<PAGE>
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 December 31, 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) 526-1600
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
The number of shares of common stock outstanding as of December 31, 1998 was
10,568,764.
Page 1
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INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Operations -
Three Month and Six Month Periods Ended
December 31, 1998 and 1997 4
Condensed Consolidated Statements of Comprehensive
Income (Loss) - Three Month and Six Month Periods
Ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 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 4 - Submission of Matters to a Vote of Security Holders 25
ITEM 6 - Exhibits and Reports on Form 8-K 26
Signatures 27
2
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---- ----
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $24,451 $47,478
Marketable securities 64,666 39,307
Accounts receivable, net 23,790 18,459
Inventories 18,260 11,960
Prepaid expenses and other assets 2,854 1,674
-------- --------
Total current assets 134,021 118,878
Marketable securities 7,239 4,521
Property and equipment, net 7,198 5,411
Goodwill 10,391 3,390
Other assets 638 737
-------- --------
$159,487 $132,937
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $11,704 $ 8,143
Accrued expenses and other 10,096 8,729
Income taxes payable 3,157 1,510
-------- --------
Total current liabilities 24,957 18,382
-------- --------
Long-term obligations - 163
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares; - -
none issued and outstanding
Common stock; authorized 15,000 shares; 10,569 and 7,303 issued and
outstanding as of December 31, 1998, and June 30, 1998, respectively 143,631 133,332
Accumulated deficit (9,777) (18,825)
Accumulated other comprehensive income (loss) 676 (115)
-------- --------
Total shareholders' equity 134,530 114,392
-------- --------
$159,487 $132,937
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
December 31, December 31,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $39,172 $27,881 $71,445 $ 44,395
Cost of sales 18,197 13,117 33,210 20,853
-------- -------- -------- --------
Gross profit 20,975 14,764 38,235 23,542
-------- -------- -------- --------
Operating expenses:
Engineering and product development 3,352 2,918 6,653 4,990
Sales and marketing 10,562 8,164 19,149 13,385
General and administrative 1,885 1,132 3,394 2,403
In-process research and development -- -- -- 16,960
-------- -------- -------- --------
Total operating expenses 15,799 12,214 29,196 37,738
-------- -------- -------- --------
Operating income (loss) 5,176 2,550 9,039 (14,196)
Interest income, net 1,128 516 2,275 1,068
--------- --------- -------- --------
Income (loss) before income taxes 6,304 3,066 11,314 (13,128)
Income tax expense (1,264) (613) (2,266) (766)
--------- --------- -------- --------
Net income (loss) $ 5,040 $ 2,453 $ 9,048 $(13,894)
--------- --------- -------- --------
--------- --------- -------- --------
Net income (loss) per share
Basic $ 0.48 $ 0.29 $ 0.87 $ (1.75)
--------- --------- -------- --------
--------- --------- -------- --------
Diluted $ 0.44 $ 0.26 $ 0.80 $ (1.75)
--------- --------- -------- --------
--------- --------- -------- --------
Shares used to compute net income (loss) per share
Basic 10,524 8,464 10,363 7,942
--------- --------- -------- --------
--------- --------- -------- --------
Diluted 11,501 9,323 11,302 7,942
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 5,040 $ 2,453 $ 9,048 $ (13,894)
Foreign currency translation adjustment (55) (30) 791 26
--------- -------- --------- -----------
Comprehensive income (loss) $ 4,985 $ 2,423 $ 9,839 $ (13,868)
--------- -------- --------- -----------
--------- -------- --------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,048 $(13,894)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Acquired research and development -- 16,960
Depreciation and amortization 2,059 1,415
Changes in operating assets and liabilities:
Accounts receivable (4,879) (9,992)
Inventories (5,993) (3,114)
Accounts payable 3,303 3,207
Accrued expenses 1,060 2,370
Accrued income taxes 1,632 --
Prepaid and other (1,112) (328)
--------- --------
Net cash provided by (used in) operating activities 5,118 (3,376)
--------- --------
--------- --------
Cash flows from investing activities:
Cash payment for acquisition -- (15,150)
Purchases of property and equipment (2,883) (1,210)
Decrease (Increase) in marketable securities (28,077) 5,074
--------- --------
Net cash used in investing activities (30,960) (11,286)
--------- --------
--------- --------
Cash flow from financing activities:
Payment on note payable (150) (150)
Proceeds from issuance of common stock 2,465 48,622
--------- --------
Net cash provided by financing activities 2,315 48,472
--------- --------
--------- --------
Effects of exchange rate changes on cash 500 --
Net (decrease) increase in cash and cash equivalents (23,027) 33,810
Cash and cash equivalents at beginning of period 47,478 32,788
--------- --------
Cash and cash equivalents at end of period $ 24,451 $ 66,598
--------- --------
--------- --------
Supplemental disclosures of cash paid during the period for:
Interest $ -- $ 1
--------- --------
--------- --------
Income taxes $ 490 $ --
--------- --------
--------- --------
Non-cash transactions:
Liabilities associated with the acquisition of certain net assets $ -- $ 3,810
--------- --------
--------- --------
Common Stock issued for Miro acquisition $ 7,834 $ 4,352
--------- --------
--------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying condensed consolidated financial statements include
the accounts of Pinnacle Systems, Inc. and its wholly owned subsidiaries
("Pinnacle" or "the Company"). Intercompany transactions and related balances
have been eliminated in consolidation. These financial statements have been
prepared in conformity with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reported
periods. The most significant estimates included in these financial
statements include accounts receivable and sales allowances, inventory
valuation and the income tax valuation allowance. Actual results could differ
from those estimates. The information furnished in this report reflects all
adjustments that, 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. 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. Certain prior period amounts have been reclassified to conform to
the current period's presentation.
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, 1998 included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 11, 1998. Results
of operations for interim periods are not necessarily indicative of results for
the full year.
FISCAL YEAR AND INTERIM REPORTING DATES
Pinnacle reports on a fiscal year that ends June 30. In fiscal 1998 and
prior, the Company's three interim quarters (September, December and March)
ended on the last Friday of the respective months. Beginning July 1, 1998, the
Company's fiscal year end and interim quarters will end on the last day of the
respective months. Prior periods have not been adjusted to reflect this change.
CURRENCY TRANSLATION
The results of operations for non-U.S. subsidiaries are translated into
U.S. dollars using average exchange rates for the period, while assets and
liabilities are translated using period-end rates. Resulting translation
adjustments are recorded in shareholders' equity as accumulated other
comprehensive income (loss).
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
statement establishes standards for public companies to report operating segment
information in annual financial statements and requires those enterprises to
report selected operating segment information 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.
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
addresses the accounting for derivative instruments, including certain
derivative
7
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instruments embedded in other contracts. Under SFAS No. 133, entities
are required to carry all derivative instruments in the balance sheet at fair
value. The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, the reason for holding it. The
Company must adopt SFAS 133 by the fiscal year ending June 30, 1999. The Company
has not determined the impact that SFAS No. 133 will have on its financial
statements.
