UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-24784
PINNACLE SYSTEMS, INC.
----------------------
(Exact name of Registrant as specified in its charter)
California 94-3003809
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 N. Bernardo Ave.
Mountain View, California 94043
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(415) 526-1600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock outstanding as of March 28, 1997 was
7,234,819.
<PAGE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed consolidated financial statements
Condensed consolidated balance sheets -
March 31, 1997 and June 30, 1996 3
Condensed consolidated statements of operations -
three months and nine months ended
March 31, 1997 and 1996 4
Condensed consolidated statements of cash flows -
nine months ended March 31, 1997 and 1996 5
Notes to condensed consolidated financial statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PINNACLE SYSTEMS, INC. AND SUBSIDIIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, June 30,
1997 1996
------- -------
Assets
Current assets:
Cash and cash equivalents $36,299 $27,846
Marketable securities 19,286 29,315
Accounts receivable, less allowance for doubtful
accounts and returns of $1,526 and $840 as of
March 31, 1997 and June 30, 1996, respectively 6,212 7,526
Inventories 4,503 9,611
Deferred taxes -- 2,091
Prepaid expenses 359 311
------- -------
Total current assets 66,659 76,700
Property and equipment, net 4,388 2,204
Marketable securities -- 3,973
Deferred taxes -- 1,154
Other assets 617 530
------- -------
$71,664 $84,561
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $1,978 $ 1,495
Accrued expenses 2,462 2,621
Deferred revenue 250 247
------- -------
Total current liabilities 4,690 4,363
------- -------
Commitments
Shareholders' equity:
Common stock; authorized 15,000 shares; 7,235 and
7,468 issued and outstanding as of March 31, 1997,
and June 30, 1996, respectively 74,715 77,902
Deferred compensation, net (19) (34)
Retained earnings (deficit) (7,722) 2,330
------- --------
Total shareholders' equity 66,974 80,198
------- --------
$71,664 $ 84,561
======= ========
See accompanying notes to condensed consolidated financial statements.
3
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<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three Nine
Months Ended Months Ended
March 31, 1997 March 31, 1997
------------------- --------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 8,265 $12,766 $ 25,052 $33,932
Cost of sales 4,709 6,574 18,033 17,524
------- ------- -------- -------
Gross profit 3,556 6,192 7,019 16,408
------- ------- -------- -------
Operating expenses:
Engineering and product development 1,894 1,396 5,739 3,607
Sales and marketing 3,077 2,369 8,285 6,424
General and administrative 623 607 2,813 1,657
------- ------- -------- -------
Total operating expenses 5,594 4,372 16,837 11,688
------- ------- -------- -------
Operating income (loss) (2,038) 1,820 (9,818) 4,720
Interest income, net 719 879 2,211 2,487
------- ------- -------- -------
Income (loss) before income taxes (1,319) 2,699 (7,607) 7,207
Income tax expense -- 877 2,445 2,390
-------- ------- -------- -------
Net income (loss) $(1,319) $ 1,822 $(10,052) $ 4,817
======= ======= ======== =======
Net income (loss) per share $ (.18) $ .23 $ (1.35) $ .62
======= ======= ======== =======
Shares used to compute net income (loss) per share 7,353 7,894 7,444 7,725
======= ======= ======== =======
<FN>
See accompanying notes to condensed sonsolidated financial statements.
</FN>
</TABLE>
4
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<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended March 31,
---------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,052) $ 4,817
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,080 474
Increase of valuation allowance on deferred tax assets 3,245 --
Tax benefit from exercise of common stock options -- 2,041
Loss on disposal of property and equipment 448 --
Changes in operating assets and liabilities:
Accounts receivable 1,314 (2,182)
Inventories 5,108 (5,383)
Accounts payable 483 1,411
Accrued expenses (159) 865
Other (267) (344)
-------- --------
Net cash provided by operating activities 1,200 1,699
-------- --------
Cash flows investing activities:
Purchases of property and equipment (3,562) (1,322)
Purchase of marketable securities (14,906) (33,360)
Proceeds from maturity of marketable securities 28,908 7,000
-------- --------
Net cash provided by (used in) investing activities 10,440 (27,682)
-------- --------
Cash flow from financing activities:
Purchase of common stock (3,627) --
Proceeds from issuance of common stock 440 44,443
-------- --------
Net cash provided by (used in) financing activities (3,187) 44,443
-------- --------
Net increase in cash and cash equivalents 8,453 18,460
Cash and cash equivalents at beginning of period 27,846 12,626
-------- --------
Cash and cash equivalents at end of period $ 36,299 $ 31,086
======== ========
Supplemental disclosures of cash paid during the period for:
Interest $ 10 $ 8
======== ========
Income taxes $ 445 $ 87
======== ========
<FN>
See accompanying notes to condensed sonsolidated financial statements.
