As filed with the Securities and Exchange Commission on October 29, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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PINNACLE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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California 280 North Bernardo Ave. 94-3003809
(State or other jurisdiction Mountain View, California 94043 (IRS Employer
of incorporation or organization) (650) 237-1600 Identification Number)
(Address, including zip code, and
telephone number, including area code, of
Registrant's principal executive offices)
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ARTHUR D. CHADWICK
Vice President, Finance and Administration,
Chief Financial Officer and Secretary
PINNACLE SYSTEMS, INC.
280 North Bernardo Ave.
Mountain View, California 94043
(650) 237-1600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
ROBERT P. LATTA, ESQ. BROOKS STOUGH, ESQ.
CHRIS F. FENNELL, ESQ. DAVID T. YOUNG, ESQ.
Wilson Sonsini Goodrich & Rosati Gunderson Dettmer Stough Villeneuve
Professional Corporation Franklin & Hachigian, LLP
650 Page Mill Road 155 Constitution Drive
Palo Alto, California 94304 Menlo Park, California 94025
(650) 493-9300 (650) 321-2400
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act") other than securities offered only
in connection with dividend or interest reinvestment plans, please check the
following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Proposed
Amount Offering Maximum
Title of Each Class of to be Price Per Aggregate Amount of
Securities to be Registered Registered Share(1) Offering Price(1) Registration Fee(1)
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Common Stock, no par value per share 2,645,000(2) $28.25 $74,721,250 $22,643
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<FN>
(1) Estimated solely for the purpose of computing the amount of the
registration fee. The estimate is made pursuant to Rule 457 of the
Securities Act of 1933, as amended.
(2) Includes Preferred Share Purchase Rights which, prior to the occurrence of
certain events, will not be exercisable or evidenced separately from the
Common Stock.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1997
PROSPECTUS
2,300,000 Shares
[GRAPHIC OMITTED]
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 October 28, 1997, the last reported sale price for the
Common Stock was $28.25 per share. See "Price Range of Common Stock."
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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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Price to Underwriting Proceeds to Proceeds to Selling
Public Discount (1) Company (2) Shareholders
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Per Share ...... $ $ $ $
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Total (3) ...... $ $ $ $
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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 $______ ,
$______ and $______, respectively. See "Underwriting."
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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 ______, 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
______, 1997
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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
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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
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The Offering
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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
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Summary Consolidated Financial Data
(in thousands, except per share data)
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Three Months Ended
Fiscal Year Ended June 30, September 30,
--------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1996 1997
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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
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September 30, 1997
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Actual As Adjusted (4)
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Consolidated Balance Sheet Data:
Working capital .................. $ 42,308 $ 95,251
Total assets (5) .................. 80,717 133,660
Retained earnings (deficit) ...... (28,952) (28,952)
Shareholders' equity ............ 51,446 104,389
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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 at an
assumed public offering price of $28.25 per share. 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.
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Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting."
4
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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
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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 $5.6 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
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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 at an assumed public offering price
of $28.25 per share are estimated to be $52,942,500 ($62,152,706 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 October 28, 1997) ...... 33.500 23.813
</TABLE>
On October 28, 1997, the reported last sale price of the Common Stock on
the Nasdaq National Market was $28.25 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 at an assumed public offering price of $28.25 per share. 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) .............................. 80,342 133,285
Foreign currency translation ................................. 56 56
Retained earnings (deficit) .................................... (28,952) (28,952)
--------- ----------
Total shareholders' equity ................................. 51,446 104,389
--------- ----------
Total capitalization ....................................... $ 51,921 $ 104,864
========= ==========
<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, September 30,
---------------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 (2)
----------- ----------- ---------- ---------- ------------ ------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital .................. $ 275 $ 2,647 $ 26,588 $ 72,337 $ 57,662 $ 42,308
Total assets ..................... 3,731 5,904 32,724 84,561 70,007 80,717
Long-term debt .................. - - - - 475 475
Retained earnings (deficit) ...... (3,028) (3,594) (1,354) 2,330 (12,605) (28,952)
Shareholders' equity ............ 677 3,125 27,743 80,198 62,711 51,446
<FN>
- ------------
(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.
</FN>
</TABLE>
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 $4.5 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 $4.5 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>
Quarter Ended
--------------------------------------------------------------------
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>
Quarter Ended
------------------------------------------------
Fiscal 1997 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.
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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.
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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,
26
<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."
31
<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
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<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
33
<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>
MANAGEMENT
Executive Officers and Directors
<TABLE>
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>
PRINCIPAL AND SELLING SHAREHOLDERS
<TABLE>
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
Five Percent Shareholders, Owned Owned
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, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Piper Jaffray Inc. and Volpe Brown Whelan & Company, LLC, 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 ..................