In March 1998, Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued which provides guidance on applying generally accepted accounting
principles in addressing whether and under what condition the costs of
internal-use software should be capitalized. SOP 98-1 is effective for
transactions entered into in fiscal years beginning after December 15, 1998,
however earlier adoption is encouraged. The Company adopted the guidelines of
SOP 98-1 as of January 1, 1999. The impact of such adoption was not material to
results of operations or cash flows for the three- and six-month periods ended
December 31, 1998.
2. NET INCOME PER SHARE
The Company computes basic and diluted earnings per share in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share." The following tables reconcile the numerator and
denominator of the basic and diluted earnings per share computations shown on
the Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands) December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS - weighted average shares of common stock
Outstanding 10,524 8,464 10,363 7,942
Effect of dilutive common equivalent shares - stock
options outstanding 977 859 939 -
----------- ---------- ----------- -----------
Diluted EPS - weighted average shares and common
Equivalent shares outstanding 11,501 9,323 11,302 7,942
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Options to purchase shares of common stock
excluded due to anti-dilution 67 0 67 0
-- - -- -
-- - -- -
</TABLE>
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 December 31, 1998. All investments at December 31, 1998 were classified as
held-to-maturity. Such investments mature through September 2000.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---- ----
<S> <C>
Accounts receivable $ 29,678 $ 22,883
Less allowances for:
Doubtful accounts (1,712) (1,469)
Sales allowances (4,176) (2,955)
--------------- ------------
$ 23,790 $ 18,459
--------------- ------------
--------------- ------------
</TABLE>
8
<PAGE>
5. CUSTOMERS AND CREDIT CONCENTRATIONS
During the three and six month periods ended December 31, 1998,
Ingram Micro Inc. accounted for approximately 9.3% and 11.0% of net sales,
respectively, compared to 11.1% and 11.3% for the comparable periods in 1997.
No other customer accounted for greater than 10% of sales.
Ingram Micro Inc. accounted for approximately 24.3% and 18.5% of accounts
receivable at December 31, 1998 and June 30, 1998, respectively.
6. INVENTORIES
A summary of inventories follows:
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---- ----
<S> <C> <C>
Raw materials $ 7,744 $ 6,418
Work in process 2,994 2,946
Finished goods 7,522 2,596
------------ -----------
$ 18,260 $ 11,960
------------ -----------
------------ -----------
</TABLE>
Raw materials inventory represents purchased materials, components and
assemblies, including fully assembled circuit boards purchased from outside
vendors.
7. 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 month
period ended December 31, 1998 and 1997, the Company purchased materials
totaling $4,155,000 and $1,433,000 respectively, from Bell pursuant to the
Agreement. During the six month period ended December 31, 1998 and 1997, the
Company purchased materials totaling $5,581,000 and $2,432,000 respectively from
Bell pursuant to the Agreement.
8. ACQUISITIONS
On December 16, 1998, the Company announced that it had entered into
a definitive agreement to acquire Truevision, Inc., a supplier of digital
video products, in a transaction designed to extend Pinnacle's leadership in
the desktop digital video capture and editing market. Under the terms of the
merger agreement, Truevision shareholders will receive 0.0313 shares of
Pinnacle common stock for each share of Truevision common stock. The
transaction is subject to various conditions including the receipt of
required regulatory approvals and approval by the shareholders of Truevision
and is expected to close no sooner than March 15, 1999. Based on the
outstanding shares of Truevision common stock on December 31, 1998, Pinnacle
expects to issue approximately 410,168 new shares of Pinnacle common stock.
Pinnacle will also assume Truevision stock options and warrants. Based on the
closing price of Pinnacle common stock on December 16, 1998, the
consideration to be paid, including the assumption of stock options and
warrants, plus estimated transaction costs is approximately $15.3 million.
The transaction will be accounted for as a purchase and will be taxable to
the stockholders of Truevision. During the quarterly period in which the
transaction closes, the Company expects to take an in-process research and
development charge and to incur certain non-recurring expenses related to
integrating the two businesses.
In August 1997, the Company acquired the miro Digital Video Products
from miro Computer Products AG. The terms of the acquisition included an earnout
provision in which miro Computer Products AG would receive additional
consideration equal to 50% of sales generated in excess of $37 million during
the first twelve full months following the acquisition. In September 1998,
pursuant to this earnout provision, the Company issued an aggregate of 307,534
shares of its common stock to miro Computer Products AG. Upon the issuance of
these shares, the Company recorded goodwill of $7.8 million or approximately
$25.50 per share to be amortized into income over nine years using the
straight-line method.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussions and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q 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 sentences of the paragraphs below relating to "Engineering
and Product Development" and "Sales and Marketing," and the statements
regarding the Company's expected investment in property, machinery and
equipment under "Liquidity and Capital Resources" below, among others.
OVERVIEW
The Company designs, manufactures, markets and supports video
post-production tools for high quality real time video processing. The Company's
products are used to capture, compress and store and edit video and to perform a
variety of video manipulation functions, including the addition of special
effects, graphics and titles to multiple streams of live or previously recorded
video material. Pinnacle's strategy is to leverage its existing market and
technological position to continue to provide innovative, real time, computer
based solutions for three video post-production markets which the Company
characterizes as broadcast, desktop and consumer.
Pinnacle distributes and sells its products to end users through the
combination of independent domestic and international dealers, retail
distributors, OEMs and a growing direct sales force. Sales to dealers,
distributors and OEMs are generally at a discount to the published list prices.
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. Generally, products
sold to OEMs are integrated into systems sold by the OEMs to their customers.
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 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,
Inc. ("Deko Acquisition") and has since enhanced and expanded that product line.
Substantially all of the broadcast revenue in fiscal 1998 came from the sale of
DVEtreme, Lightning and Deko products. In June 1998, the Company commenced
shipment of AlladinPRO; a high-performance Windows NT based digital video
effects system designed for live and on-line applications. In September 1998,
the Company commenced shipment of FXDeko; a new high performance Windows NT
based product that combines the feature set of Deko with real-time digital
effects technology. These four product families, DVExtreme, Lightning, Deko and
AlladinPRO comprise the Company's suite of high performance real time Windows
NT-based products designed for on-air, broadcast and high-end, post-production
applications. The broadcast market accounted for approximately 13.4% and 22.2%
of net sales in the three-month periods ended December 31, 1998 and 1997,
respectively, and approximately 16.6% and 25.5% of net sales in the six month
periods ended December 31, 1998 and 1997, respectively.
