UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-24784
PINNACLE SYSTEMS, INC.
----------------------
(Exact name of Registrant as specified in its charter)
California 94-3003809
- ---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
280 N. Bernardo Ave.
Mountain View, CA 94043
- ----------------- -----
(Address of principal executive offices) (Zip Code)
(650)237-1600
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
The number of shares of common stock outstanding as of March 27, 1998 was
9,827,202.
Page 1
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
March 31, 1998 and 1997 4
Condensed Consolidated Statements of Comprehensive Income -
Three Months and Nine Months Ended
March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 66,121 $ 32,788
Marketable securities 10,117 15,024
Accounts receivable, less allowance for doubtful
accounts and returns of $4,123 and $1,754 as of
March 31, 1998 and June 30, 1997, respectively 16,929 10,646
Inventories 11,781 5,497
Prepaid expenses 1,054 528
--------- ---------
Total current assets 106,002 64,483
Property and equipment, net 5,121 4,395
Marketable securities 6,138 --
Other assets 4,290 1,129
--------- ---------
$ 121,551 $ 70,007
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 5,075 $ 3,955
Accrued expenses 10,528 2,866
--------- ---------
Total current liabilities 15,603 6,821
--------- ---------
Long-term obligations 244 475
Commitments
Shareholders' equity:
Preferred stock; 5,000 shares authorized, none issued
and outstanding -- --
Common stock; authorized 15,000 shares; 9,827 and
7,303 issued and outstanding as of March 31, 1998,
and June 30, 1997, respectively 128,996 75,316
Foreign currency translation (121) --
Accumulated deficit (23,171) (12,605)
--------- ---------
Total shareholders' equity 105,704 62,711
--------- ---------
$ 121,551 $ 70,007
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three Nine
Months Ended Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 29,332 $ 8,265 $ 73,727 $ 25,052
Cost of sales 13,631 4,709 34,484 18,033
-------- -------- -------- --------
Gross profit 15,701 3,556 39,243 7,019
-------- -------- -------- --------
Operating expenses:
Engineering and product development 3,165 1,894 8,155 5,739
Sales and marketing 7,947 3,077 21,332 8,285
General and administrative 1,455 623 3,858 2,813
In-process research and development -- -- 16,960 --
-------- -------- -------- --------
Total operating expenses 12,567 5,594 50,305 16,837
-------- -------- -------- --------
Operating income (loss) 3,134 (2,038) (11,062) (9,818)
Interest income, net 1,026 719 2,094 2,211
-------- -------- -------- --------
Income (loss) before income taxes 4,160 (1,319) (8,968) (7,607)
Income tax expense (832) -- (1,598) (2,445)
-------- -------- -------- --------
Net income (loss) $ 3,328 $ (1,319) $(10,566) $(10,052)
======== ======== ======== ========
Net income (loss) per share
Basic $ 0.34 $ (0.18) $ (1.23) $ (1.35)
======== ======== ======== ========
Diluted $ 0.31 $ (0.18) $ (1.23) $ (1.35)
======== ======== ======== ========
Shares used to compute net income (loss) per share
Basic 9,780 7,353 8,570 7,444
======== ======== ======== ========
Diluted 10,810 7,353 8,570 7,444
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<CAPTION>
Three Nine
Months Ended Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 3,328 $ (1,319) $(10,566) $(10,052)
Foreign currency translation adjustment (147) - (121) -
-------- -------- -------- --------
Comprehensive income $ 3,181 $ (1,319) $(10,687) $(10,052)
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended March 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,566) $(10,052)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Acquired research and development 16,960 --
Depreciation and amortization 2,072 1,080
Increase of valuation allowance on deferred tax assets -- 3,245
Loss on disposal of property and equipment -- 448
Changes in operating assets and liabilities:
Accounts receivable (5,942) 1,314
Inventories (4,517) 5,108
Accounts payable 984 483
Accrued expenses 4,445 (159)
Deferred revenue (282) --
Other (802) (267)
-------- --------
Net cash provided by operating activities 2,352 1,200
-------- --------
Cash flows from investing activities:
Cash payment for acquisition (15,150) --
Purchases of property and equipment (1,735) (3,562)
Purchase of marketable securities (4,224) (14,906)
Proceeds from maturity of marketable securities 2,993 28,908
-------- --------
Net cash provided by (used in) investing activities (18,116) 10,440
-------- --------