</FN>
</TABLE>
5
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PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. General
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in this report reflects all adjustments
which, in the opinion of management, are necessary for a fair statement of the
consolidated financial position, results of operations and cash flows as of and
for the interim periods. Such adjustments consist of items of a normal recurring
nature. The condensed consolidated financial statements included herein should
be read in conjunction with the consolidated financial statements and notes
thereto, which include information as to significant accounting policies, for
the fiscal year ended June 30, 1996 included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission on September 17,
1996. Results of operations for interim periods are not necessarily indicative
of results for the full year.
2. Significant Accounting Policies
Fiscal Year
Pinnacle Systems, Inc. and its subsidiaries (the Company) reports on a fiscal
year which ends on June 30. The Company's first three fiscal quarters end on the
last Friday in September, December, and March. For financial statement
presentation, the Company has indicated its fiscal quarters as ending on the
month-end.
Net Income 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.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards 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 31, 1997. The Company has not yet
determined the impact of adopting SFAS No. 128.
3. Financial Instruments
Debt securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Presently, the Company
classifies all debt securities as held-to-maturity and carries them at amortized
cost. Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to "Interest income."
The fair value of marketable securities is substantially equal to their carrying
value as of March 31, 1997. All investments at March 31, 1997 were classified as
held-to-maturity. Such investments mature through December 1997.
4. Inventories
A summary of inventories follows:
March 31, June 30,
1997 1996
------- --------
Raw materials $2,966 $ 7,695
Work in process 912 405
Finished goods 625 1,511
------ -------
$4,503 $ 9,611
====== =======
Raw materials inventory represents purchased materials, components and
assemblies, including fully assembled circuit boards purchased from outside
vendors.
6
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5. Customers and Credit Concentrations
During the three and nine months ended March 31, 1997, Avid Technology Inc.
accounted for approximately 30.5% and 26.6%, respectively, of net sales,
compared to 46.4% and 42.8% for the comparable periods ending March 31, 1996. No
other customer accounted for more than 10% of sales.
Avid Technology Inc. accounted for approximately 35.1% and 36.7% of accounts
receivable at March 31, 1997 and June 30, 1996, respectively.
6. 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 three months ended March 31, 1997
and 1996, the Company purchased materials totaling $392 and $5,643,
respectively, from Bell pursuant to the Agreement. During the nine months ended
March 31, 1997 and 1996, the Company purchased materials totaling $3,313 and
$13,627, respectively from Bell pursuant to the Agreement.
7
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain Forward-Looking Information
Certain statements in this Management's Discussions and Analysis are
forward-looking statements based on current expectations, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth below under "Overview" and "Significant Fluctuations
in Future Operating Results." These forward-looking statements include the last
sentences of the paragraphs below relating to "Engineering and Product
Development," "Sales and Marketing" and "Income Tax Expense," and the statements
below in the last sentence in the second paragraph, the last sentence in the
third paragraph, the last sentence in the sixth paragraph, the fifth sentence in
the seventh paragraph, the fifth and last sentences in the eighth paragraph, the
sixth and seventh sentences in the ninth paragraph, and all of the eleventh
paragraph under "Overview," among others.
Overview
The Company designs, manufactures, markets and supports video
post-production tools for high quality real time video processing. The Company's
products are used to perform a variety of video manipulation functions,
including the addition of special effects, graphics and titles to multiple
streams of live or previously recorded video material. 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 traditional video market.
With the introduction of Alladin in June 1994, the Company began sales
into the desktop video market. The Alladin product family provides real time
digital video manipulation capabilities for the desktop video market. Since the
introduction of Alladin, the Company's sales have been largely dependent on the
success of the Alladin. Alladin sales represented approximately 45.7% and 74.2%
of net sales for the three month periods ended March 31, 1997 and 1996,
respectively. Alladin sales represented approximately 46.6% and 72.1% of net
sales for the nine month periods ended March 31, 1997 and 1996, respectively.