DESKTOP MARKET
The Company's desktop products are designed to provide high quality
video capture, compression/decompression, editing, and 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's first desktop product was the Alladin,
which commenced shipment in June 1994. The Company expanded its desktop product
line with the introduction of Genie in June 1996. In August 1997 the Company
acquired the miroVIDEO desktop product lines and during fiscal 1998 the Company
introduced additional new desktop products. The Company has two general classes
of desktop products: digital video effects products, which include the Alladin
and Genie families, and video capture and editing products, which include the
ReelTime, ReelTime Nitro, miroVIDEO DC30, miroVIDEO DC50 and miroVIDEO DV300
families. In September 1998, the Company commenced
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shipment of ReelTime Nitro which combines the video capture and editing
capabilities of ReelTime with the digital video effects capabilities of
Genie. The desktop market accounted for approximately 51.9% and 54.1% of net
sales in the three-month periods ended December 31, 1998 and 1997,
respectively, and approximately 55.4% and 46.6% of net sales in the six month
periods ended December 31, 1998 and 1997, respectively.
CONSUMER MARKET
The Company's consumer products provide complete video editing
solutions that allow consumers to edit their home videos using their personal
computer, camcorder and VCR. 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. In June 1998 the Company
commenced shipment of Studio 400, which expands the capabilities of and replaces
VideoDirector Studio 200. In November 1998 the Company commenced shipment of
Studio DC10 Plus. Also in November 1998, the Company announced the introduction
of Studio MP10 which management expects to begin shipping by March 1999. As of
December 31, 1998 the Company's consumer product line included Studio 400,
Studio DC10+, miroVIDEO DC10, miroVIDEO DC20 and miroVIDEO PCTV. Consumer
products are distributed direct to retail outlets and through retail
distributors such as Ingram Micro. The Company also sells directly to end users
by accepting orders via the telephone and internet. Price points of consumer
products are lower than the Company's broadcast and desktop products and are
marketed as both software packages and computer peripheral products. The
consumer market accounted for approximately 34.7% and 23.7% of net sales in the
three-month periods ended December 31, 1998 and 1997, respectively, and
approximately 28.0% and 27.8% of net sales in the six month periods ended
December 31, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
NET SALES. The Company's net sales increased 40.5% to $39,172,000 in
the three month period ended December 31, 1998 compared to $27,881,000 in the
same period last year. Net sales increased by 60.9% to $71,445,000 in the six
months ended December 31, 1998 from $44,395,000 in the six months ended December
31, 1997 (see below).
<TABLE>
<CAPTION>
Group 1998 1997 Increase (Decrease)
----- ---- ---- -------------------
<S> <C> <C> <C>
Quarter end December 31:
- ------------------------
Broadcast $ 5,254 $ 6,195 (15.2)%
Desktop 20,336 15,470 31.5%
Consumer 13,582 6,216 118.5%
-------- ---------
$ 39,172 $ 27,881 40.5%
-------- ---------
-------- ---------
Six months ended December 31:
- -----------------------------
Broadcast $ 11,846 $ 11,340 4.5%
Desktop 39,592 23,861 65.9%
Consumer 20,007 9,194 117.6%
-------- ---------
$ 71,445 $ 44,395 60.9%
-------- ---------
-------- ---------
</TABLE>
In the quarter ended December 31, 1998, sales increases in the consumer and
desktop groups over the prior year were offset by a decrease in the broadcast
sales. For the desktop group, the growth was attributable to an expanded product
line which added DC50, DV300, Reeltime and Reeltime Nitro to an already strong
base of DC30 revenue. Consumer sales increased due to growing sales of PCTV in
Europe and worldwide sales of Studio 400 which began shipping in June 1998.
Revenues in the broadcast group decreased in quarter ended December 31, 1998 and
increased slightly in the six month period ended December 31, 1998 compared to
the corresponding periods last year as the industry focuses its attention and
resources on evolving technologies in areas such as high definition digital
television (HDTV).
INTERNATIONAL SALES. International sales (sales outside of North
America) increased 61% in the three month period ended December 31, 1998
compared to the three month period ended December 31, 1997 and accounted for
approximately 71% and 62% of net sales respectively. International sales
increased 82% in the six month period ended December 31, 1998 compared to the
six month period ended December 31, 1997 and accounted for approximately 64%
and
11
<PAGE>
57% of the Company's net sales respectively. The Company expects that
international sales will continue to represent a significant portion of its
net sales.
COST OF SALES AND GROSS PROFIT. 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, warranty costs and post sale customer
support costs. For the three and six month periods ended December 31, 1998
and 1997, cost of sales were approximately 47% of sales and related gross
margins held at 53%. From the six month period ended December 31, 1997 to the
six month period ended December 31, 1998, the Company has experienced a shift
in product mix away from higher margin broadcast products to lower margin
consumer products. In spite of this, Pinnacle has been able to maintain its
gross margin percentage due to growing sales in its higher margin desktop
products.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering and product
development expenses increased 14.9% to $3,352,000 in the three months ended
December 31, 1998 from $2,918,000 during the comparable three months period in
the prior year. The Company's engineering and product development expenses
increased 33.3% to $6,653,000 in the six months ended December 31, 1998 from
$4,990,000 during the six months ended December 31, 1997. As a percentage of
sales, engineering and product development expenses decreased to 8.6% in the
quarter ended December 31, 1998 from 10.5% in the quarter ended December 31,
1997, and to 9.3% from 11.2% in the six months ended December 31, 1998 and 1997,
respectively. Management believes that investment in research and development is
crucial to its future growth and position in the industry. The Company expects
to continue to allocate significant resources to engineering and product
development efforts in Mountain View and Grass Valley, California, the Deko
engineering team located in Paramus, New Jersey and the Miro engineering team
located in Braunschweig, Germany in addition to purchasing research and
development through acquisition as evidenced in its pending acquisition of
Truevision, Inc. (see "Truevision Acquisition" above).
SALES AND MARKETING. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show and advertising expenses and professional fees
for marketing services. Sales and marketing expenses increased by 29.4% to
$10,562,000 in the three months ended December 31, 1998 from $8,164,000 during
the comparable three months period in the prior year. The growth during the
three month period was due primarily to increased spending in Europe. The
Company's sales and marketing expenses increased 43.1% to $19,149,000 in the six
months ended December 31, 1998 from $13,385,000 in the six month period ended
December 31, 1997 as the Company continues to invest in its infrastructure to
promote its products worldwide. Although sales and marketing expenditures have
increased significantly year to year, as a percentage of net sales expenditures
have fallen to 27.0% from 29.3% in the three month periods ending December 31,
1998 and 1997, and to 26.8% from 30.1% in the six month periods ending December
31, 1998 and 1997, respectively. These decreases reflect a growth in sales
exceeding incremental sales and marketing expenditures. Although management
continues to invest substantial amounts in the Company's sales and marketing
efforts, there can be no assurance that these current or increased sales and
marketing expenditures will enable the Company to maintain or grow its current
level of sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 66.5% to $1,885,000 in the three months ended December 31, 1998 from
$1,132,000 during the comparable three months period in the prior year. General
and administrative expenditures increased 41.2% to $3,394,000 in the six months
ended December 31, 1998 from $2,403,000 during the comparable six months period
in the prior year. As a percentage of net sales, general and administrative
expenses were 4.8% and 4.1% during the three months ended December 31, 1998 and
1997 and 4.8% and 5.4% during the six months ended December 31, 1998 and 1997,
respectively.
