter acquired upon the exercise of options
currently held by the executive officers or directors, or hereafter acquired by
such individuals under the Company's 1994 Employee Stock Purchase Plan. The
Company and the Selling Shareholders have also agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, any share of Common
Stock or any securities convertible into or exercisable or exchangeable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
similar arrangement that transfers, in whole
41
<PAGE>
or in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in the above clause (i) or (ii) is to be
settled by delivery of such Common Stock or such other securities, in cash or
otherwise, during the 90 days after the date of this Prospectus, other than (a)
the sale by the Company to the Underwriters of the shares of Common Stock
pursuant to the Underwriting Agreement (b) the issuance by the Company of
shares of Common Stock upon exercise of options granted pursuant to the
Company's stock plans or upon purchases pursuant to the Company's Employee
Stock Purchase Plan, in each case as outstanding or reserved for issuance on
the date of this Prospectus and (c) options to purchase Common Stock granted
under the Company's stock plans and reserved for such purpose on the date of
this Prospectus.
In general, the rules of the Commission will prohibit the Underwriters
from making a market in the Common Stock during the "cooling off" period
immediately preceding the commencement of sales in this offering. The
Commission has, however, adopted exemptions from these rules that permit
passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain Underwriters, selling
group members (if any) or their respective affiliates intend to engage in
passive market making in the Common Stock during the "cooling off" period.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids or effecting syndicate
covering transaction. A stabilizing bid means the placing of any bid or
effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of the Common Stock. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the
offering. Such transactions may be effected on the Nasdaq National Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
The Underwriters have advised the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
EXPERTS
The consolidated financial statements and schedule of the Company as of
June 30, 1996 and 1997 and for each of the years in the three-year period ended
June 30, 1997 have been included herein and incorporated by reference in this
Prospectus and in the Registration Statement of which this Prospectus forms a
part, in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, and are included and incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with
the offering will be passed upon for the Underwriters by Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California.
42
<PAGE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ........................ F-2
Consolidated Balance Sheets ........................... F-3
Consolidated Statements of Operations ............... F-4
Consolidated Statements of Shareholders' Equity ...... F-5
Consolidated Statements of Cash Flows ............... F-6
Notes to Consolidated Financial Statements ............ F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PINNACLE SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1996 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Palo Alto, California
July 22, 1997
F-2
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, September 30,
------------------------ --------------
1996 1997 1997
---------- ----------- --------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................. $ 27,846 $ 32,788 $ 28,635
Marketable securities ....................................... 29,315 15,024 19,248
Accounts receivable, less allowance for doubtful accounts
and returns of $840 and $1,754 and $2,463 as of June 30,
1996 and 1997, and September 30, 1997, respectively ...... 7,526 10,646 15,858
Inventories ................................................ 9,611 5,497 6,692
Deferred taxes ............................................. 2,091 -- --
Prepaid expenses and other assets ........................... 311 528 671
-------- --------- ---------
Total current assets .................................... 76,700 64,483 71,104
Property and equipment, net ................................. 2,204 4,395 4,809
Marketable securities ....................................... 3,973 -- --
Deferred taxes ............................................. 1,154 -- --
Other assets ................................................ 530 1,129 4,804
-------- --------- ---------
$ 84,561 $ 70,007 $ 80,717
======== ========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .......................................... $ 1,495 $ 3,955 $ 5,375
Accrued expenses & other .................................... 2,621 2,584 7,634
Note payable for acquisition .............................. -- -- 15,150
Deferred revenue .......................................... 247 282 637
-------- --------- ---------
Total current liabilities ................................. 4,363 6,821 28,796
-------- --------- ---------
Long-term obligations ....................................... -- 475 475
Commitments
Shareholders' equity:
Preferred Stock; authorized 5,000 shares; none issued and
outstanding ................................................ -- -- --
Common stock; authorized 15,000 shares; 7,468, 7,303 and
7,580 issued and outstanding as of June 30, 1996 and