Since the introduction of Alladin, the company has expanded the desktop product
line to include other desktop products, and expanded the company's traditional
and consumer product lines. As a result of new products introductions, and the
transition of Original Equipment Manufacturers (OEMs) from Alladin to newer
desktop products, sales of Alladin are expected to decline as a percentage of
total company sales.
In June 1996, the Company commenced shipment of Genie, the second
desktop video family product. The Company is highly dependent upon the
successful market acceptance, distribution and sale of Genie to increase revenue
and profitability in the future. Sales of Genie products represented
approximately 11.0% and 17.6% of net sales for the three and nine months ended
March 31, 1997, respectively. Sales of Genie will be dependent on the successful
integration of Genie by various OEMs into their non-linear editing products. The
timing and success in which Genie is integrated into non-linear OEM systems
could adversely affect the Company's business, operating results and financial
condition, particularly on a quarterly basis. In particular, the integration of
Genie into several OEMs has been slower than anticipated and has led to a sales
and profitability level below expectations. The Company believes that sales of
Genie to OEMs will increase beginning in the quarter ending June 30, 1997.
In June 1996, the Company acquired the Video Director product line from
Gold Disk, Inc. VideoDirector is low-cost video software package sold primarily
to home video enthusiasts. Pinnacle intends to develop a new family of consumer
products that combine a subset of its video manipulation technology with
VideoDirector technology to enable home video enthusiasts to create
professional-looking video content. The Company commenced shipment of the first
such follow-on product, VideoDirector Studio 200, in February 1997. The Company
is highly dependent upon the successful market acceptance, distribution and sale
of this product to increase revenue and profitability in the future. Sales of
VideoDirector family products represented approximately 19.2% and 11.7% of net
sales for the three and nine months ended March 31, 1997. 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. Any delay in the Company's
ability to manufacture and ship VideoDirector Studio 200 and the failure of
VideoDirector Studio 200 to gain market acceptance could adversely affect the
Company's business, operating results and financial condition, particularly on a
quarterly basis.
The sources of competition for home video market products are not yet
well defined. The Company expects that existing computer software manufacturers
and new market entrants will develop new products that may compete directly with
the Video Director derivative products. Increased competition could result in
lower prices, margins and market share than are currently anticipated in
designing and developing these products. In addition, the Company expects to
expend
8
<PAGE>
considerable resources to introduce and promote products in this home video
market category. There can be no assurance that the Company will be able to
compete successfully against current and future competitors in the home video
markets, and to the extent the Company is not successful with the development,
introduction and sale of products in this market segment, the Company's
business, operating results and financial condition could be adversely affected.
The Company has been highly dependent on sales of Alladin and Genie
products through OEM's, in particular Avid Technology, Inc. ("Avid") and Media
100, Inc. ("Media 100"). Sales to Avid declined significantly from the year ago
period, and accounted for approximately 30.5% and 46.4% of net sales during the
three months ended March 31, 1997 and 1996, respectively. Though sales to Media
100 were nominal this quarter, the company has signed an OEM agreement with
Media 100 and expects that sales to Media 100 will be an important source of
revenues in future quarters.
This concentration of net sales to a few OEM's 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 customers. Variations in the timing of revenues can cause significant
fluctuations in quarterly results of operations. 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 and by deferrals or
cancellations of orders as a result of changes in Avid and Media 100
requirements. For example, although sales to Avid have increased sequentially
for the quarter ended March 31, 1997, sales to Avid decreased sequentially for
the quarters ended June 30, September 30, and December 31, 1996 contributing to
the overall decline in net sales for the Company during those same periods.
Although there can be no assurance, the Company currently believes that sales to
Avid in the quarter ending June 30, 1997 will increase as compared to sales to
Avid in the quarter ended March 31, 1997. However, if the Company were to lose
Avid or Media 100 as a customer, or if orders from these customers were to
decrease, the Company's business, operating results and financial condition
would be materially adversely affected. See "Results of Operations-Net Sales."
In April 1997, the Company announced DVExtreme and Lightning, two new
Windows NT based products designed to serve the traditional video market.