IN PROCESS RESEARCH AND DEVELOPMENT. During the six month period ended
December 31, 1997, the Company recorded an in process research and development
charge of approximately $17.0 million relating to the Miro Acquisition.
INTEREST INCOME (EXPENSE), NET. Interest income, net consists primarily
of interest income, other income and interest expense. Interest income is
generated primarily from the Company's low risk investments in money market
funds, government securities and high-grade commerical paper. In the three and
six months ended December 31, 1998, net interest income was $1,128,000 and
$2,275,000, respectively, as compared to net interest income of $516,000 and
$1,068,000 in the comparable periods a year ago. The increase reflects the
investment of proceeds from the Company's common stock offering in Novmeber 1997
and investment of cash generated from operations.
INCOME TAX EXPENSE. The Company recorded provisions for income taxes of
$1,264,000 and $613,000 for the three months ended December 31, 1998 and 1997,
respectively. Income tax expense was $2,266,000 and $766,000 for the six months
ended December 31, 1998 and 1997, respectively. As of June 30, 1998, the Company
had federal research and
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experimentation and alternative minimum tax credit carryforwards of
$1,315,000 that expire between 2009 to 2013, and state research and
experimentation credit carryforwards of $546,000 that have no expiration
provision.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has funded its operations to date through sales of equity
securities as well as through cash flows from operations. As of December 31,
1998, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $96.4 million. 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.
The Company's operating activities generated cash of $5,118,000 in
the six months ended December 31, 1998. Cash was generated primarily from net
income of $9,048,000 million as well as from increases in accounts payable,
accrued expenses and income taxes payable. These amounts were offset by
increases in accounts receivable due to the Company's sales growth and
inventory on account of higher broadcast and certain consumer inventories on
hand due to lower than expected revenues from these products.
During the six months period ended December 31, 1998, $2,883,000 was
invested in property and equipment, compared to $1,210,000 in the six months
ended December 31, 1997. The high level of expenditures for the six months ended
December 31, 1998 were primarily for leasehold improvements, furniture and
equipment purchased for the Company's Mountain View facility expansion in
September 1998. As the Company continues to grow it expects ongoing purchases of
property and equipment. Such capital expenditures will be financed from working
capital.
On December 16, 1998, the Company announced that it entered into a
definitive agreement to acquire Truevision, Inc. a supplier of digital video
products, in a transaction designed to extend Pinnacle's leadership in the
desktop digital video capture and editing market. Under the terms of the
merger agreement, Truevision shareholders will receive 0.0313 shares of
Pinnacle common stock for each share of Truevision common stock. The
transaction is subject to various conditions including the receipt of
required regulatory approvals and approval by the shareholders of Truevision
and is expected to close no sooner than March 15, 1999. Based on the
outstanding shares of Truevision common stock on December 31, 1998, Pinnacle
expects to issue approximately 410,168 new shares of Pinnacle common stock.
Pinnacle will also assume Truevision stock options and warrants. Based on the
closing price of Pinnacle common stock on December 16, 1998, the
consideration to be paid, including the assumption of stock options and
warrants, plus estimated transaction costs is approximately $15.3 million.
The transaction will be accounted for as a purchase and will be taxable to
the stockholders of Truevision. During the quarterly period in which the
transaction closes, the Company expects to take an in-process research and
development charge and to incur certain non-recurring expenses related to
integrating the two businesses.
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FACTORS AFFECTING OPERATING RESULTS
RISKS RELATED TO THE PROPOSED MERGER WITH TRUEVISION
The successful combination of companies in the high technology industry may
be more difficult to accomplish than in other industries. The anticipated
benefits of the merger will not be achieved unless the operations of Truevision
are successfully combined with those of Pinnacle Systems in a timely manner.
Prior to the merger, Pinnacle Systems and Truevision will have operated
independently, each with its own business, business culture, clients, employees
and systems. Following the merger, the combined company must operate as a single
organization utilizing common (1) information communication systems; (2)
operating procedures; (3) financial controls and (4) human resource practices,
including benefit, training and professional development programs. There may be
substantial difficulties, costs and delays involved in integrating Pinnacle
Systems and Truevision which could harm the combined company. These
difficulties, costs and delays may include:
- Diversion of the attention of management
- Potential incompatibility of business cultures
- Interruption of, or a loss of momentum in, the activities of either or
both of the companies' businesses
- Difficulties in assimilating Pinnacle Systems' and Truevision's product
offerings
- Difficulties in coordinating Pinnacle Systems' and Truevision's research
and development and sales and marketing efforts
- Costs and delays in implementing common systems and procedures, including
financial accounting systems
- Costs and inefficiencies in delivering services to the clients of the
combined company
- Inability to retain and integrate key management, technical sales and
customer support personnel
Also, the engineering teams of Pinnacle Systems and Truevision may not
successfully cooperate and realize any technological benefits. For these
reasons, Pinnacle Systems may not realize any of the anticipated benefits of the
merger. In addition, the announcement and consummation of the merger could cause
customers and potential customers of Pinnacle Systems or Truevision to delay or
cancel orders for products as a result of customer concerns and uncertainty over
product evolution, integration and support of the combined company's products. A
delay or cancellation of orders could harm the business, results of operations
and financial condition of either or both of Pinnacle Systems or Truevision.
Pinnacle Systems and Truevision estimate that the negotiation and
implementation of the merger will result in aggregate pre-tax expenses to
Pinnacle Systems and Truevision of approximately $2 million to $3 million,
primarily relating to the fees of financial advisors, attorneys and accountants.
Pinnacle Systems also expects to take a non-recurring charge associated with
combining the operations of the two companies of approximately $1 million to $3
million and an in-process research and development write-off of approximately $3
million to $4 million in the quarter in which the merger closes. It is possible
that Pinnacle Systems' and Truevision's estimate is incorrect or that
unanticipated contingencies will occur that will substantially increase the
costs of combining the companies' operations. In any event, costs associated
with the merger will negatively impact results of operations in the quarter in
which the merger occurs.
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THERE ARE VARIOUS FACTORS WHICH MAY CAUSE PINNACLE SYSTEMS' NET REVENUES AND
OPERATING RESULTS TO FLUCTUATE.
Pinnacle Systems' quarterly and annual operating results have varied
significantly in the past and may continue to fluctuate because of a number of
factors, many of which are outside Pinnacle Systems' control. These factors
include:
- Timing of significant orders from and shipments to major OEM customers
- Timing and market acceptance of new products
- Success in developing, introducing and shipping new products
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- Dependence on distribution channels through which Pinnacle Systems' are
sold
- Increased competition and pricing pressure
- Accuracy of Pinnacle Systems' and resellers' forecasts of end user demand
- Accuracy of inventory forecasts
- Ability to obtain sufficient supplies from its subcontractors
- Timing and level of consumer product returns
- Foreign currency fluctuations
- Costs of integrating acquired operations
- General domestic and international economic conditions, such as the
current economic downturn in Asia
Pinnacle Systems 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 of July and August, especially in Europe. Also,
Pinnacle Systems attends a number of annual trade shows which can influence the
order pattern of products, including the NAB convention held in April, the IBC
convention held in September and the COMDEX exhibition held in November.