Piper Jaffray Inc. .....................
Volpe Brown Whelan & Company, LLC ......
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 $______
per share. The Underwriters may allow and such dealers may reallow a concession
not in excess of $______ 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 Representatives of 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)
41
<PAGE>
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 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 asking 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
======= ========= ===== ========
</TABLE>
<TABLE>
<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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for the three months ended September 30, 1996 and 1997 is unaudited
<TABLE>
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 non-recurring 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
Note 7 Income Taxes
<TABLE>
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
<TABLE>
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):
<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>
================================================================================
No dealer, salesperson or other person has been 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 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
shall, under 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.
-----------
TABLE OF CONTENTS
Page
-----
Available Information ..................... 2
Information Incorporated By Reference ...... 2
Prospectus Summary ........................ 3
Risk Factors .............................. 5
Forward-Looking Information ............... 11
Use of Proceeds ........................... 12
Price Range of Common Stock ............... 12
Dividend Policy ........................... 12
Capitalization .............................. 13
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
Underwriting .............................. 41
Experts .................................... 42
Legal Matters .............................. 42
Index to Consolidated Financial Statements ... F-1
================================================================================
2,300,000 Shares
[GRAPHIC OMITTED]
Common Stock
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
VOLPE BROWN WHELAN
& COMPANY
____________________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
estimated underwriting discount, payable by the Company in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee and Nasdaq National Market listing fee.
Amount to
Be Paid
----------
SEC registration fee ....................... $ 22,643
NASD filing fee ............................. 7,972
Nasdaq National Market listing fee ......... 17,500
Printing expenses ........................... 125,000
Legal fees and expenses .................... 100,000
Accounting fees and expenses ............... 100,000
Blue sky fees and expenses ............... 10,000
Transfer Agent and Registration fees ....... 2,500
Miscellaneous expenses ..................... 64,385
----------
Total ................................. $ 450,000
==========
Item 15. Indemnification of Directors and Officers
As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Articles of Incorporation eliminate a director's personal
liability for monetary damages to the Registrant and its shareholders arising
from a breach or alleged breach of the director's fiduciary duty, except for
liability arising under Sections 310 and 316 of the California General
Corporation Law or liability for (i) acts or omissions that involve intentional
misconduct or knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the Registrant
or its shareholders or that involve the absence of good faith on the part of
the director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for the
director's duty to the Registrant or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the Registrant
or its shareholders, (v) acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, (vi) interested transactions between the
corporation and a director in which a director has a material financial
interest, and (vii) liability for improper distributions, loans or guarantees.
This provision does not eliminate the directors' duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under California law.
Sections 204(a) and 317 of the California General Corporation Law
authorize a corporation to indemnify its directors, officers, employees and
other agents in terms sufficiently broad to permit indemnification (including
reimbursement for expenses) under certain circumstances for liabilities arising
under the Securities Act. The Registrant's Articles of Incorporation and Bylaws
contain provisions covering indemnification to the maximum extent permitted by
the California General Corporation Law of corporate directors, officers and
other agents against certain liabilities and expenses incurred as a result of
proceedings involving such persons in their capacities as directors, officers
employees or agents, including proceedings under the Securities Act or the
Exchange Act. The Company has entered into Indemnification Agreements with its
directors and executive officers.
In addition to the foregoing, the Underwriting Agreement provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the Several Underwriters, against certain
liabilities, including liabilities under the Securities Act of 1933 as amended.
II-1
<PAGE>
The Registration Rights Agreement dated as of August 29, 1997, by and
among between the Registrant and Miro Computer Products AG ("Miro") provides
that the Company will indemnify Miro against certain liabilities, including
liabilities under the Securities Act.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
<TABLE>
Item 16. Exhibits
<CAPTION>
Exhibit No. Description
- --------------- ----------------------------------------------------------------------------------
<S> <C>
1.1 ........ Form of Underwriting Agreement
4.1* ...... Preferred Share Rights Agreement, dated December 12, 1996, between Registrant and
ChaseMellon Shareholder Services, L.L.C.
5.1 ...... Legal Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
23.1 ...... Consent of KPMG Peat Marwick LLP, independent auditors
23.2 ...... Consent of Arthur Andersen LLP, independent accountants
23.3 ...... Consent of Counsel (See Exhibit 5.1)
24.1 ...... Power of Attorney (See Page II-3).
27.1 ...... Financial Data Schedule.
<FN>
- ------------
* Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (Reg. No. 000-24784) as declared effective by the
Commission on February 17, 1997.