1997 and September 30, 1997, respectively ............... 77,902 75,316 80,342
Deferred compensation, net ................................. (34) -- --
Foreign currency translation .............................. -- -- 56
Retained earnings (deficit) ................................. 2,330 (12,605) (28,952)
-------- --------- ---------
Total shareholders' equity .............................. 80,198 62,711 51,446
-------- --------- ---------
$ 84,561 $ 70,007 $ 80,717
======== ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three Months Ended
Fiscal Year Ended June 30, September 30,
---------------------------------------- -------------------------
(Unaudited)
1995 1996 1997 1996 1997
---------- ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales .............................. $ 22,193 $ 46,151 $ 37,482 $ 11,443 $ 16,514
Cost of sales ........................ 11,291 23,854 23,997 5,996 7,736
-------- -------- ---------- -------- ----------
Gross profit ........................... 10,902 22,297 13,485 5,447 8,778
-------- -------- ---------- -------- ----------
Operating expenses:
Engineering and product development ... 2,405 5,140 7,579 1,782 2,072
Sales and marketing .................. 5,340 8,907 12,667 2,694 5,221
General and administrative ............ 1,088 2,186 3,702 764 1,271
In process research and development ... -- 3,991 4,894 -- 16,960
-------- -------- ---------- -------- ----------
Total operating expenses ......... 8,833 20,224 28,842 5,240 25,524
-------- -------- ---------- -------- ----------
Operating income (loss) ............... 2,069 2,073 (15,357) 207 (16,746)
Interest income, net .................. 738 3,345 2,867 763 552
-------- -------- ---------- -------- ----------
Income (loss) before income taxes ...... 2,807 5,418 (12,490) 970 (16,194)
Income tax expense ..................... (567) (1,734) (2,445) (358) (153)
-------- -------- ---------- -------- ----------
Net income (loss) ..................... $ 2,240 $ 3,684 $ (14,935) $ 612 $ (16,347)
======== ======== ========== ======== ==========
Net income (loss) per share ............ $ 0.44 $ 0.48 $ (2.02) $ 0.08 $ (2.21)
======== ======== ========== ======== ==========
Shares used to compute net income (loss)
per share ........................... 5,110 7,689 7,402 7,823 7,402
======== ======== ========== ======== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Convertible
preferred stock Common stock
----------------------- --------------------
(In thousands) Shares Amount Shares Amount
- --------------------------------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balances as of June 30, 1994 ......... 1,551 $ 6,504 1,057 $ 328
Conversion of preferred stock to
common stock ........................ (1,551) (6,504) 1,600 6,504
Issuance of common stock in initial
public offering, net of issuance costs
of $2,268 ........................... -- -- 2,395 21,682
Issuance of common stock related to
stock plans and warrants ............ -- -- 204 269
Tax benefit from common stock option
exercise ........................... -- -- -- 387
Amortization of deferred
compensation ........................ -- -- -- --
Net income ........................... -- -- -- --
------- --------- ----- --------
Balances as of June 30, 1995 ......... -- $ -- 5,256 $ 29,170
Issuance of common stock in
secondary public offering, net of
issuance costs of $2,831 ............ -- -- 1,810 43,787
Issuance of common stock related to
stock plans ........................ -- -- 402 1,248
Tax benefit from common stock option
exercise ........................... -- -- -- 3,697
Amortization of deferred
compensation ........................ -- -- -- --
Net income ........................... -- -- -- --
------- --------- ----- --------
Balances as of June 30, 1996 ......... -- $ -- 7,468 $ 77,902
Issuance of common stock related to
stock plans ........................ -- -- 152 1,041
Repurchase of common stock ......... -- -- (317) (3,627)
Amortization of deferred
compensation ........................ -- -- -- --
Net loss ........................... -- -- -- --
------- --------- ----- --------
Balances as of June 30, 1997 ......... -- $ -- 7,303 $ 75,316
Issuance of common stock related to
stock plans (unaudited) ............ -- -- 73 674
Issuance of common stock related to
acquisition (unaudited) ............ -- -- 204 4,352
Foreign currency translation
(unaudited) ........................ -- -- -- --
Net loss (unaudited) ............... -- -- -- --
------- --------- ----- --------
Balances as of September 30, 1997
(unaudited) ........................ -- $ -- 7,580 $ 80,342
======= ========= ===== ========
<CAPTION>
Foreign Retained Total
Deferred currency earnings shareholders'
(In thousands) compensation translation (deficit) equity
- --------------------------------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances as of June 30, 1994 ......... $ (113) $-- $ (3,594) $ 3,125
Conversion of preferred stock to
common stock ........................ -- -- -- --
Issuance of common stock in initial
public offering, net of issuance costs
of $2,268 ........................... -- -- -- 21,682
Issuance of common stock related to
stock plans and warrants ............ -- -- -- 269
Tax benefit from common stock option
exercise ........................... -- -- -- 387
Amortization of deferred
compensation ........................ 40 -- -- 40
Net income ........................... -- -- 2,240 2,240
------- ----- ---------- ----------
Balances as of June 30, 1995 ......... $ (73) -- $ (1,354) $ 27,743
Issuance of common stock in