Pinnacle Systems' 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. Due to these factors,
Pinnacle Systems 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.
PINNACLE SYSTEMS' STOCK PRICE MAY BE VOLATILE.
The trading price of Pinnacle Systems' common stock has in the past and
could in the future fluctuate significantly. The fluctuations have been or could
be in response to numerous factors including:
- Quarterly variations in results of operations
- Announcements of technological innovations or new products by Pinnacle
Systems, their customers or competitors
- Changes in securities analysts' recommendations
- Earnings estimates for Pinnacle Systems
- General fluctuations in the stock market
Pinnacle Systems' revenues and results of operations may be below the
expectations of public market securities analysts or investors. This could
result in a sharp decline in the market price of Pinnacle Systems' common stock.
In addition, stock markets have from time to time experienced extreme price and
volume fluctuations. The market prices for high technology companies have been
particularly affected by these market fluctuations and such effects have often
been unrelated to the operating performance of such companies. These broad
market fluctuations may cause a decline in the market price of Pinnacle Systems'
common stock.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against the
issuing company. Although no such litigation has been brought against Pinnacle
Systems, it is possible that similar litigation could be brought against
Pinnacle Systems. Such litigation could result in substantial costs and would
likely divert management's attention
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and resources. Any adverse determination in such litigation could also subject
Pinnacle Systems to significant liabilities.
PINNACLE SYSTEMS' FAILURE TO ACQUIRE AND SUCCESSFULLY INTEGRATE THE
BUSINESSES IT ACQUIRES COULD NEGATIVELY IMPACT IT.
In August 1997, Pinnacle Systems completed the acquisition of certain assets
from miro Computer Products AG ("Miro Acquisition"). Pinnacle Systems may in the
near- or long-term pursue acquisitions of complementary businesses, products or
technologies. Integrating acquired operations is a complex, time-consuming and
expensive process. All acquisitions involve risks that could materially and
adversely affect Pinnacle Systems' business and operating results. These risks
include:
- Distracting management from the day-to-day operations of Pinnacle Systems'
business
- Costs, delays and inefficiencies associated with integrating acquired
operations, products and personnel
- The potential to result in dilutive issuance of Pinnacle Systems' equity
securities
- The incurrence of debt and amortization expenses related to goodwill and
other intangible assets
PINNACLE SYSTEMS MAY FAIL TO SELL PRODUCTS IN THE CONSUMER MARKET.
Pinnacle Systems entered the consumer market with the purchase of the
VideoDirector product line from Gold Disk in June 1996. Pinnacle Systems began
shipping its first internally developed consumer product, the VideoDirector
Studio 200, in March 1997 and began shipping a successor product, the Studio 400
in June 1998. In addition, with the Miro Acquisition in August 1997, Pinnacle
Systems acquired Miro's consumer products and European sales organization.
Pinnacle Systems aims to expend considerable resources to develop, market and
sell products into the consumer market. Pinnacle Systems expects to devote
significant effort and resources to developing its consumer market. However,
Pinnacle Systems could fail since it currently lacks:
- Significant experience marketing and selling products through the consumer
distribution channels.
- Established relationships with distributors and retailers
- A fully developed infrastructure to support electronic retail stores and
telephone and internet orders.
Additionally, several factors beyond Pinnacle Systems' control could hurt
consumer product sales and consequently Pinnacle Systems' financial condition.
These factors include:
- Pinnacle Systems' products may have compatibility problems with other
manufacturers' electronic components
- Pinnacle Systems, and not the reseller, bears the risk of obsolete
inventory and inventory returns
- The growth of the consumer video market is difficult to predict
PINNACLE SYSTEMS' SALES ARE CONCENTRATED AMONGST OEM CUSTOMERS AND PINNACLE
SYSTEMS COULD BE NEGATIVELY AFFECTED IF SALES TO THESE CUSTOMERS WERE TO
DECLINE.
Pinnacle Systems has been highly dependent on sales of its Alladin and Genie
products to OEMs. Sales to Avid Technology, Inc. accounted for approximately
5.8% in the quarter ended December 31, 1998, 10.7% of net sales in fiscal 1998
and 26.4% of sales in fiscal 1997. Though this concentration has lessened during
the last fiscal years, it still subjects Pinnacle Systems to a number of risks.
In particular, its operating results will vary on a quarter-to-quarter basis as
a result of variations in the ordering patterns of OEM customers. Pinnacle
Systems' results of operations have in the past and could in the
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future be materially harmed 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 Pinnacle Systems anticipates that such fluctuations may
continue. If sales to OEM customers were to decrease, Pinnacle's business could
be materially harmed.
IF PINNACLE SYSTEMS' PRODUCTS DO NOT KEEP PACE WITH THE TECHNOLOGICAL
DEVELOPMENTS IN THE RAPIDLY CHANGING VIDEO POST-PRODUCTION EQUIPMENT INDUSTRY,
THEN IT MAY BE ADVERSELY AFFECTED.
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. Delays in the introduction or shipment of new or enhanced
products, the inability of Pinnacle Systems 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 materially harm
Pinnacle Systems' business, particularly on a quarterly basis.
Pinnacle Systems 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 AlladinPRO, Studio 400, miroVIDEO DC50, Studio DC10 plus and
Studio MP10, as well as products that began shipping in the first fiscal quarter
of 1999, such as FXDeko and ReelTime Nitro. Once a new product is developed,
Pinnacle Systems must rapidly commence volume production. This process requires
accurate forecasting of customer requirements and attainment of acceptable
manufacturing costs. The introduction of new or enhanced products also requires
Pinnacle Systems 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, Lightning and Studio 400 has resulted in a significant decline in
sales of Prizm, Flashfile and Studio 200 and a write down of inventory. In
addition, as is typical with any new product introduction, quality and
reliability problems may arise. 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.
IF PINNACLE SYSTEMS DOES NOT EFFECTIVELY COMPETE, ITS BUSINESS WILL BE
HARMED.
The market for Pinnacle's products is highly competitive. Pinnacle Systems
competes in the broadcast, desktop and consumer video production markets.
Pinnacle anticipates increased competition in each of the broadcast, desktop and
consumer video production markets, particularly since the industry is undergoing
a period of technological change and consolidation. Competition for Pinnacle
Systems' broadcast, consumer and video products is generally based on:
- Product performance
- Breadth of product line
- Quality of service and support
- Market presence
- Price
- Ability of competitors to develop new, higher performance, lower cost
consumer video products
Pinnacle Systems' competitors in the broadcast, consumer and video market
include companies with substantially greater financial, technical, marketing,
sales and customer support resources, greater
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name recognition and larger installed customer bases than Pinnacle Systems. In
addition, these competitors have established relationships with current and
potential customers of Pinnacle Systems and some offer a wide variety of video
equipment that can be bundled in certain large system sales.