DVEtreme is a Windows-NT based real time 3D digital video effects system, which
will allow users to produce unique real time video effects using Pinnacle's new
ParticalFX and Painterly FX effects technology. It uses three video manipulation
channels, each with full linear key, and ten-bit digital video processing.
Lightning is a Windows-NT based image management system for broadcast and
post-production applications, with built-in, real-time 3D digital effects. The
Company currently expects to initiate production shipment of both products
during the quarter ending June 30, 1997. The same market acceptance,
distribution and sales risks as described for the VideoDirector family also
apply to the introduction of DVExtreme and Lightning. The Company currently has
two products designed to serve the same market: Prizm and FlashFile. The
introduction of the DVExtreme and Ligntning is expected to slow or replace sales
of Prizm and FlashFile.
In April 1997, the Company purchased the Deko product line and
technology, including the TypeDeko product from Digital Graphix. TypeDeko is a
Windows NT-based character generator used for on-air broadcast and
post-production applications. TypeDeko, in conjunction with DVExtreme and
Lightning furthers Pinnacle's strategy of offering an interconnected family of
Windows NT-based video production systems. In addition, the Company hired 27
employees from Digital Graphix to help support the ongoing development,
marketing and sales of the Deko product line. The Company paid $5,170,000 in
cash and assumed liabilities of approximately $1,000,000 to consummate the
purchase. The Company expects that between $4,000,000 and $5,000,000 of the
purchase price will be recorded as in-process research and development charge
during the quarter ending June 30, 1997. The Company also expects to incur
expense of between $300,000 and $400,000 related to the integration of the Deko
product line. Such charges and expenses will adversely impact the Company's
results of operations during the quarter.
The Company distributes and sells its products to end users through the
combination of independent domestic and international dealers, retail
distributors, OEMs and, to a lesser extent, a direct sales force. Sales to
dealers, distributors and OEMs are generally 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. In
the United States, the Company supports the sale of desktop products with
independent sales representatives that earn commissions based on sales into
their region.
The Company anticipates that an increase in OEM Genie sales, the
addition of Deko sales, initial sales of DVEtreme and Lightning, and an increase
in Video Director sales, partially offset by a decrease in older product lines,
will lead to an overall increase in net sales for the quarter ending June 30,
1997 as compared to the quarter which ended March 31, 1997. The Company also
anticipates that operating expenses in the quarter ending June 30, 1997 will
increase over the prior quarter due to the addition of Deko related engineering,
marketing and sales expenses, as well as increased marketing and sales costs
associated with the introduction of DVEtreme and Lightning. The Company incurred
an operating loss during the
9
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quarter ended March 31, 1997 which was significantly less than the loss incurred
in the quarter ended December 31, 1996. Though the Company considers this to be
a favorable trend, the Company considers it likely that excluding the in-process
research and development charge an operating loss will also be incurred in the
quarter ending June 30, 1997.
Results of Operations
Net Sales. The Company's net sales decreased by 35.3% to $8,265,000 in
the three months March 31, 1997 from $12,766,000 during the comparable three
months in the prior year. Net sales decreased by 26.2% to $25,052,000 in the
nine months ended March 31, 1997 from $33,932,000 in the nine months ended March
31, 1996. The decrease in both periods was attributable to a decline in sales
across all traditional video and desktop products, the most significant of which
was a decline in sales of desktop products to OEMs, in particular Avid. This
decrease was partially offset by sales of the Company's consumer products which
were approximately $1,600,000 and $2,900,000 during the three and nine months
ended March 31, 1997. There were no consumer product sales during the three or
nine months ended March 31, 1996. Sales outside of North America were
approximately 32.8% and 40.0% of net sales in the three months ended March 31,
1997 and 1996, respectively and 37.2% and 37.9% in the nine months ended March
31, 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 43.0% and
48.5% in the three months ended March 31, 1997 and 1996, respectively, and 28.0%
and 48.4 % in the nine months ended March 31, 1997 and 1996, respectively. The
decrease in gross profit percentage for the three month comparable periods is
primarily the result of decreased manufacturing overhead absorption due to lower
production volume and higher manufacturing overhead costs related to the new
facility in Mountain View, California. The decrease in gross profit percentage
for the nine month comparable periods is due primarily to an a significant
charge to cost of sales totaling $4,021,000 relating primarily to inventory
write downs in connection with the decline in sales during the quarter ended
December 31, 1996.