secondary public offering, net of
issuance costs of $2,831 ............ -- -- -- 43,787
Issuance of common stock related to
stock plans ........................ -- -- -- 1,248
Tax benefit from common stock option
exercise ........................... -- -- -- 3,697
Amortization of deferred
compensation ........................ 39 -- -- 39
Net income ........................... -- -- 3,684 3,684
------- ----- ---------- ----------
Balances as of June 30, 1996 ......... $ (34) -- $ 2,330 $ 80,198
Issuance of common stock related to
stock plans ........................ -- -- -- 1,041
Repurchase of common stock ......... -- -- -- (3,627)
Amortization of deferred
compensation ........................ 34 -- -- 34
Net loss ........................... -- -- (14,935) (14,935)
------- ----- ---------- ----------
Balances as of June 30, 1997 ......... $ -- -- $ (12,605) $ 62,711
Issuance of common stock related to
stock plans (unaudited) ............ -- -- -- 674
Issuance of common stock related to
acquisition (unaudited) ............ -- -- -- 4,352
Foreign currency translation
(unaudited) ........................ -- 56 -- 56
Net loss (unaudited) ............... -- -- (16,347) (16,347)
------- ----- ---------- ----------
Balances as of September 30, 1997
(unaudited) ........................ $ -- $ 56 $ (28,952) $ 51,446
======= ===== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
--------------------------------------- --------------------------
1995 1996 1997 1996 1997
----------- ------------ -------------- ----------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................. $ 2,240 $ 3,684 $ (14,935) $ 612 $ (16,347)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Acquired research and development ............ -- 3,991 4,894 -- 16,960
Depreciation and amortization .................. 285 736 1,599 254 648
Deferred taxes ................................. -- (3,245) 3,245 -- --
Tax benefit from exercise of common stock
options ....................................... 387 3,697 -- -- --
Loss on disposal of property and equipment . -- -- 448 -- --
Changes in operating assets and liabilities:
Accounts receivable ........................... (2,755) (2,980) (3,120) (1,680) (4,871)
Inventories ................................. (2,924) (4,073) 4,649 373 572
Accounts payable .............................. 2,350 (1,916) 2,460 (64) 1,284
Accrued expenses .............................. 526 1,307 (512) 144 1,376
Deferred revenue .............................. (674) (170) 35 (58) 355
Other ....................................... (93) (152) (349) (171) (63)
-------- --------- ---------- -------- ----------
Net cash provided by (used in) operating
activities ................................. (658) 879 (1,586) (590) (86)
-------- --------- ---------- -------- ----------
Cash flows from investing activities: ............
Cash payment for acquistions ..................... -- (4,412) (5,270) -- --
Purchases of property and equipment ............ (931) (1,834) (3,880) (1,659) (517)
Purchases of marketable securities ............... (9,840) (37,448) (14,644) (3,955) (4,224)
Proceeds from maturity of marketable securities 1,000 13,000 32,908 18,000 --
-------- --------- ---------- -------- ----------
Net cash provided by (used in) investing
activities ................................. (9,771) (30,694) 9,114 12,386 (4,741)
-------- --------- ---------- -------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock ......... 21,951 45,035 1,041 60 674
Purchase of common stock ........................ -- -- (3,627) -- --
-------- --------- ---------- -------- ----------
Net cash provided by (used in) financing
activities ................................. 21,951 45,035 (2,586) 60 674
-------- --------- ---------- -------- ----------
Net increase (decrease) in cash and cash
equivalents .................................... 11,522 15,220 4,942 11,856 (4,153)
Cash and cash equivalents at beginning of period . 1,104 12,626 27,846 27,846 32,788
-------- --------- ---------- -------- ----------
Cash and cash equivalents at end of period ...... $ 12,626 $ 27,846 $ 32,788 $ 39,702 $ 28,635
======== ========= ========== ======== ==========
Supplemental disclosures of cash paid during the
period:
Interest ....................................... $ 23 $ 9 $ 11 $ 2 $ 1
======== ========= ========== ======== ==========
Income taxes .................................... $ 2 $ 312 $ 442 $ 285 $ (280)
======== ========= ========== ======== ==========
Non-cash transactions:
Note payable to Miro for acquisition ............ $ -- $ -- $ -- $ -- $ 15,150
======== ========= ========== ======== ==========
Liabilities associated with the acquistion of
certain net assets ........................... $ -- $ 161 $ 978 $ -- $ 3,810
======== ========= ========== ======== ==========
Common stock issued for Miro acquisition ......... $ -- $ -- $ -- $ -- $ 4,352
======== ========= ========== ======== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information for the three months ended September 30, 1996 and 1997 is unaudited
Note 1 Summary of the Company and Significant Accounting Policies
Company. Pinnacle Systems, Inc. designs, manufactures, markets and
supports computer-based video post-production products for the broadcast,
desktop and consumer markets.
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
The Company's first three fiscal quarters end on the last Friday in September,
December and March, respectively. For financial statement presentation, the
Company has indicated its fiscal quarters as ending on the month-end.