Principal competitors in the broadcast market include:
Chyron Corporation
Matsushita Electric Industrial Co. Ltd.
Quantel Ltd. (a division of Carlton Communications Plc)
Accom, Inc.
Sony Corporation
Principal competitors in the desktop and consumer markets are:
Quantel Ltd. (a division of Carlton Communications Plc)
Accom, Inc.
Sony Corporation
Avid Technology, Inc.
Digitel Processing Systems, Inc.
Fast Multimedia
Iomega Corp.
Matrox Electronics Systems, Ltd.
Media 100, Inc.
Adobe Systems, Inc.
These lists are not all-inclusive.
The consumer market in which certain of Pinnacle Systems' 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 Pinnacle Systems'
consumer products by providing some or all of the same features and video
editing capabilities. In addition, Pinnacle Systems expects that existing
manufacturers and new market entrants will develop new, higher performance,
lower cost consumer video products that may compete directly with Pinnacle
Systems' consumer products. Pinnacle Systems 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
these effects could materially harm Pinnacle Systems' business.
PINNACLE SYSTEMS IS DEPENDENT ON CONTRACT MANUFACTURERS AND SINGLE OR
LIMITED SOURCE SUPPLIERS FOR ITS COMPONENTS. IF THESE MANUFACTURERS AND
SUPPLIERS DO NOT MEET PINNACLE SYSTEMS' DEMAND EITHER IN VOLUME OR QUALITY, THEN
PINNACLE SYSTEMS COULD BE MATERIALLY HARMED.
Pinnacle Systems relies on subcontractors to manufacture its consumer
products and the major subassemblies of its broadcast and desktop products.
Pinnacle Systems and its manufacturing subcontractors are dependent upon single
or limited source suppliers for a number of components and parts used in
Pinnacle Systems' products, including certain key integrated circuits. Pinnacle
Systems' strategy to rely on subcontractors and single or limited source
suppliers involves a number of significant risks, including:
- Loss of control over the manufacturing process
- Potential absence of adequate capacity
- Potential delays in lead times
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- Unavailability of certain process technologies
- Reduced control over delivery schedules, manufacturing yields, quality and
costs
- Unexpected increases in component costs
If any significant subcontractor or single or limited source suppliers
becomes unable or unwilling to continue to manufacture these subassemblies or
provide critical components in required volumes, Pinnacle Systems will have to
identify and qualify acceptable replacements or redesign its products with
different components. Additional sources may not be available and product
redesign may not be feasible on a timely basis. This could materially harm
Pinnacle Systems' business. 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 harm Pinnacle
Systems' business.
WITHOUT A DIRECT SALES FORCE, PINNACLE SYSTEMS RELIES HEAVILY ON DEALERS AND
OEMS TO MARKET, SELL, AND DISTRIBUTE ITS PRODUCTS. IN TURN, PINNACLE SYSTEMS
DEPENDS HEAVILY ON THE SUCCESS OF THESE RESELLERS. IF THESE RESELLERS DO NOT
SUCCEED IN EFFECTIVELY DISTRIBUTING PINNACLE SYSTEMS' PRODUCTS, THEN PINNACLE
SYSTEMS' FINANCIAL PERFORMANCE WILL BE NEGATIVELY AFFECTED.
These resellers may:
- Not effectively promote or market Pinnacle Systems' products
- Experience financial difficulties and even close operations
Pinnacle Systems' dealers and retailers are not contractually obligated to
sell Pinnacle Systems' products. Therefore, they may, at any time:
- Refuse to promote or pay for Pinnacle Systems' products
- Discontinue Pinnacle Systems' products in favor of a competitor's product
Also, with these distribution channels standing between them and the actual
market, Pinnacle Systems may not be able to accurately gauge current demand for
products and anticipate demand for newly introduced products, such as
AlladinPro, DC50, Studio 400, FXDeko ReelTime Nitro, Studio DC10 plus and Studio
MP10. For example, dealers may place large initial orders for a new product just
to keep their stores stocked with the newest products and not because there is a
significant demand for them.
As to consumer products offerings, Pinnacle Systems 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. Pinnacle Systems also sells its consumer
products directly to some retailers. Rapid change and financial difficulties of
distributors have characterized distribution channels for consumer retail
products. These arrangements have exposed Pinnacle Systems to the following
risks, some of which are out of Pinnacle Systems' control:
- Pinnacle Systems is obligated to provide price protection to such
retailers and distributors and, while the agreements limit the conditions
under which product can be returned to Pinnacle Systems, Pinnacle Systems
may be faced with significant product returns or price protection
obligations.
- The distributors or retailers may not continue to stock and sell Pinnacle
Systems consumer products.
- Retailers and retail distributors most likely will carry competing
products.
Any of the foregoing events could materially harm Pinnacle Systems'
business.
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IF CERTAIN KEY EMPLOYEES OF PINNACLE SYSTEMS LEAVE OR ARE NO LONGER ABLE TO
PERFORM SERVICES FOR PINNACLE SYSTEMS, IT COULD HAVE A MATERIAL ADVERSE EFFECT
ON PINNACLE SYSTEMS' BUSINESS.
Pinnacle Systems believes that the efforts and abilities of its senior
management and key technical personnel are very important to its continued
success. In particular, if Mark Sanders or Ajay Chopra left or were unable to
perform services for Pinnacle Systems, Pinnacle Systems' business could be
materially harmed. Only one of Pinnacle Systems senior management or key
technical personnel is bound by an employment agreement and none are the subject
of key man life insurance.
PINNACLE SYSTEMS MAY NOT BE ABLE TO ATTRACT AND RETAIN A SUFFICIENT NUMBER
OF MANAGERIAL PERSONNEL AND TECHNICAL EMPLOYEES TO COMPETE SUCCESSFULLY.
Pinnacle Systems' success is dependent upon its ability to attract and
retain qualified technical and managerial personnel. There are not enough
engineers, technical support, software services and managers available to meet
the current demands of the computer industry. Pinnacle Systems may not be able
to retain its key technical and managerial employees or attract, assimilate and
retain such other highly-qualified technical and managerial personnel as
required in the future. Also, employees may leave Pinnacle Systems and
subsequently compete against Pinnacle Systems, or contractors may perform
services for competitors of Pinnacle Systems. If Pinnacle Systems is unable to
retain key personnel, its business could be materially harmed.
PINNACLE SYSTEMS MAY BE UNABLE TO PROTECT ITS PROPRIETARY INFORMATION AND
PROCEDURES EFFECTIVELY.
Pinnacle Systems must protect its proprietary technology and operate without
infringing the intellectual property rights of others. Pinnacle Systems 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, Pinnacle Systems generally enters into confidentiality and
nondisclosure agreements with its employees and OEM customers and limits access
to and distribution of its proprietary technology. These steps may not protect
Pinnacle Systems proprietary information nor give it any competitive advantage.