Cash flow from financing activities:
Purchase of common stock -- (3,627)
Proceeds from issuance of common stock 49,328 440
Exercise of stock options (231) --
-------- --------
Net cash provided by (used in) financing activities 49,097 (3,187)
-------- --------
Net increase in cash and cash equivalents 33,333 8,453
Cash and cash equivalents at beginning of period 32,788 27,846
-------- --------
Cash and cash equivalents at end of period $ 66,121 $ 36,299
======== ========
Supplemental disclosures of cash paid (received) during the period for:
Interest $ 2 $ 10
======== ========
Income taxes $ (263) $ 445
======== ========
Non-cash transactions:
Liabilities associated with the acquisition of certain net assets $ 3,810
========
Common Stock issued for Miro acquisition $ 4,352
========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in this report reflects all adjustments
which, in the opinion of management, are necessary for a fair statement of the
consolidated financial position, results of operations and cash flows as of and
for the interim periods. Such adjustments consist of items of a normal recurring
nature. The condensed consolidated financial statements included herein should
be read in conjunction with the financial statements and notes thereto, which
include information as to significant accounting policies, for the fiscal year
ended June 30, 1997 included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on August 29, 1997. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
2. Significant Accounting Policies
Fiscal Year
Pinnacle Systems, Inc. and its subsidiaries (the "Company") reports on
a fiscal year which ends on June 30. The Company's first three fiscal quarters
end on the last Friday in September, December and March. For financial statement
presentation, the Company has indicated its fiscal quarters as ending on the
last day of the month.
Net Income Per Share
<TABLE>
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." In accordance with
SFAS No. 128, basic EPS is computed using the weighted-average number of common
shares outstanding. Diluted EPS is computed using the weighted average number of
common shares outstanding and dilutive common share equivalents from the assumed
exercise of options outstanding during the period, if any, using the treasury
stock method. The following is a reconciliation of the shares used in the
computation of basic diluted EPS:
<CAPTION>
Three Nine
Months Ended Months Ended
(in thousands) March 31, March 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS - weighted average shares of common stock
Outstanding 9,780 7,353 8,570 7,444
Effect of dilutive common equivalent - stock
options outstanding 1,030 - - -
------ ----- ----- -----
Diluted EPS - weighted average shares and common
Equivalent shares outstanding 10,810 7,353 8,570 7,444
====== ===== ===== =====
</TABLE>
Common stock squivalents of 98,000, 1,022,000 and 231,000 were excluded from the
net loss per share computation during the three months ended March 31, 1997 and
the nine months ended March 31, 1998 and 1997, respectively, due to the
antidilutive effect.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130 "Reporting of Comprehensive income." SFAS No. 130 establishes standards
for the display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in equity during
a period except those resulting from the issuance of shares of stock and
distributions to stockholders. There was no material differences between net
income (loss) and comprehensive income (loss) during the three and nine months
ended March 31, 1998 and 1997, except for the cumulative tranlation adjustment.
Recent Accounting Pronouncements
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 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," which
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 will disclose segment information beginning with the annual report on
Form 10-K for the fiscal year ending June 30, 1999.
3. Financial Instruments
Debt securities for which the Company has both the positive intent and
ability to hold to maturity are carried at amortized cost. Presently, the
Company classifies all debt securities as held-to-maturity and carries them at
amortized cost. Interest income is recorded using an effective interest rate,
with the associated premium or discount amortized to "Interest income."
The fair value of marketable securities is substantially equal to their
carrying value as of March 31, 1998. All investments at March 31, 1998 were
classified as held-to-maturity. Such investments mature through June 1999.