Cash and Marketable Securities. The Company considers all highly liquid
investments with a remaining maturity of three months or less at the date of
purchase to be cash equivalents. Marketable securities consist principally of
government securities with maturities between three and eighteen months and are
carried at cost which approximates fair value. These investments are typically
short-term in nature and therefore bear minimal interest rate risk.
All investments are classified as held-to-maturity and are carried at
amortized cost as the Company has both the positive intent and the ability to
hold to maturity. Interest income is recorded using an effective interest rate,
with the associated premium or discount amortized to "Interest income." Due to
the relatively short term until maturity, the fair value of marketable
securities is substantially equal to their carrying value as of June 30, 1997.
Such investments mature through December 1997.
Inventories. Inventories are stated at the lower of first-in, first-out
cost or market. Raw materials inventory represents purchased materials,
components and assemblies, including fully assembled circuit boards purchased
from outside vendors.
Property and Equipment. Purchased property and equipment are recorded at
cost. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, generally three to five years.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," effective as of the beginning of fiscal 1997. This adoption
had no material effect on the Company's financial statements.
Revenue Recognition. Revenue on product sales is recognized upon shipment.
Warranty costs are accrued at the time sales are recognized. Provision is made
currently for estimated product returns and price protection which may occur
under programs the Company has with certain customers.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Net Income (Loss) Per Share. Net income per share is computed using the
weighted average number of common shares and dilutive common stock equivalents
outstanding using the treasury stock method. Dilutive common stock equivalents
include convertible preferred stock, stock options and warrants. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued for consideration below the assumed initial public offering
("IPO") price and stock options granted with exercise prices below the IPO
price during the 12-month period preceding the date of the initial filing of
the Company's IPO, even when antidilutive, have been included in the
calculation of common equivalent shares, using the treasury stock method based
on the IPO price, as if they were outstanding for all periods presented prior
to the IPO date. The 1995 net income per share amounts are presented on a pro
forma basis using the pro forma weighted average number of common shares
outstanding and common share equivalents outstanding during the period, after
giving retroactive effect to the automatic conversion of all series of
preferred stock into shares of common stock at the IPO date.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
Recent Accounting Pronouncements. The Financial Accounting Standards Board
recently issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires the
presentation of basic earnings per share ("EPS") and, for companies with
complex capital structures (or potentially dilutive securities, such as
convertible debt, options and warrants), diluted EPS. SFAS No. 128 is effective
for annual and interim periods ending after December 15, 1997. The Company has
not yet determined the impact of adopting SFAS No. 128.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for annual and interim periods
beginning after December 15, 1997. The Company has not yet determined the
impact of adopting SFAS No. 130.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. This
Statement is effective for financial statements for periods beginning after
December 31, 1997. The Company has not yet determined whether it has any
separately reportable business segments.
Stock-Based Compensation. The Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" beginning with the fiscal year ended June 30,
1996. Upon adoption of SFAS No. 123, the Company continued to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, "Accounting for Stock Issued
to Employees," and has provided in Note 6 pro forma disclosures of the effect
on net income and earnings per share as if the fair value-based method
prescribed by SFAS 123 had been applied in measuring compensation expense.
Concentration of Credit Risk. The Company distributes and sells its
products to end users primarily through a combination of independent domestic
and international dealers and original equipment manufacturers ("OEMs"). The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains cash
and cash equivalents, short- and long-term investments with various financial
institutions. Company policy is designed to limit exposure with any one
institution. As part of its cash and risk management process, the Company
performs periodic evaluations of the relative credit standing of the financial
institutions. The Company has not sustained material credit losses from these
institutions.
Use of Estimates in Preparation of Financial Statements. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-8
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
Note 2 Balance Sheet Components
<CAPTION>
June 30,
----------------------- September 30,
In thousands 1996 1997 1997
- ------------------------------------------- ---------- ---------- --------------
(unaudited)
<S> <C> <C> <C>
Marketable securities:
Amortized cost .................. $ 32,872 $14,982 $ 18,955
Accrued interest ............... 416 42 293
-------- -------- --------
$ 33,288 $15,024 $ 19,248
======== ======== ========
Inventories:
Raw materials .................. $ 7,695 $ 3,554 $ 4,514
Work in process ............... 405 771 967
Finished goods .................. 1,511 1,172 1,211
-------- -------- --------
$ 9,611 $ 5,497 $ 6,692
======== ======== ========
Property and equipment:
Machinery and equipment ......... $ 3,072 $ 3,462 $ 4,043
Office furniture and fixtures ... 747 2,917 3,195
-------- -------- --------
3,819 6,379 7,238
Accumulated depreciation ...... (1,615) (1,984) (2,429)
-------- -------- --------
$ 2,204 $ 4,395 $ 4,809
======== ======== ========
Accrued expenses:
Payroll and commission related $ 382 $ 508 $ 718
Taxes payable .................. 1,145 -- 333
Warranty reserve ............... 388 613 1,254
Other ........................... 706 1,463 5,329
-------- -------- --------
$ 2,621 $ 2,584 $ 7,634
======== ======== ========
</TABLE>
Note 3 Acquisitions
In August 1997, the Company acquired the miro Digital Video Products from
miro Computer Products AG. In the acquisition, the Company acquired the assets
of the miro Digital Video Products group, including the miroVIDEO product line,
certain technology and other assets. The Company paid $15.2 million in cash in
October 1997, issued 203,565 shares of common stock, valued at $4.4 million,
assumed liabilities of $2.7 million and incurred transaction costs of $1.1
million. The fair value of assets acquired included tangible assets, primarily
inventories, of $2.4 million, goodwill and other intangibles of $3.9 million,
and the Company expensed $17.0 million of in-process research and development.