Others may independently develop substantially equivalent intellectual property
or otherwise gain access to Pinnacle Systems' trade secrets or intellectual
property, or disclose such intellectual property or trade secrets. Pinnacle
Systems has an application pending with the United States Patent and Trademark
Office, which may not be granted, and any future patent applications may not be
allowed. If Pinnacle Systems is unable to protect its intellectual property,
Pinnacle Systems' business could be materially harmed.
PINNACLE SYSTEMS MAY BE ADVERSELY AFFECTED IF IT IS SUED BY A THIRD PARTY OR
IF PINNACLE DECIDES TO SUE A THIRD PARTY FOR 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 Pinnacle Systems,
to protect its trade secrets, trademarks and other intellectual property rights
owned by Pinnacle Systems, or to defend Pinnacle Systems against claimed
infringement. This litigation may
- Divert management's attention away from the operation of Pinnacle Systems'
business
- Result in the loss of Pinnacle Systems' proprietary rights
- Subject Pinnacle Systems to significant liabilities
- Force Pinnacle Systems to seek licenses from third parties
- Prevent Pinnacle Systems from manufacturing or selling its products.
Any of these results could materially harm Pinnacle Systems' business.
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In the course of its business, Pinnacle Systems has in the past received
communications asserting that Pinnacle Systems products infringe patents or
other intellectual property rights of third parties. Pinnacle Systems
investigated the factual basis of such communications and negotiated licenses
where appropriate. It is likely that in the course of its business, Pinnacle
Systems will receive similar communications in the future. 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, Pinnacle Systems
may not be able to do so on commercially reasonable terms or at all. These
disputes may not be settled on commercially reasonable terms and may result in
long and costly litigation.
BECAUSE PINNACLE SYSTEMS SELLS PRODUCTS INTERNATIONALLY, IT IS SUBJECT TO
ADDITIONAL RISKS.
Sales of Pinnacle Systems' products outside of North America represented
approximately 64% of Pinnacle Systems' net sales in the six month period ended
December 31, 1998 and 57.6% of Pinnacle Systems' net sales in fiscal 1998
compared to 39.7% of Pinnacle Systems' net sales in fiscal 1997 and 38.7% of
Pinnacle Systems' net sales in fiscal 1996. Pinnacle Systems expects that
international sales will continue to represent a significant portion of its net
sales, particularly in light of it's increased European sales as a result of the
Miro Acquisition and the addition of the Miro European sales channel. Pinnacle
Systems makes foreign currency denominated sales in many, primarily European,
countries. This exposes Pinnacle Systems to risks associated with currency
exchange fluctuations. Although the dollar amount of such foreign currency
denominated sales was nominal during fiscal 1997, it increased substantially
during fiscal 1998, especially for sales of consumer and desktop products into
Europe. In fiscal 1999 and beyond, Pinnacle Systems expects that a majority of
its European sales will be denominated in local foreign currency including the
Euro. In addition to foreign currency risks, international sales and operations
may also be subject to the following risks:
- Unexpected changes in regulatory requirements
- Export license requirements
- Restrictions on the export of critical technology
- Generally longer receivable collection periods and difficulty in
collecting accounts receivable;
- Political instability
- Trade restrictions
- Changes in tariffs
- Difficulties in staffing and managing international operations
- Potential insolvency of international dealers
- Difficulty in collecting accounts receivable
Pinnacle Systems is also subject to the risks of generally poor economic
conditions in certain areas of the world, most notably Asia. These risks may
harm Pinnacle Systems' future international sales and, consequently, Pinnacle
Systems' business.
PINNACLE SYSTEMS IS NOT SURE WHAT THE EFFECT THE RECENT ESTABLISHMENT OF THE
EURO WILL BE ON PINNACLE SYSTEMS' FINANCIAL OR RESULTS OF OPERATIONS.
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their sovereign currencies and
the euro. As of that date, the participating countries have agreed to adopt the
euro as their common legal currency. However, the legacy currencies will also
remain legal tender in the participating countries for a transition period
between January 1, 1999 and January 1, 2002. During this transition period,
public and private parties may elect to pay or charge for goods and services
using either the euro or the participating country's legacy
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currency. Pinnacle Systems is not sure what the effect of the recent
establishment of the euro will be on Pinnacle Systems' financial condition or
results of operations. Pinnacle Systems' European operations have conformed to
the requirements of this transition and are currently invoicing customers in
both legacy currencies and the euro. Due to numerous uncertainties, Pinnacle
Systems can not reasonably estimate the effects one common currency will have on
pricing and the resulting impact, if any, on Pinnacle Systems' financial
condition or results of operations.
COMPUTER SOFTWARE, COMPONENTS AND SYSTEMS USED BY OR DESIGNED BY PINNACLE
SYSTEMS OR USED BY THIRD PARTIES WITH WHOM PINNACLE SYSTEMS REGULARLY DEALS MAY
NOT BE ABLE TO PROCESS DATE/TIME INFORMATION BETWEEN THE TWENTIETH AND
TWENTY-FIRST CENTURY. THIS INABILITY COULD CAUSE THE DISRUPTION OR FAILURE OF
SUCH COMPUTER SYSTEMS. PINNACLE SYSTEMS' BUSINESS COULD BE INTERRUPTED
MATERIALLY AS A RESULT OF SUCH DISRUPTION OR FAILURE.
Like many other companies, Pinnacle Systems is potentially susceptible to
the year 2000 problem, i.e., computer systems will not correctly recognize and
process date information beyond the year 1999. In addition, moving from 1999 to
2000 may cause problems since some systems' programming assigns special meaning
to certain dates, such as 9/9/99, and the year 2000 is a leap year
Pinnacle Systems has initiated a special program to confront those potential
problems. This program will involve assessing all areas that may be affected by
or responsible for the year 2000 problem and initiating changes wherever
necessary. Some of the activities include:
- Assessing all major categories of systems used by Pinnacle Systems,
including manufacturing, sales and financial systems
- Working with key suppliers of products and services to determine that
their operations and products are year 2000 capable, or to monitor their
progress toward year 2000 capability
- Internal discussions concerning contingency planning to address potential
problem areas with internal systems and with suppliers and other third
parties
- Implementing a program to assess the capability of its products to handle
the year 2000
It is expected that assessment, remediation and contingency planning
activities will be ongoing throughout 1999 with the goal of appropriately
resolving all material internal systems and third party issues. However, if
these activities fail and problems occur, Pinnacle Systems' business will likely
be materially harmed. Further, Pinnacle Systems does not have any contingency
plans if these planning activities fail. It is uncertain to what extent Pinnacle
Systems will be affected by the year 2000 problem, and if third parties or
suppliers have year 2000 problems, Pinnacle Systems' business may be materially
harmed.