</FN>
</TABLE>
Item 17. Undertakings
The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Exchange Act of 1934, (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act of 1934) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein and the
offering at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Mountain View, State of California, on the 29th
day of October, 1997.
PINNACLE SYSTEMS, INC.
By: /s/ ARTHUR D. CHADWICK
--------------------------------------
Vice President, Finance and Administration,
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each such person whose signature
appears below constitutes and appoints, jointly and severally, Mark L. Sanders
and Arthur D. Chadwick his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Registration Statement on Form S-3 (including post-effective amendments), to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, as amended, and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, thereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutions, may do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<CAPTION>
Signature Title Date
- ----------------------------- ---------------------------------------- -------------------
<S> <C> <C>
/s/ MARK L. SANDERS
- --------------------------- President, Chief Executive Officer and October 29th, 1997
Mark L. Sanders Director (Principal Executive Officer)
/s/ ARTHUR D. CHADWICK
- --------------------------- Vice President, Finance and October 29th, 1997
Arthur D. Chadwick Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
/s/ AJAY CHOPRA
- --------------------------- Chairman of the Board, Vice President, October 29th, 1997
Ajay Chopra Desktop Products
/s/ JOHN LEWIS
- --------------------------- Director October 29th, 1997
John Lewis
/s/ CHARLES J. VAUGHAN
- --------------------------- Director October 29th, 1997
Charles J. Vaughan
/s/ NYAL D. McMULLIN
- --------------------------- Director October 29th, 1997
Nyal D. McMullin
/s/ GLENN E. PENISTEN
- --------------------------- Director October 29th, 1997
Glenn E. Penisten
</TABLE>
II-3
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
No. Description
- -------- ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
4.1* Preferred Share Rights Agreement, dated December 12, 1996, between Registrant and
ChaseMellon Shareholder Services, L.L.C.
5.1 Legal Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
23.1 Consent of KPMG Peat Marwick, LLP, independent auditors
23.2 Consent of Arthur Anderson LLP, independent accountants
23.3 Consent of Counsel (See Exhibit 5.1)
24.1 Power of Attorney (See Page II-3)
27.1 Financial Data Schedule.
<FN>
- ------------
* Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (Reg. No. 000-24784) as declared effective by the
Commission on February 17, 1997.
</FN>
</TABLE>
EXHIBIT 1.1
PINNACLE SYSTEMS, INC.
2,300,000 Shares1
Common Stock
UNDERWRITING AGREEMENT
November __, 1997
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
VOLPE BROWN WHELAN & COMPANY, LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Pinnacle Systems, Inc., a California corporation (herein called the
Company), proposes to issue and sell 2,000,000 shares of its authorized but
unissued Common Stock, no par value (herein called the Common Stock), and the
shareholders of the Company named in Schedule II hereto (herein collectively
called the Selling Securityholders) propose to sell an aggregate of 300,000
shares of Common Stock of the Company (said 2,300,000 shares of Common Stock
being herein called the Underwritten Stock). The Company proposes to grant to
the Underwriters (as hereinafter defined) an option to purchase up to 345,000
additional shares of Common Stock (herein called the Option Stock and with the
Underwritten Stock herein collectively called the Stock). The Common Stock is
more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and
warrant that you have been authorized by each of the other Underwriters to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
1. Registration Statement. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-3 (No. 333-_____), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all documents incorporated by reference
therein, all exhibits and financial statements, all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred to
below, in the form in which it became effective, and any registration statement
filed pursuant to Rule 462(b) of the rules and regulations of the Commission
with respect to the Stock (herein called a Rule 462(b) registration statement),
and, in the event of any
- -----------------
1 Plus an option to purchase from the Company up to 345,000 additional shares
to cover over-allotments.
<PAGE>
amendment thereto after the effective date of such registration statement
(herein called the Effective Date), shall also mean (from and after the
effectiveness of such amendment) such registration statement as so amended
(including any Rule 462(b) registration statement). The term Prospectus as used
in this Agreement shall mean the prospectus, including the documents
incorporated by reference therein, relating to the Stock first filed with the
Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus, including the documents incorporated by reference
therein, included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. Representations and Warranties of the Company and the Selling
Securityholders.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries (including each of the
subsidiaries and partnerships directly or indirectly owned by the Company
and its subsidiaries) has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus and as being conducted, and is duly qualified
as a foreign corporation and in good standing in all jurisdictions in which
the character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary (except where the failure to
be so qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company and
its subsidiaries (including each of the subsidiaries and partnerships
directly or indirectly owned by the Company and its subsidiaries), taken as
a whole). Pinnacle Systems C.V., a Dutch limited liability partnership, has
been duly formed and is validly existing as a partnership in good standing
under the laws of the jurisdiction of its formation, has full power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign partnership and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries
(including each of the subsidiaries and partnerships directly or indirectly
owned by the Company and its subsidiaries), taken as a whole). The only
partners of Pinnacle Systems C.V. are the Company and a subsidiary of the
Company.