Engineering and Product Development. Engineering and product
development expenses increased 35.7% to $1,894,000 in the three months ended
March 31, 1997 from $1,396,000 during the comparable three months in the prior
year. The Company's engineering and product development expenses increased 59.1%
to $5,739,000 in the nine months ended March 31, 1997 from $3,607,000 during the
comparable nine months in the prior year. The increases in each period 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
22.9% and 10.9% during the three months ended March 31, 1997 and 1996, and 22.9%
and 10.6% during the nine months ended March 31, 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.
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 29.9% to
$3,077,000 in the three months ended March 31, 1997 from $2,369,000 during the
comparable three months in the prior year. The Company's sales and marketing
expenses increased 29.1% to $8,285,000 in the nine months ended March 31, 1997
from $6,424,000 during the comparable nine months in the prior year. Sales and
marketing as a percentage of net sales were 37.2% and 18.6% for the three month
periods ending March 31, 1997 and 1996, and 33.1% and 18.9% for the nine month
periods ending March 31, 1997 and 1996, respectively. The increase in sales and
marketing expenses was primarily attributable to promotional costs for the
introduction of several new professional and consumer video products. The
Company expects to continue to allocate significant resources to sales and
marketing, particularly during the quarter ending June 30, 1997 for two
significant international trade shows and the costs associated with the newly
acquired Deko product line.
General and Administrative. General and administrative expenses
increased a 2.6% to $623,000 in the three months ended March 31, 1997 from
$607,000 during the comparable three months in the prior year. General and
administrative expenditures increased 69.8% to $2,813,000 in the nine months
ended March 31, 1997 from $1,657,000 during the comparable nine months in the
prior year. As a percentage of net sales, general and administrative expenses
were 7.5% and 4.8% during the three months ended March 31, 1997 and 1996 and
11.2% and 4.9% during the nine months ended March 31, 1997 and 1996,
respectively. Included in general and administrative expenses for the nine
months ended March 31, 1997 is 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.
Interest Income, Net. Interest income was $719,000 and $879,000 for the
three months ended March 31, 1997 and 1996, respectively. Interest income was
$2,211,000 and $2,487,000 for the nine months ended March 31, 1997 and 1996,
respectively. The decrease was due to a decline in cash and marketable
securities as well as a decline in investment yields. All of the Company's cash
and marketable securities have maturities of less than one year. Changes in the
market interest rates will have an effect on interest income in future periods,
as well as the decrease in cash resulting from the Deko purchase.
Income Tax Expense. The Company recorded no provision for income taxes
for the three months ended March 31, 1997 compared to income tax expense of
$877,000 during the same period in 1996. Income tax expense was $2,445,000 and
$2,390,000 for the nine months ended March 31, 1997 and 1996,
10
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respectively. Included in income tax expense for the nine months ended March 31,
1997 is a charge of $3,245,000 resulting from the establishment of a valuation
allowance against the Company's deferred tax asset. The Company does not
anticipate any tax benefit or expense for the quarter ending June 30, 1997.
Significant Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have in the past varied, 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
customers, in particular Avid and Media 100, the timing and market acceptance of
new products or technological advances by the Company and its competitors, 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
resellers' forecasts of end user demand, 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, and general economic conditions both domestically and internationally.
The Company's expense levels are based, in part, on its expectations as to
future revenue and, as a result, net income would be disproportionately affected
by a reduction in net sales.
The Company experiences significant fluctuations in orders and sales, due mainly
to reduced customer purchasing activity during the summer months and the timing
of major trade shows, in particular, the convention of the National Association
of Broadcasters (NAB) in April 1997. The Company expects that its operating
results will fluctuate in the future as a result of these and other factors,
including changes in the rate of sales to OEM customers, in particular Avid and
Media 100, and the Company's success in developing, introducing and shipping new
products, in particular DVExtreme, Lightning, Deko and Video Director Studio
200. In April 1997 the Company purchased assets and technology related to the
Deko product line and expects to record an in-process research and development
charge of between $4,000,000 and $5,000,000 during the quarter ending June 30,
1997. 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, net of offering
expenses.