In addition, the Company incurred $465,000 of other nonrecurring costs in the
quarter ended September 30, 1997 and anticipates that it will incur additonal
costs in connection with integrating the businesses. The terms of the
acquisition also included an earnout provision in which miro Computer Products
AG will receive additional consideration equal to 50% of sales generated in
excess of $37 million during the first twelve full months following the
acquisition as long as operating profits related to such sales exceed 3% of
sales, increasing to 85% of sales for those sales which exceed $59 million
during the same twelve month period. Any earnout payments will be paid in
common stock of the Company.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
The following table presents unaudited pro forma financial information
which gives effect to the acquisition of certain assets and assumption of
certain liabilities of the Digital Video Group from miro Computer Products AG
as if the transaction occurred at the beginning of each period presented. The
table includes the impact of certain adjustments, including elimination of the
nonrecurring charge for acquired in process research and development, and
additional depreciation and amortization relating to property, equipment and
intangible assets acquired.
Three months ended Year ended
September 30, 1997 June 30, 1997
(In thousands, except per share data) -------------------- --------------
Net sales ........................... $22,991 $ 74,255
Net income (loss) ..................... $ 487 $ (14,353)
Net income (loss) per share ......... $ 0.06 $ (1.89)
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire
periods presented. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that might be achieved from the
combined operations.
In April 1997, the Company purchased the Deko titling systems product line
and technology from Digital GraphiX, Inc. The Company paid $5,270,000 in cash,
and assumed liabilities of $978,000. The assets acquired primarily included
intangible assets consisting of software in the development stage and existing
software. The Company acquired inventory and other tangible property of
$593,000; intangible assets including the Deko brand name, work force-in-place,
and source code technology totaling $762,000; and in process research and
development of $4,894,000. The capitalized intangible assets and purchased
software are being amortized over a seven year period.
In June 1996, the Company purchased certain assets and liabilities from
Gold Disk Inc., a developer and marketer of software products for video editing
and assembly. The Company paid $4,412,000 in cash and assumed liabilities of
$161,000. The assets acquired primarily included intangible assets consisting
of software in the development stage and existing software. The Company
acquired inventory, accounts receivable, and other tangible property of
$240,000; intangible assets including the VideoDirector brand name, user list
and source code technology totaling $342,000; and in process research and
development of $3,991,000. The capitalized intangible assets and purchased
software are being amortized over a three year period.
To determine the value of the software in the development stage for these
acquisitions, the Company considered, among other factors, the stage of
development of each project, the time and resources needed to complete each
project, expected income and associated risks. Associated risks include the
inherent difficulties and uncertainties in completing the project and thereby
achieving technological feasibility and risks related to the viability of and
potential changes in future target markets.
Note 4 Commitments
The Company's future minimum commitments under all noncancelable leases at
June 30, 1997 are $1,316,000, $1,316,000, $1,307,000, $1,228,000, $1,210,000
and $1,151,000 for 1998, 1999, 2000, 2001, 2002 and thereafter, respectively.
Rental income from noncancelable subleases will be $305,000 and $40,000 for
1998 and 1999, respectively. Rent expense was $817,000, $343,000 and $256,000
for the years ended June 30, 1997, 1996, and 1995, respectively.
Note 5 Shareholders' Equity
Common Stock. In November 1994, the Company completed its IPO selling
2,395,000 shares of common stock for net proceeds of $21,682,000 after
underwriting discounts and associated costs. In conjunction therewith,
1,551,000 shares of preferred stock outstanding were converted to 1,600,000
shares of common
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
stock. In July 1995, the Company completed a public offering selling an
additional 1,810,000 shares of common stock for net proceeds of $43,787,000
after underwriting discounts and associated costs.
Stock Repurchase Program. In January 1997, the Board of Directors
authorized a stock repurchase program pursuant to which the Company may
repurchase up to 750,000 shares of its common stock on the open market. Through
June 30, 1997, the Company has repurchased and retired 317,000 shares at an
average purchase price of $11.43 for a total cost of $3,627,000. No shares were
repurchased after June 30, 1997 and, in October, 1997 the Board of Directors
rescinded the stock repurchase program.