(ii) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and its subsidiaries (including
each of the subsidiaries and partnerships directly or indirectly owned by
the Company and its subsidiaries), taken as a whole, whether or not arising
from transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such
dates, except in the ordinary course of business, neither the Company nor
any of its subsidiaries (including each of the subsidiaries and
partnerships directly or indirectly owned by the Company and its
subsidiaries) has entered into any material transaction not referred to in
the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of
2
<PAGE>
the Commission thereunder; on the Effective Date, the Registration
Statement did not contain any untrue statement of a material fact and did
not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on
the Effective Date the Prospectus did not and, on the Closing Date and any
later date on which Option Stock is to be purchased, will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in the case of
shares of the Stock to be sold by the Company, will be, when issued and
sold to the Underwriters as provided herein) duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the shareholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Stock to be sold by the Selling Securityholders or the issuance
and sale of the Stock as contemplated herein.
(v) The Stock to be sold by the Selling Securityholders is listed and
duly admitted to trading on the Nasdaq National Market, and prior to the
Closing Date the Stock to be issued and sold by the Company will be
authorized for listing by the Nasdaq National Market.
(vi) Except as specifically disclosed in the Registration Statement,
the Company does not have outstanding any options to purchase, or any
preemptive rights, or other rights to subscribe or to purchase or rights of
co-sale, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations.
(vii) The consolidated financial statements of the Company, together
with related notes and schedules as set forth in the Registration Statement
("Financial Statements"), present fairly the financial position and the
results of operations of the Company and any of its subsidiaries (including
each of the subsidiaries and partnerships directly or indirectly owned by
the Company and its subsidiaries), taken as a whole, at the indicated dates
and for the indicated periods. The Financial Statements, schedules and
related notes have been prepared in accordance with generally accepted
accounting principles, consistently applied through the period involved,
and all adjustments necessary for a fair presentation of results for such
periods have been made.
(viii) Neither the Company nor any of its subsidiaries (including each
of the subsidiaries and partnerships directly or indirectly owned by the
Company and its subsidiaries) is in violation or default under any
provision of its charter documents or bylaws, as currently in effect, or
any indenture, license, mortgage, lease, franchise, permit, deed of trust
or other agreement or instrument to which the Company or any of such
subsidiaries is a party or by which the Company, any of such subsidiaries
or any of their respective properties is bound or may be affected, except
where such violation or default would not have a material adverse effect on
the business, financial condition or results of operations of the Company
and such subsidiaries, taken as a whole.
(ix) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of, or violation of, any of the terms
or provisions of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any indenture, license, mortgage,
lease, franchise, permit, deed of trust or other agreement or instrument to
which the Company or any of its subsidiaries (including each of the
subsidiaries and partnerships directly or indirectly owned by the Company
and its subsidiaries) is a party or by which the Company, any of such
subsidiaries or any of their respective properties is bound or may be
affected, except where such breach, violation or default would not have a
materially adverse effect on the
3
<PAGE>
business, financial condition or results of operations of the Company and
any of such subsidiaries, taken as a whole, or violate any of the
provisions of the certificate or articles of incorporation or bylaws, as
applicable, each as amended, of the Company or any of such subsidiaries or
violate any material order, judgment, statute, rule or regulation
applicable to the Company or any of such subsidiaries of any court or of
any regulatory, administrative or governmental body or agency having
jurisdiction over the Company, any of such subsidiaries or any of their
respective properties.
(b) Each of the Selling Securityholders hereby represents and warrants as
follows:
(i) Such Selling Securityholder has good and marketable title to all
the shares of Stock to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of each Selling Securityholder, to the
rights of Chase Mellon Shareholder Services, L.L.C., as Custodian (herein
called the Custodian), and that upon the delivery of and payment for such
shares of the Stock hereunder, the several Underwriters will receive good
and marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.