7
<PAGE>
4. Inventories
A summary of inventories follows:
(in thousands)
March 31, June 30,
1998 1997
------- -------
Raw materials $ 7,716 $ 3,554
Work in process 1,772 771
Finished goods 2,293 1,172
------- -------
$11,781 $ 5,497
======= =======
Raw materials inventory represents purchased materials, components and
assemblies, including fully assembled circuit boards purchased from outside
vendors.
5. Customers and Credit Concentrations
During the three months ended March 31, 1998, Ingram Micro Inc. accounted for
approximately 10.2% of net sales. Avid Technology Inc. accounted for
approximately 11.3% of net sales for the nine months ended March 31, 1998,
compared to 26.6% for the comparable period ending March 31, 1997. No other
customer accounted for greater than 10% of sales during these periods.
Ingram Micro Inc. accounted for approximately 19.9% and 21.9% of accounts
receivable at March 31, 1998 and June 30, 1997, respectively. Avid Technology
Inc. accounted for approximately 5.4% and 20.4% of accounts receivable at March
31, 1998 and June 30, 1997, respectively.
6. Related Parties
The Company and Bell Microproducts Inc. ("Bell") are parties to an agreement
("the Agreement") under which value-added turnkey services are performed by Bell
on behalf of the Company. Pursuant to the Agreement, Bell builds certain
products in accordance with the Company's specifications. A director of the
Company is also a director of Bell. During the three months ended March 31, 1998
and 1997, the Company purchased materials totaling $748,000 and $392,000
respectively, from Bell pursuant to the Agreement. During the nine months ended
March 31, 1998 and 1997, the Company purchased materials totaling $3,180,000 and
$3,313,000 respectively from Bell pursuant to the Agreement.
7. 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 and incurred transaction costs of $1.1
million. The fair value of assets acquired included tangible assets, primarily
inventories, of $2.4 million, goodwill and other intangibles of $3.9 million,
and the Company expensed $17.0 million of in-process research and development.
In addition, the Company incurred $465,000 of other nonrecurring costs in the
nine months ended March 31, 1998. 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.
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
8
<PAGE>
occurred at the beginning of each of the periods 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.
(In thousands, except per share data) Nine months ended Year ended
March 31, 1998 June 30, 1997
-------------- -------------
Net sales $ 80,204 $ 74,255
Net income (loss) $ 6,268 $ (14,353)
Net income (loss) per share - Basic $ 0.73 $ (1.89)
Net income (loss) per share - Diluted $ 0.65 $ (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.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain Forward-Looking Information
Certain statements in this Management's Discussions and Analysis are
forward-looking statements based on current expectations, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth below under "Factors Affecting Operating Results."
These forward-looking statements include the last sentence of the first
paragraph of "Overview," the sentence under "Broadcast Market" regarding
commercial shipments of AlladinPro, the sentence under "Desktop Market"
regarding commercial shipments of DC50, the sentence under "Consumer Market"
regarding commercial shipments of Studio 400, the "Engineering and Product
Development" paragraph, the second and fourth paragraphs of "Liquidity and
Capital Resources" as well as those set forth in "Factors Affecting Future
Operating Results."