The Company's operating activities generated cash of $1,200,000 in the
nine months ended March 31, 1997, compared to $1,699,000 for the same period in
1996. The cash generated by operating activities during the nine months ended
March 31, 1997 was the result of net decreases in the components of working
capital, primarily accounts receivable and inventory, partially offset by the
net loss of $10,052,000 as adjusted by an increase in the valuation allowance on
deferred tax assets of $3,245,000, depreciation and amortization of $1,080,000,
and a loss on disposal of property and equipment of $448,000. The Company
expects operations to consume a modest amount of cash during the three months
ending June 30, 1997 as a result of an anticipated increase in working capital
and costs associated with the Deko product line acquisition. See "Overview".
During the nine months ended March 31, 1997, $3,562,000 was invested in
property and equipment, compared to $1,322,000 in the nine months ended March
31, 1996. The increase over the prior year is primarily related to leasehold
improvements, furniture and equipment for the new Mountain View facility. The
Company expects to continue to purchase property and equipment, however at a
reduced rate following the completion of improvements to the Mountain View
facility. Such investing 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 may purchase up to 750,000
shares of its common stock on the open market. Through March 31, 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 during the
quarter for a total cost of $3,627,000.
11
<PAGE>
In April 1997, the Company purchased the Deko product line and
technology, including the TypeDeko product from Digital Graphix. The Company
paid $5,170,000 in cash and assumed liabilities of approximately $1,000,000 to
consummate the transaction. See "Overview."
As of March 31, 1997, the Company had working capital of approximately
$62.0 million, including $36.3 million in cash and cash equivalents and $19.3
million in marketable securities. The Company believes that the existing cash
and cash equivalent balances as well as marketable securities and anticipated
cash flow from operations will be sufficient to support the Company's working
capital requirements for the foreseeable future.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 10, 1997, the Company held a Special Meeting of
Shareholders for which it solicited votes by proxy. The following is a brief
description of the matters voted upon at the meeting and a statement of the
number of votes cast for and against, and the number of abstentions. There were
no broker non-votes with respect to this matter.
1. To approve an amendment to the 1994 Employee Stock Purchase
Plan to increase the number of shares of Common Stock reserved
for issuance thereunder by 250,000 shares.
FOR: 5,515,863 AGAINST: 936,779 ABSTAIN: 6,095
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11.1 Statement of Computation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended March 31, 1997.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
Date: May 12, 1997 By: /s/Mark L. Sanders
------------------------------------------------
Mark L. Sanders
President, Chief Executive Officer and Director
Date: May 12, 1997 By: /s/Arthur D. Chadwick
------------------------------------------------
Arthur D. Chadwick
Vice President, Finance and Administration and
Chief Financial Officer
13
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARY
Exhibit 11.1 - Statement of Computation of Net Income (Loss) Per Share
(In thousands, except per share data)
<CAPTION>
Three Nine
Months Ended Months Ended
March 31, March 31,
----------------- ------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average shares of common stock outstanding 7,353 7,313 7,444 7,070
Weighted average common stock equivalent shares -- 581 -- 655
------- ------ -------- ------
Shares used to compute net income (loss) per share 7,353 7,894 7,444 7,725
======= ====== ======== ======
Net income (loss) used in per share calculation $(1,319) $1,822 $(10,052) $4,817
======= ====== ======== ======
Net income (loss) per share $ (0.18) $ 0.23 $ (1.35) $ 0.62
======= ====== ======== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> MAR-28-1997
<CASH> 36,299,000
<SECURITIES> 19,286,000
<RECEIVABLES> 6,212,000
<ALLOWANCES> 1,526,000
<INVENTORY> 4,503,000
<CURRENT-ASSETS> 66,659,000
<PP&E> 6,024,000
<DEPRECIATION> 1,636,000
<TOTAL-ASSETS> 71,664,000
<CURRENT-LIABILITIES> 4,690,000
<BONDS> 0
<COMMON> 74,715,000
0
0
<OTHER-SE> (7,741,000)
<TOTAL-LIABILITY-AND-EQUITY> 71,664,000
<SALES> 8,265,000
<TOTAL-REVENUES> 8,265,000
<CGS> 4,709,000
<TOTAL-COSTS> 4,709,000
<OTHER-EXPENSES> 5,594,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 719,000
<INCOME-PRETAX> (1,319,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,319,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,319,000)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