(ii) Certificates in negotiable form for the shares of the Stock to be
sold by such Selling Securityholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that
on the Effective Date, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date the Prospectus contained and, on
the Closing Date, contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
2,000,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $___ per share. The obligation of each Underwriter to the Company and each of
the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the
4
<PAGE>
Underwritten Stock which represents the same proportion of the total number of
shares of the Underwritten Stock to be sold by each of the Company and the
Selling Securityholders pursuant to this Agreement as the number of shares of
the Underwritten Stock set forth opposite the name of such Underwriter in
Schedule I hereto represents of the total number of shares of the Underwritten
Stock to be purchased by all Underwriters pursuant to this Agreement, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
In making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Securityholders shall immediately give
notice thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such shares
and portion on the terms herein set forth. In any such case, either you or the
Company and the Selling Securityholders shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
said Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made. If
neither the non-defaulting Underwriters nor the Company and the Selling
Securityholders shall make arrangements within the 24-hour periods stated above
for the purchase of all the shares of the Stock which the defaulting Underwriter
or Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
or the Selling Securityholders to any non-defaulting Underwriter and without any
liability on the part of any non-defaulting Underwriter to the Company or the
Selling Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to 345,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
5
<PAGE>
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Wilson, Sonsini, Goodrich & Rosati, P.C., 650 Page Mill Road, Palo
Alto, California 94304, at 7:00 a.m., San Francisco time, on the fourth business
day after the date of this Agreement, or at such time on such other day, not
later than seven full business days after such fourth business day, as shall be
agreed upon in writing by the Company, the Selling Securityholders and you. The
date and hour of such delivery and payment (which may be postponed as provided
in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Wilson, Sonsini, Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304, at 7:00 a.m., San
Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter. Any
such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. Further Agreements of the Company and the Selling Securityholders. Each
of the Company and the Selling Securityholders respectively covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in
6
<PAGE>
reliance on Rule 430A and (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act or the
rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company and
the Selling Securityholders will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications
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in good standing under said securities or blue sky laws; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation in any jurisdiction in which it
is not so qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to continue
such qualifications in effect for so long a period as you may reasonably request
for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to shareholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company and the Selling Securityholders jointly and severally agree
to pay all costs and expenses incident to the performance of their obligations
under this Agreement, including all costs and expenses incident to (i) the
preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. ("NASD") of the Registration Statement,
any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The Selling
Securityholders will pay any transfer taxes incident to the transfer to the
Underwriters of the shares the Stock being sold by the Selling Securityholders.
(j) The Company and the Selling Securityholders jointly and severally agree
to reimburse you, for the account of the several Underwriters, for blue sky fees
and related disbursements (including reasonable counsel fees and disbursements
and cost of printing memoranda for the Underwriters) paid by or for the account
of the Underwriters or their counsel in qualifying the Stock under state
securities or blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Company and the Selling Securityholders hereby agree to pay and shall not affect
any agreement which the Company and the Selling Securityholders may make, or may
have made, for the sharing of any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby agrees that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company or such Selling Securityholder, as the case may be,
will not, for a period of 90 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (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 shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the exercise of
options granted under the stock plans of the Company or upon purchase pursuant
to the Company's Employee Stock Purchase Plan, in each case as outstanding or
reserved for issuance on the date of the Prospectus, (C) options to purchase
Common Stock granted under the Company's stock plans and reserved for such
purpose on the date of the Prospectus and (D) shares of Common Stock or other
securities issued pursuant to the Company's Preferred Shares Rights Agreement
dated December 12, 1996.
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(m) The Company agrees to use its best efforts to cause all directors and
officers to agree that, without the prior written consent of Hambrecht & Quist
LLC on behalf of the Underwriters, such person or entity will not, for a period
of 90 days following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (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 shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to the Stock to be sold to
the Underwriters pursuant to this Agreement.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(o) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
7. Indemnification and Contribution.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such
9
<PAGE>
Underwriter) if at or prior to the written confirmation of the sale of such
Stock a copy of the Prospectus (or the Prospectus as amended or supplemented)
was not sent or delivered to such person (excluding the documents incorporated
therein by reference) and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
noncompliance by the Company with paragraph (c) of Section 6 hereof, and (3)
each Selling Securityholder shall only be liable under this paragraph with
respect to (A) information pertaining to such Selling Securityholder furnished
by or on behalf of such Selling Securityholder expressly for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto or (B) facts that would constitute
a breach of any representation or warranty of such Selling Securityholder set
forth in Section 2(b) hereof. The indemnity agreements of the Company and the
Selling Securityholders contained in this paragraph (a) and the representations
and warranties of the Company and the Selling Securityholders contained in
Section 2 hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b) of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or notification to the
party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceeding to
which the Notice would have related and was prejudiced by the failure to give
the Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire
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<PAGE>
defense of such action, suit, investigation, inquiry or proceeding, in which
event such defense shall be conducted, at the expense of the indemnifying party
or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b) of
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Securityholders on the one hand and the Underwriters on the other shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Stock received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
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Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraph (b) of
Section 2 hereof and under the indemnity and reimbursement agreements contained
in the provisions of this Section 7 and Section 11 hereof shall be limited to an
amount equal to the net proceeds received by such Selling Securityholder from
the sale of the stock sold by such Selling Securityholder to the Underwriters.