Shareholder Rights Plan. In December 1996, the Company adopted a
Shareholder Rights Plan pursuant to which one Right was distributed for each
outstanding share of common stock. Each Right entitles stockholders to buy one
one-thousandth of a share of Series A Participating Preferred Stock at an
exercise price of $65.00 upon certain events.
The Rights become exercisable if a person acquires 15% or more of the
Company's common stock or announces a tender offer that would result in such
person owning 15% or more of the Company's common stock. If the Rights become
exercisable, the holder of each Right (other than the person whose acquisition
triggered the exercisability of the Rights) will be entitled to purchase, at
the Right's then-current exercise price, a number of shares of the Company's
common stock having a market value of twice the exercise price. In addition, if
the Company were to be acquired in a merger or business combination after the
Rights became exercisable, each Right will entitle its holder to purchase, at
the Right's then-current exercise price, common stock of the acquiring company
having a market value of twice the exercise price. The Rights are redeemable by
the Company at a price of $0.001 per Right at any time within ten days after a
person has acquired 15% or more of the Company's common stock.
Note 6 Employee Benefit Plans
Stock Option Plans. The Company's 1987 Stock Option Plan (the "1987 Plan")
provides for the grant of both incentive and nonstatutory stock options to
employees, directors and consultants of the Company. Pursuant to the terms of
the 1987 Plan, after April 1997 no further shares are available for future
grants.
In September 1994, the shareholders approved the 1994 Directors' Option
Plan (the "Director Plan"), reserving 100,000 shares of common stock for
issuance. The Plan provides for the granting of nonstatutory stock options to
non-employee directors of the Company. Under the Director Plan, upon joining
the Board, each non-employee director automatically receives an option to
purchase 5,000 shares of the Company's common stock vesting over four years.
Following each annual shareholders meeting, each non-employee director receives
an option to purchase 1,250 shares of the Company's common stock vesting over a
twelve month period. All Director Plan options are granted at an exercise price
equal to fair market value on the date of grant and have a ten year term. There
were 75,000 and 80,000 shares available for grants under the Director Plan at
June 30, 1997 and 1996, respectively.
In October 1996, the shareholders approved the 1996 Stock Option Plan (the
"1996 Plan"), reserving 370,000 shares of common stock for issuance. The 1996
Plan provides for grants of both incentive and nonstatutory common stock
options to employees, directors and consultants to purchase common stock at a
price equal to the fair market value of such shares on the grant dates. Options
pursuant to the 1996 Plan are generally granted for a 10-year term and
generally vest over a four-year period. At June 30, 1997, there were 325,000
shares available for grant under the 1996 Plan. Subject to shareholder approval
at the 1997 annual meeting of Shareholders, the Board of Directors increased
the number of shares available for grant by 365,000 shares.
In November 1996, the Board of Directors approved the 1996 Supplemental
Stock Option Plan (the "1996 Supplemental Plan"), reserving 350,000 shares of
common stock for issuance. The 1996 Supplemental Plan provides for grants of
nonstatutory common stock options to employees and consultants other than
officers and directors at a price determined by the Board of Directors. Options
pursuant to the 1996 Supplemental Plan are
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
generally granted for a 10-year term and generally vest over a four-year
period. At June 30, 1997, there were 39,000 shares available for grant under
the 1996 Supplemental Plan. In July 1997, the Board of Directors increased by
500,000 the number of shares available for grant.
In addition to the above mentioned plans, an officer of the Company holds
73,000 options at an exercise price of $1.00 and 140,000 options at an exercise
price of $2.25, all of which are outside of these plans and were exercisable as
of June 30, 1997 and 1996.
<TABLE>
Stock option activity under these employee and director option plans was
as follows (shares in thousands):
<CAPTION>
Available Options Weighted Average
For Grant Outstanding Exercise Price
----------- ------------- -----------------
<S> <C> <C> <C>
Balance at June 30, 1994 ......... 597 956 $ 1.45
Additional shares reserved ...... 100 -- --
Exercised ........................ -- (188) $ 1.02
Granted ........................ (494) 494 $ 11.77
Canceled ........................ 14 (14) $ 3.54
----- -----
Balance at June 30, 1995 ......... 217 1,248 $ 5.57
Additional shares reserved ...... 360 -- --
Exercised ........................ -- (367) $ 2.12
Granted ........................ (516) 516 $ 20.71
Canceled ........................ 139 (139) $ 26.33
----- -----
Balance at June 30, 1996 ......... 200 1,258 $ 10.50
Additional shares reserved ...... 720 -- --
Exercised ........................ -- (81) $ 4.71
Granted ........................ (708) 708 $ 11.22
Canceled ........................ 227 (248) $ 15.41
----- -----
Balance at June 30, 1997 ......... 439 1,637 $ 10.35
===== ===== ========
</TABLE>
<TABLE>
The following table summarizes stock options outstanding and execisable at
June 30, 1997.