Overview
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. 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 Windows
NT-based products designed to serve the broadcast market. In April 1997, the
Company purchased the Deko titling systems product line and technology from
Digital GraphiX Inc. Deko, in conjunction with DVExtreme and Lightning, furthers
the Company's BroadNet strategy of offering an interconnected family of Windows
NT-based video production systems for the broadcast market. In April 1998, the
Company announced AlladinPro, a digital video effects system positioned to
address the cost-conscious broadcast digital market. AlladinPro is expected to
commence shipment during the three months ending June 30, 1998. The primary
products sold into the broadcast market in the nine months ended March 31, 1998
are the DVExtreme, Lightning, and Deko products. The broadcast market accounted
for approximately 24.1% and 23.1% of net sales in the three month periods ended
March 31, 1998 and 1997, respectively, and approximately 25.0% and 22.3% of net
sales in the nine month periods ended March 31, 1998 and 1997, 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. Additionally, in August 1997 the Company
acquired the Digital Video Group (the "Miro Acquisition") from Miro Computer
Products AG and began selling the miroVideo desktop product lines. During the
three months ended March 31, 1998, the Company commenced production shipments of
DV300 and Reeltime. DV300 is an all-digital video editing platform that allows
enthusiasts and professionals to scan, capture, and edit video data using a
digital video camcorder and a personal computer. Reeltime is a dual stream video
and audio capture product with real time special effects. In April 1998, the
Company introduced the DC50, a professional non-linear editing system offering
component, composite and S-Video input and output connections. DC50 is expected
to commence shipment during the three months ending June 30, 1998. The desktop
market accounted for approximately 60.4% and 58.0% of net sales in the three
month periods ended March 31, 1998 and 1997, respectively, and approximately
52.1% and 66.1% of net sales in the nine month periods ended March 31, 1998 and
1997, respectively.
10
<PAGE>
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, Inc. 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
consumer product line. In March 1998, the Company announced Studio 400, which is
the successor product to VideoDirector Studio 200. The Company currently expects
to initiate production shipment of Studio 400 during the three months ending
June 30, 1998. The consumer market accounted for approximately 15.5% and 18.9%
of net sales in the three month periods ended March 31, 1998 and 1997,
respectively, and approximately 22.9% and 11.6% of net sales in the nine month
periods ended March 31, 1998 and 1997, respectively.
Expanding Product Line
In April 1997, the Company purchased the Deko titling systems product
line and technology from Digital GraphiX Inc. 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
completed the Miro Acquisition. The Company paid approximately $15.2 million in
cash, issued 203,565 shares of Common Stock valued at $4.4 million, assumed
liabilities of approximately $2.7 million and incurred transaction costs of $1.1
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 nine months ended March 31, 1998. The terms of the acquisition also
include an earnout provision pursuant to 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. Such additional consideration, if any, will be paid in Common Stock of
the Company, recorded as goodwill and amortized over nine years beginning
September 1, 1998. As of March 31, 1998, seven months following the Miro
Acquistion, sales of Miro-derived products totaled approximately $31.3 million
and operating profits exceeded 3% of sales.
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.
Results of Operations
Net Sales. The Company's net sales increased by 255% to $29,332,000 in
the three months ended March 31, 1998 from $8,265,000 in the three month period
ended March 31, 1997. Net sales increased by 194% to $73,727,000 in the nine
months ended March 31, 1998 from $25,052,000 in the nine months ended March 31,
1997. The increase in both periods was attributable to an increase in sales of
all three product groups: broadcast, desktop and consumer. The increase in
consumer sales resulted from sales of products acquired in the Miro Acquisition
and sales of the VideoDirector Studio 200, which commenced shipment in March
1997. 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, partially offset by a decline in sales of Prizm and FlashFile.
Desktop sales increased as a result of miroVideo DC30 sales following the Miro
Acquisition, as well as DV300 and ReelTime, which commenced shipment in February
1998 and March 1998, respectively. Sales outside of North America were
approximately 57.7% and 32.8% of net sales in the three months ended March 31,
1998 and 1997, respectively
11
<PAGE>
and 57.0% and 37.2% in the nine months ended March 31, 1998 and 1997,
respectively. The increase in sales outside of North America in both periods was
primarily attributable to sales of miroVideo products in Europe following the
Miro Acquisition.
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 53.5% and
43.0% in the three months ended March 31, 1998 and 1997, respectively, and 53.2%
and 28.0% in the nine months ended March 31, 1998 and 1997, respectively. The
increase in the three month period was due primarily to an increase in sales of
higher margin broadcast products, partially offset by increased sales of
consumer product lines which generally have lower gross margins. The increase in
the nine month period was primarily due to a significant charge to cost of sales
relating primarily to inventory write downs totaling $4.0 million during the
nine months ended March 31, 1997.