In addition, no Selling Shareholder shall be liable under the expense, indemnity
and contribution agreements of Section 6 and 7 hereof unless and until the
Underwriters have made written demand on the Company for payment under such
Sections which shall not have been paid by the Company within 45 days after
receipt of such demand. The Company and the Selling Securityholders may agree,
as among themselves and without limiting the rights of the Underwriters under
this Agreement, as to the respective amounts of such liability for which they
each shall be responsible, including, without limitation, allocating between the
Company and the Selling Shareholders the liability resulting in a breach of the
representations and warranties of the Company and the Selling Shareholders
hereunder.
8. Termination. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company and the Selling
Securityholders if after the date of this Agreement trading in the Common Stock
shall have been suspended, or if there shall have occurred (i) the engagement in
hostilities or an escalation of major hostilities by the United States or the
declaration of war or a national emergency by the United States on or after the
date hereof, (ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, calamity, crisis or change in economic or political conditions
in the financial markets of the United States would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Stock impracticable,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling
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Securityholders of all their respective obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and the
validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by (degree) , counsel for the Underwriters.
(c) You shall have received from Wilson, Sonsini, Goodrich & Rosati, P.C.,
counsel for the Company and the Selling Securityholders, from Oppenhoff &
Radler, special German counsel for the Company and from ____________, special
United Kingdom counsel for the Company, addressed to the Underwriters and dated
the Closing Date, covering the matters set forth in Annex A, Annex B and Annex C
hereto, respectively, and if Option Stock is purchased at any date after the
Closing Date, additional opinions from each such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements expressed
as of the Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries (including subsidiaries and
partnerships directly or indirectly owned by the Company or its subsidiaries)
has entered into any material transaction not referred to in the Registration
Statement in the form in which it originally became effective and the Prospectus
contained therein, (iv) neither the Company nor any of its subsidiaries
(including subsidiaries and partnerships directly or indirectly owned by the
Company or its subsidiaries) has any material contingent obligations which are
not disclosed in the Registration Statement and the Prospectus, (v) there are
not any pending or known threatened legal proceedings to which the Company or
any of its subsidiaries (including subsidiaries and partnerships directly or
indirectly owned by the Company or its subsidiaries) is a party or of which
property of the Company or any of such subsidiaries is the subject which are
material and which are not disclosed in the Registration Statement and the
Prospectus, (vi) there are not any franchises, contracts, leases or other
documents which are required to be filed as exhibits to the Registration
Statement which have not been filed as required, (vii) the representations and
warranties of the Company herein are true and correct in all material respects
as of the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and (viii) there has not been any material change
in the market for securities in general or in political, financial or economic
conditions from those reasonably foreseeable as to render it impracticable in
your reasonable judgment to make a public offering of the Stock, or a material
adverse change in market levels for securities in general (or those of companies
in particular) or financial or economic conditions which render it inadvisable
to proceed.
(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus
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contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.
(f) You shall have received from KPMG Peat Marwick LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries (including
subsidiaries and partnerships directly or indirectly owned by the Company or its
subsidiaries) which, in your sole judgment, makes it impractical or inadvisable
to proceed with the public offering of the Stock or the purchase of the Option
Stock as contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market.
(i) On or prior to the Closing Date, you shall have received from all
directors and officers of the Company shareholders agreements, in form
reasonably satisfactory to Hambrecht & Quist LLC, stating that without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such
person or entity will not, for a period of 90 days following the commencement of
the public offering of the Stock by the Underwriters, directly or indirectly,
(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
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or (ii) enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel for the Underwriters, shall be satisfied that they
comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
14
<PAGE>
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
10. Conditions of the Obligation of the Company and the Selling
Securityholders. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
11. Reimbursement of Certain Expenses. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. Persons Entitled to Benefit of Agreement. This Agreement shall inure to
the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 280 North Bernardo Avenue,
Mountain View, California 94043, Attention: President; and if to the Selling
Securityholders, shall be mailed, telegraphed or delivered to the Selling
Securityholders in care of Marc Sanders or Arthur Chadwick, c/o Pinnacle
Systems, Inc., 280 North Bernardo Avenue, Mountain View, California 94043. All
notices given by telegraph shall be promptly confirmed by letter.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be
of no further force or effect.
15
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
PINNACLE SYSTEMS, INC.