<CAPTION>
Outstanding Exercisable
--------------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Remaining Exercise Shares Exercise
Exercise Price Range in thousands Life in years Price In thousands Price
- ----------------------- -------------- --------------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.85 to 6.25 ...... 512 4.1 $ 3.05 441 $ 2.67
$10.00 to 11.19 ...... 437 9.2 $10.19 17 $10.49
$11.50 to 16.00 ...... 507 8.9 $14.27 97 $15.30
$17.00 to 31.75 ...... 181 8.2 $20.38 79 $19.81
------ --- ------- ---- -------
Total ............ 1,637 7.4 $10.35 634 $ 6.96
====== === ======= ==== =======
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
<TABLE>
Stock Compensation. The Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Issued to
Employees" which established a fair value based method of accounting for
employee stock option plans. The Company has elected to adopt the disclosure
method of SFAS No. 123. The fair value of options at date of grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions:
<CAPTION>
Employee Stock Options Stock Purchase Plan
Year ended June 30, Year ended June 30,
----------------------- -----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Expected life (in years) ...... 6.0 6.0 0.5 0.5
Risk-free interest rate ......... 6.01% 6.33% 5.46% 5.89%
Volatility ..................... 55.5 % 55.5 % 55.5 % 55.5 %
Dividend yield ............... 0% 0% 0% 0%
</TABLE>
Had compensation expense for the Company's stock based compensation plans
been determined consistent with SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would have been as follows:
Year ended June 30,
--------------------------------
1996 1997
------------ -----------------
Net income (loss):
As reported ...... $3,684,000 $ (14,935,000)
Pro forma ......... $2,418,000 $ (17,245,000)
Earnings per share:
As reported ...... $ 0.48 $ (2.02)
Pro forma ......... $ 0.31 $ (2.33)
Because the method of accounting prescribed by SFAS No. 123 has not been
applied to options granted prior to July 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
Retirement Plan. The Company has a defined contribution 401(k) plan
covering substantially all of its domestic employees. Participants may elect to
contribute up to 15% of their eligible earnings to this plan (up to the
statutory maximum amount). The Company can make discretionary contributions to
the plan determined solely by the Board of Directors. The Company has not made
any such contributions to the plan to date.
Stock Purchase Plan. The Company has a 1994 Employee Stock Purchase Plan
(the "Purchase Plan") under which all eligible employees may acquire Common
Stock at the lesser of 85% of the closing sales price of the stock at specific,
predetermined dates. In April 1997, the shareholders increased the number of
shares authorized to be issued under the plan to 350,000 shares, of which
238,000 are available for issuance at June 30, 1997. Employees purchased
72,000, 34,000 and 6,000 shares for the years ended June 30, 1997, 1996 and
1995, respectively.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
<TABLE>
Note 7 Income Taxes
A summary of the components of income tax expense follow (in thousands):
<CAPTION>
Year ended June 30,
-----------------------------------
1995 1996 1997
-------- ---------- -----------
<S> <C> <C> <C>
Current:
U.S federal ................................. $ 886 $ 1,185 $ (841)
State ....................................... 242 539 5
Foreign .................................... 5 15 36
Less: benefit of net operating losses ...... (953) (457) --
------ -------- -------
Total current ........................... 180 1,282 (800)
Deferred:
U.S. Federal .............................. -- (2,467) 2,467
State ....................................... -- (778) 778
------ -------- -------
Total deferred ........................... -- (3,245) 3,245
Charge in lieu of taxes attributable to
employer stock option plans ............... 387 3,697 --
------ -------- -------
Total tax expense ........................ $ 567 $ 1,734 $ 2,445
====== ======== =======
</TABLE>
<TABLE>
Total income tax expense differs from expected income tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
profit (loss) before taxes) as follows (in thousands):
<CAPTION>
Year ended June 30,
-------------------------------------
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate ...... $ 954 $ 1,842 $ (4,246)
State income taxes, net of federal income tax benefit ...... 143 738 5
Domestic international sales corporation benefit ............ (215) -- --
Termination of domestic international sales corporation
election ................................................... -- 566 --
Unutilized net operating loss .............................. -- -- 3,305
Research tax credit .......................................... (81) -- --
Change in beginning of the year valuation allowance ......... (311) (1,572) 3,245
Other, net ................................................... 77 160 136
------ -------- ---------
$ 567 $ 1,734 $ 2,445
====== ======== =========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of June 30,
1997, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------
1995 1996 1997
----------- --------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Accrued expense and reserves ..................... $ 811 $ 1,682 $ 3,965
Acquired intangibles .............................. -- 1,622 3,410