To assist customers in evaluating their year 2000 issues, Pinnacle Systems
is currently assessing the capability of its current products and products no
longer being produced to handle the year 2000 problem, and expects to complete
that assessment by early 1999. Products will be assigned to one of the four
following categories: "Year 2000 Compliant," "Year 2000 Compliant with minor
issues" "Year 2000 non-compliant," "No evaluation done--will not test." "Year
2000 Compliant" means that when used properly and in conformity with the product
information provided by Pinnacle Systems', and when used with "Year 2000
Compliant" computer systems, the product will accurately store, display,
process, provide, and/or receive data from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the Pinnacle Systems' product properly
exchanges date data with the Pinnacle Systems' product. Testing has not yet been
completed, but based on preliminary tests, Pinnacle Systems believes that all
current products shipping, which run under Microsoft Windows NT or Windows 95,
will be "Year 2000 compliant." Testing of older products that are no longer
shipping has only recently been initiated and Pinnacle Systems considers it
likely that some older products may not be year 2000 Compliant.
23
<PAGE>
The costs incurred to date related to year 2000 compliance have been
immaterial. The cost which will be incurred by Pinnacle Systems regarding the
implementation of year 2000 compliant internal information systems, testing of
current or older products for year 2000 compliance, and answering and responding
to customer requests related to year 2000 issues, including both incremental
spending and redeployed resources, is currently not expected to exceed $500,000.
The total cost estimate does not include potential costs related to any customer
or other claims or the cost of internal software and hardware replaced in the
normal course of business. In some instances, the installation schedule of new
software and hardware in the normal course of business is being accelerated to
also afford a solution to year 2000 capability issues. The total cost estimate
is based on the current assessment of the projects and is subject to change as
the project progress. Pinnacle Systems' estimate as to cost of year 2000
compliance may prove to be wrong. If actual cost of year 2000 compliance exceeds
Pinnacle Systems' current estimate, Pinnacle Systems' business could be harmed.
PINNACLE SYSTEMS HAS GROWN RAPIDLY AND CONTINUES TO GROW RAPIDLY. IF
PINNACLE SYSTEMS FAILS TO EFFECTIVELY MANAGE THIS GROWTH, ITS FINANCIAL RESULTS
COULD SUFFER.
Pinnacle Systems has in the past experienced rapid growth and anticipates
that it may grow at a rapid pace in the future. For example, net sales in fiscal
1998 were $105.3 million compared to $37.5 million in fiscal 1997 and net sales
in the six month period ended December 31, 1998 increased 60.9% over the same
period last year. As a result of recent acquisitions, Pinnacle Systems has
increased the number of its employees substantially, including the addition of
approximately 100 employees in connection with the Miro Acquisition, which
increases the difficulty in managing Pinnacle Systems, particularly as employees
are now geographically dispersed in North America and Europe. This growth has
placed increasing demands on Pinnacle Systems' management, financial and other
resources. Pinnacle Systems has built these resources and systems to account for
such growth, but continued growth may require Pinnacle Systems to increase its
investment in such systems, or to reorganize its management team. Such changes,
should they occur, could cause an interruption or diversion of focus from
Pinnacle Systems' core business activities and have an adverse effect on
financial results.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 21, 1998, the Company held an Annual Meeting of
Shareholders for which it solicited votes by proxy. The following
is a brief description of the matters voted upon at the meeting
and a statement of the number of votes cast for and against, and
the number of abstentions. There were no broker non-votes with
respect to items 1 and 5 below.
1. To elect seven directors to serve until the next Annual
Meeting of Shareholders and until their successors are duly
elected and qualified.
<TABLE>
<CAPTION>
VOTES
NOMINEE VOTES WITHHELD
------- ----- --------
<S> <C> <C>
Mark L. Sanders 8,784,003 224,199
Ajay Chopra 8,783,203 224,999
L. Gregory Ballard 8,783,703 224,499
John Lewis 8,784,203 223,999
Nyal D. McMullin 8,784,203 223,999
Glenn E. Penisten 8,784,203 223,999
Charles J. Vaughan 8,784,203 223,999
</TABLE>
2. To approve the reincorporation of the Company as a Delaware
corporation by means of a merger of the Company with and into
a wholly owned Delaware subsidiary of the Company.
The meeting was adjourned with respect to this proposal
only. The adjourned meeting reconvened at 10:00 a.m. Friday
on November 20, 1998, and was again adjourned until
December 4, 1998, at which time the meeting was again
adjourned. A final meeting will reconvene on February 25,
1999 at 10:00 a.m. at the Company's offices located at 280
N. Bernardo Avenue, Mountain View, California, at which
time this proposal to reincorporate the Company as a
Delaware corporation shall come before the shareholders.
3. To approve an amendment to the 1994 Employee Stock Purchase
Plan to (a) increase the number of shares of Common Stock
reserved for issuance thereunder by 300,000 and (ii) provide
for an annual increase in the number of shares of Common
Stock reserved thereunder by the lesser of 300,000 shares or
2% of the outstanding shares of Common Stock.
FOR: 7,191,274 AGAINST: 1,049,882 ABSTAIN: 18,542
BROKER NON-VOTES: 748,504
4. To approve an amendment to the 1996 Stock Option Plan to
increase the number of shares of Common Stock reserved for
issuance thereunder by 500,000 shares.
FOR: 4,398,885 AGAINST: 3,842,175 ABSTAIN: 18,638
BROKER NON-VOTES: 748,504
5. To ratify the appointment of KPMG, LLP as independent
auditors of the Company for the fiscal period ending
June 30, 1999.
FOR: 8,993,965 AGAINST: 585 ABSTAIN: 13,652
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger dated as of December
16, 1998 by and among the Registrant, Bernardo Merger
Corporation, Walsh Merger Corporation and Truevision,
Inc. (Incorporated by reference to the exhibits to the
Schedule 13D filed by the Registrant with the
Securities and Exchange Commission on December 28,
1998 with respect to Truevision, Inc.
27.1 Financial Data Schedule
26
<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: February 2, 1999 By: /s/ Mark L. Sanders
------------------------
Mark L. Sanders
President, Chief Executive Officer
and Director
Date: February 2, 1999 By: /s/ Arthur D. Chadwick
---------------------------
Arthur D. Chadwick
Vice President, Finance and Administration
and Chief Financial Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,451,000
<SECURITIES> 71,905,000
<RECEIVABLES> 23,790,000
<ALLOWANCES> 0
<INVENTORY> 18,260,000
<CURRENT-ASSETS> 134,021,000
<PP&E> 12,215,000
<DEPRECIATION> 5,017,000
<TOTAL-ASSETS> 159,487,000
<CURRENT-LIABILITIES> 24,957,000
<BONDS> 0
0
0
<COMMON> 143,631,000
<OTHER-SE> (9,101,000)
<TOTAL-LIABILITY-AND-EQUITY> 159,487,000
<SALES> 71,445,000
<TOTAL-REVENUES> 71,445,000
<CGS> 33,210,000
<TOTAL-COSTS> 33,210,000
<OTHER-EXPENSES> 29,196,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,275,000)
<INCOME-PRETAX> 11,314,000
<INCOME-TAX> 2,266,000
<INCOME-CONTINUING> 9,048,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,048,000
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.80
</TABLE>