By __________________________
[Name]
[Title]
SELLING SECURITYHOLDERS:
[List Names]
By __________________________
[Attorney-in-Fact]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
VOLPE BROWN WHELAN & COMPANY, LLC
By Hambrecht & Quist LLC
By __________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of Shares
Underwriters to be Purchased
- ------------ ---------------
Hambrecht & Quist LLC........................................
Piper Jaffray Inc. ..........................................
Volpe Brown Whelan & Company, LLC............................
==================
Total........................................................ 2,300,000
==================
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
Name Number of Shares
of Selling Securityholders to be Sold
-------------------------- ----------
Miro Computer Products AG .......................... 203,565
Mark L. Sanders .................................... 44,935
Ajay Chopra ........................................ 20,000
Arthur D. Chadwick ................................. 5,000
Brian Conner ....................................... 5,000
William Loesch ..................................... 5,000
Nyal D. McMullin ................................... 5,000
Robert Wilson ...................................... 5,000
Keith Trickett ..................................... 4,000
William Ludwig ..................................... 2,500
-------
Total .............................................. 300,000
=======
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of
Wilson, Sonsini, Goodrich & Rosati, P.C.,
Counsel for the Company
and the Selling Securityholders
(i) Each of the Company and [its subsidiaries incorporated in the state
of California] (the "Subsidiaries") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each state of the United States of
America in which its ownership or leasing of property requires such
qualification (except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole), and has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; all the issued and outstanding capital stock of each of the
Subsidiaries has been duly authorized and validly issued and is fully paid
and nonassessable, and is owned by the Company free and clear of all liens,
encumbrances and security interests, and to the best of such counsel's
knowledge, no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in such subsidiaries are
outstanding;
(ii) the authorized capital stock of the Company consists of 5,000,000
shares of Preferred Stock, none of which there are outstanding shares, and
15,000,000 shares of Common Stock, no par value, of which there are
outstanding _______________ shares (including the Underwritten Stock plus
the number of shares of Option Stock issued on the date hereof); proper
corporate proceedings have been taken validly to authorize such authorized
capital stock; all of the outstanding shares of such capital stock
(including the Underwritten Stock and the shares of Option Stock issued, if
any) have been duly and validly issued and are fully paid and
nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in the
Underwriting Agreement, will have been duly and validly issued and be fully
paid and nonassessable; and no preemptive rights of, or rights of refusal
in favor of, shareholders exist with respect to the Stock, or the issue and
sale thereof, pursuant to the Articles of Incorporation or Bylaws of the
Company and, to the knowledge of such counsel, there are no contractual
preemptive rights that have not been waived, rights of first refusal or
rights of co-sale which exist with respect to the Stock being sold by the
Selling Securityholders or the issue and sale of the Stock; except as
disclosed in the Registration Statement, to such counsel's knowledge, the
Company does not have outstanding any options to purchase or any other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell shares
of its capital stock or any such options, rights, convertible securities or
obligations;
(iii) based solely on oral advice to such counsel from the staff of the
Commission, the Registration Statement has become effective under the
Securities Act;
(iv) to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the
use of the Prospectus is in effect and no proceedings for that purpose have
been instituted or are pending or contemplated by the Commission; any
required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) of the Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b);
(v) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Securities Act,
the Exchange Act and with the rules and regulations of the Commission
thereunder;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9 and 10 (insofar as it relates to such
counsel) of Form S-3 is, to such counsel's knowledge, accurately and
<PAGE>
adequately set forth therein in all material respects or no response is
required with respect to such Items, and, the description of the Company's
stock option plans and Employee Stock Purchase Plan and the options and
purchase rights granted and which may be granted thereunder set forth or
incorporated by reference in the Prospectus accurately and fairly presents
the information required to be shown with respect to said plans, options
and purchase rights to the extent required by the Securities Act and the
rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion
of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required; such
items are summarized in the Registration Statement or Prospectus fairly and
correctly present in all material respects the information disclosed with
respect thereto in all material respects;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(ix) the Underwriting Agreement has been duly executed and delivered by
or on behalf of the Selling Securityholders and the Custody Agreement
between the Selling Securityholders and (degree) , as Custodian, and the
Power of Attorney referred to in such Custody Agreement have been duly
executed and delivered by the several Selling Securityholders;
(x) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Articles of Incorporation or Bylaws of
the Company or any of the Subsidiaries or any agreement or instrument known
to such counsel to which the Company or any of the Subsidiaries is a party
or any applicable law or regulation, or so far as is known to such counsel,
any order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality;
(xi) to such counsel's knowledge all holders of securities of the
Company having rights to the registration of shares of Common Stock, or
other securities, because of the filing of the Registration Statement by
the Company have waived such rights or such rights have expired by reason
of lapse of time following notification of the Company's intent to file the
Registration Statement;
(xii) good and marketable title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear of
all liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this
opinion that the Underwriters purchased the same in good faith without
notice of any adverse claims; and
(xiii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required
under state securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters.