Net operating loss carry forwards ............... 792 122 1,121
Tax credit carryforwards ........................ 560 286 1,225
Other ............................................. -- 146 53
-------- ------- --------
Total gross deferred tax assets ............... 2,163 3,858 9,774
Less: valuation allowance ..................... (2,115) -- (9,243)
-------- ------- --------
Net deferred tax assets ........................ 48 3,858 531
-------- ------- --------
Deferred tax liabilities:
Accumulated domestic international sales corporation
income .......................................... -- (566) (503)
Fixed assets and other assets ..................... (48) (47) (28)
-------- ------- --------
Total gross deferred tax liabilities ......... (48) (613) (531)
-------- ------- --------
Net deferred tax assets ........................ $ -- $ 3,245 $ --
======== ======= ========
</TABLE>
As of June 30, 1997, the Company has federal and state net operating loss
carryforwards of $3,065,000 and $1,349,000, respectively, which expire from
2002 to 2012. The Company also has federal research and experimentation and
alternative minimum tax credit carryforwards of $886,000 which expire between
2006 and 2012, and state research and experimentation credit carryforwards of
$339,000 which have no expiration provision. Included in gross deferred tax
assets above is approximately $300,000 related to stock option compensation for
which the benefit, when realized, will be recorded to equity.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
Note 8 Industry and Geographic Information
The Company markets its products in North America and in foreign countries
through its sales personnel, dealers, distributors and subsidiaries. Export
sales account for a significant portion of the Company's net sales. Net sales
are summarized by geographic areas as follows:
Three months
ended September
Year ended June 30, 30,
------------------------ -----------------
1995 1996 1997 1996 1997
------ ------ ------ ------ --------
North America ...... 53% 61% 60% 64% 52%
Europe ............ 26 26 26 23 37
Rest of World ...... 21 13 14 13 11
---- ---- ---- ---- ----
100% 100% 100% 100% 100%
In the years ended June 30, 1997 and 1996, and the three months ended
September 30, 1997 and 1996 one customer, Avid Technology, Inc. ("Avid"),
accounted for approximately 26.4%, 43.3%, 17.9% and 27.2% of the Company's net
sales, respectively. Avid also accounted for approximately 13.4% and 20.0% and
36.7% of net accounts receivable at September 30, 1997, June 30, 1997 and 1996,
respectively. Another customer accounted for approximately 12.8% of net sales
during the three months ended September 30, 1996.
Note 9 Related Parties
The Company and Bell Microproducts Inc. ("Bell") are parties to an
agreement ("the Agreement") under which value-added turnkey services are
performed by Bell on behalf of the Company. Pursuant to the Agreement, Bell
builds certain products in accordance with the Company's specifications. A
director of the Company is also a director of Bell. During the years ended June
30, 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996,
the Company purchased materials totaling $4,451,000, $16,466,000, $8,286,000,
$999,000 and $2,087,000, respectively, from Bell pursuant to the Agreement.
F-16
<PAGE>
<TABLE>
<S> <C>
======================================================== =============================================================
No dealer, salesperson or other person has been 2,300,000 Shares
authorized to give any information or to make any
representations other than those contained in this
Prospectus, and, if given or made, such information or
representations must not be relied upon as having been
authorized by the Company, any Selling Shareholder or
the Underwriters. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy
to any person in any jurisdiction in which such offer [PINNACLE LOGO GOES HERE]
or solicitation would be unlawful or to any person to
whom it is unlawful. Neither the delivery of this
Prospectus nor any offer or sale made hereunder any
circumstances, create an implication that there has
been no change in the affairs of the Company or that
the information contained herein is correct as of any
date subsequent to the date hereof.
----------- Common Stock
TABLE OF CONTENTS
--------------
Page PROSPECTUS
----- --------------
Available Information ..................... 2 HAMBRECHT & QUIST
Information Incorporated By Reference ...... 2
Prospectus Summary ........................ 3
Risk Factors .............................. 5 PIPER JAFFRAY INC.
Forward-Looking Information ............... 11
Use of Proceeds ........................... 12
Price Range of Common Stock ............... 12 VOLPE BROWN WHELAN
Dividend Policy ........................... 12
Capitalization .............................. 13 & COMPANY
Selected Consolidated Financial Data ...... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 15
Business .................................... 23
Management ................................. 35
Principal and Selling Shareholders ......... 38 November 21, 1997
Underwriting .............................. 41
Experts .................................... 42
Legal Matters .............................. 42
Index to Consolidated Financial Statements . F-1
======================================================== =============================================================
</TABLE>