Engineering and Product Development. Engineering and product
development expenses increased 67.1% to $3,165,000 in the three months ended
March 31, 1998 from $1,894,000 during the comparable three month period in the
prior year. The Company's engineering and product development expenses increased
42.1% to $8,155,000 in the nine months ended March 31, 1998 from $5,739,000
during the nine months ended March 31, 1997. 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 established in
connection with the Miro Acquisition. Engineering and product development
expenses as a percentage of net sales were 10.8% and 22.9% during the three
months ended March 31, 1998 and 1997, and 11.1% and 22.9% during the nine months
ended March 31, 1998 and 1997, 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. In April 1998, the Company
formed an additional engineering design team located in Grass Valley,
California.
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 158% to
$7,947,000 in the three months ended March 31, 1998 from $3,077,000 during the
comparable three month period in the prior year. The Company's sales and
marketing expenses increased 157% to $21,332,000 in the nine months ended March
31, 1998 from $8,285,000 during the nine months ended March 31, 1997. 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 as a percentage of net sales were
27.1% and 37.2% for the three month periods ending March 31, 1998 and 1997, and
28.9% and 33.1% for the nine month periods ending March 31, 1998 and 1997,
respectively.
General and Administrative. General and administrative expenses
increased 134% to $1,455,000 in the three months ended March 31, 1998 from
$623,000 during the comparable three month period in the prior year. General and
administrative expenditures increased 37.1% to $3,858,000 in the nine months
ended March 31, 1998 from $2,813,000 during the comparable nine month period in
the prior year. As a percentage of net sales, general and administrative
expenses were 5.0% and 7.5% during the three months ended March 31, 1998 and
1997, respectively and 5.2% and 11.2% during the nine months ended March 31,
1998 and 1997, respectively. Included in general and administrative expenses for
the nine months ended March 31, 1998 is approximately $465,000 of nonrecurring
costs associated with the Miro Acquisition. Included in general and
administrative expenses for the nine months ended March 31, 1997 is
approximately $500,000 relating to the disposal of leasehold improvements and
other capital equipment, moving costs and rent overlap incurred as a result of
the move to the Company's Mountain View facility.
In Process Research and Development. During the nine month period ended
March 31, 1998, the Company recorded an in process research and development
charge of approximately $17.0 million relating to the Miro Acquisition.
Interest Income (Expense), Net. In the three and nine month periods
ended March 31, 1998, net interest income was $1,026,000 and $2,094,000,
respectively, as compared to net interest income of $719,000 and $2,211,000 in
the comparable periods a year ago.
Income Tax Expense. The Company recorded provisions for income taxes of
$832,000 and zero for the three months ended March 31, 1998 and 1997,
respectively. Income tax expense was $1,598,000 and $2,445,000 for the nine
months ended March 31, 1998 and 1997, respectively. Included in income tax
expense for the nine months ended March 31,
12
<PAGE>
1997 is a charge of $3,245,000 resulting from the establishment of a valuation
allowance against the Company's deferred tax asset. As of June 30, 1997, the
Company had federal and state net operating loss carryforwards of $3.1 million
and $1.3 million, respectively, which expire from 2002 to 2012. As of June 30,
1997, the Company also had 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.
Liquidity and Capital Resources
The Company completed public offerings in November 1994 and July 1995,
raising approximately $65.5 million in cash, net of offering expenses. In
November 1997 the Company completed an additional public offering, raising
approximately $47.0 million in cash, net of offering expenses.
The Company's operating activities generated $2,352,000 during the nine
months ended March 31, 1998. The cash provided by operating activities was the
result of the net loss of $10,566,000 as adjusted by the acquired research and
development charge of $16,960,000, depreciation and amortization of $2,072,000,
and was partially offset by net increases in the components of working capital,
primarily accounts receivable.