------------------------------------
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the State of California, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel. [The opinions with
respect to the Selling
<PAGE>
Securityholders may rely upon the representations and warranties contained in
this Agreement, the Custody Agreement and the Power of Attorney executed by each
Selling Securityholder, provided that such counsel confirms that it has no
reason to believe that the Underwriters are not justified in relying on such
representations and warranties.]
In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel that leads them to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference therein,
as to which such counsel need not express any opinion or belief) at the
Effective Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, that the Prospectus (except as to the
financial statements and schedules and other financial and statistical data
contained or incorporated by reference therein, as to which such counsel need
not express any opinion or belief) as of its date or at the Closing Date (or any
later date on which Option Stock is purchased), contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
<PAGE>
ANNEX B
Matters to be Covered in the Opinion of Oppenhoff & Radler
German Counsel for the Company
(i) [Name of German subsidiary of the Company], a German limited
liability company (the "German Sub"), [, and its subsidiaries] has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly qualified
as a foreign corporation and in good standing in each jurisdiction in which
its ownership or leasing of property requires such qualification and has
full corporate power and authority to own or lease its properties and
conduct its business and has the corporate power to own its properties and
to carry on its business as now conducted;
(ii) All the issued and outstanding capital stock of the German Sub
[and each its subsidiaries] has been duly authorized and validly issued and
is fully paid and nonassessable, and is owned by the Company free and clear
of all liens, encumbrances and security interests, and to the best of such
counsel's knowledge, no options, warrants or other rights to purchase,
agreements or other obligations of any character, written or oral, to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in the German Sub [or such subsidiaries] are
outstanding; and
<PAGE>
ANNEX C
Matters to be Covered in the Opinion of ___________
United Kingdom Counsel for the Company
(i) [Name of United Kingdom subsidiary of the Company], a United
Kingdom corporation (the "UK Sub"), [, and its subsidiaries] has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly qualified
as a foreign corporation and in good standing in each jurisdiction in which
its ownership or leasing of property requires such qualification and has
full corporate power and authority to own or lease its properties and
conduct its business and has the corporate power to own its properties and
to carry on its business as now conducted;
(ii) All the issued and outstanding capital stock of the UK Sub [and
each its subsidiaries] has been duly authorized and validly issued and is
fully paid and nonassessable, and is owned by the Company free and clear of
all liens, encumbrances and security interests, and to the best of such
counsel's knowledge, no options, warrants or other rights to purchase,
agreements or other obligations of any character, written or oral, to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in the UK Sub [or such subsidiaries] are outstanding;
and
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMILE 650-493-6811
October 29, 1997
Pinnacle Systems, Inc.
280 North Bernardo Avenue
Mountain View, CA 94043
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed by
you with the Securities and Exchange Commission on October 29, 1997 (as such may
be further amended or supplemented, the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended, of up to
2,645,500 shares (including an over-allotment option granted to the Underwriters
to purchase 345,000 shares) of your Common Stock, no par value per share (the
"Shares"). Of the Shares, 2,345,000 shares (including all shares subject to the
above-referenced over-allotment option) are authorized but heretofore unissued,
and 300,000 shares are or will be issued and outstanding and held by the Selling
Shareholders referred to in the Registration Statement. We understand that the
Shares are to be sold to the Underwriters for resale to the public as described
in the Registration Statement. As your legal counsel, we have examined the
proceedings taken, and are familiar with the proceedings proposed to be taken,
by you in connection with the issuance and sale of the Shares.
It is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
Consent of Independent Auditors
We consent to the inclusion herein and incorporation by reference in the
registration statement dated October 29, 1997 on Form S-3 of Pinnacle Systems,
Inc. ("Pinnacle") of our reports dated July 22, 1997, relating to the
consolidated balance sheets of Pinnacle 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, and the consolidated financial statement schedule of Pinnacle, which
reports are included herein and in the June 30, 1997 annual report on Form 10-K
of Pinnacle, and to the reference to our firm under the headings "Selected
Consolidated Financial Data" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Palo Alto, California
October 28, 1997
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated October 22, 1997
included in Pinnacle Systems, Inc.'s Form 8-K/A for the event that occurred on
August 31, 1997.
October 28, 1997
ARTHUR ANDERSEN
Wirtschaftsprufungsgesellschaft
SteuerberatungsgesellschaftmbH
/s/ Dr. Maiss
Dr. Maiss Stieve
Wirtschaftsprufer Wirtschaftsprufer
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