During the nine months ended March 31, 1998, $1,735,000 million was
invested in property and equipment, compared to $3,562,000 million in the nine
months ended March 31, 1997. The high level of expenditure for the nine months
ended March 31, 1997 was primarily related to leasehold improvements, furniture
and equipment purchased for the Company's Mountain View facility a year ago. The
Company expects to continue to purchase property and equipment at a reduced rate
from prior year levels. 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 purchase up to
750,000 shares of its Common Stock on the open market. Through June 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. No shares were repurchased after June 30, 1997, and in
October 1997 the stock repurchase program was terminated.
In August 1997, the Company completed the Miro Acquisition. 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 March 31, 1998, the Company had working capital of approximately
$90.4 million, including $66.1 million in cash and cash equivalents and $10.1
million in marketable securities. The Company believes that the existing cash
and cash equivalent balances as well as marketable securities and anticipated
cash flow from operations will be sufficient to support the Company's working
capital requirements for the foreseeable future.
Factors Affecting Operating Results
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, 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 ReelTime,
DV300, DC50 and Studio 400, 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 lines acquired in the
Miro Acquisition, 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.
13
<PAGE>
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 convention held in April, the
International Broadcasters Convention 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.
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, Inc. in April 1997 and the VideoDirector product line from Gold
Disk, Inc. 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.
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. The successor product, Studio 400,
was announced in March 1998 and is expected to commence shipment during the
three months ending June 30, 1998. In addition, in connection with the Miro
Acquisition 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 and 400 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 and
400 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.
14
<PAGE>
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 incorporating proprietary hardware and
software is a complex and uncertain process 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 DV300 and Reeltime,
which began shipping in February and March 1998, respectively, as well as
products that have not yet been commercially launched, such as AlladinPro, DC50,
and Studio 400. 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.
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,
Studio 400 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, 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.
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 or limited 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
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. Also, because of the reliance on these single or limited source
components, the Company may be subject to
15
<PAGE>
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.
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 DV300, ReelTime, AlladinPro, DC50
and Studio 400, 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 DV300, ReelTime, AlladinPro, DC50 and Studio 400 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. Any of the foregoing events could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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
intellectual property 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
16
<PAGE>
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.
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. 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.
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 57.7% and 57.0% for
the three and nine months ended March 31, 1998. 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 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.
Year 2000 Compliance. The Company's products are used in numerous
operating environments and with other equipment. It is likely that, commencing
in the year 2000, the functionality of certain operating environments will be
adversely affected when one or more component products of the environment is
unable to process four-digit characters representing years and, therefore, the
operating environment would not be in "Year 2000 compliance." Although the
Company believes its products are in Year 2000 compliance, there can be no
assurance that the Company's fully compliant products will be able to function
properly when integrated with other vendor's noncompliant products. The
inability of one or more of the Company's products to properly function in
connection with another vendor's component product could result in a material
adverse affect on the Company's business, financial condition and the results of
operations, including increased warranty costs, customer satisfaction issues
(particularly in the consumer market) and potential lawsuits.
Although the Company's products are Year 2000 compliant, the Company
anticipates that substantial litigation may be brought against vendors of all
component products, including the Company, of noncompliant operating
environments. The Company believes that any such claims, with or without merit,
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company is identifying Year 2000 dependencies in the Company's
systems and implementing changes to its internal information systems to make
them Year 2000 compliant. While the Company currently expects that the Year 2000
will not pose significant operational problems, delays in the implementation of
new information systems, or a failure to fully identify all Year 2000
dependencies in the Company's systems could have material adverse consequences,
including delays in
17
<PAGE>
the delivery or sale of products.
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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
- -----------------------
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
Date: May 7, 1998 By: /s/Mark L. Sanders
------------------------
Mark L. Sanders
President, Chief Executive Officer
and Director
Date: May 7, 1998 By: /s/Arthur D. Chadwick
---------------------------
Arthur D. Chadwick
Vice President, Finance and
Administration and Chief Financial
Officer
19
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