SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1999 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 number: 0-24784
PINNACLE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 94-3003809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
280 North Bernardo, Mountain View, CA 94043
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (650) 526-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Share Purchase Rights
(Title of Class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
September 15, 1999 as reported on the Nasdaq National Market System, was
approximately $746,911,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of September 15, 1999, registrant had outstanding 23,723,209 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held October 26, 1999.
<PAGE>
PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the Company's ability to manage growth; the
risks associated with successfully integrating acquired businesses; the risks
associated with dependence on resellers, contract manufacturers and other
third-party relationships; the uncertainty of continued market acceptance of
professional video products; significant fluctuations in the Company's operating
results; the historical absence of backlog; the Company's highly competitive
industry and rapid technological change within the Company's industry; the risks
associated with development and introduction of new products; the need to manage
product transitions; the risks associated with product defects and reliability
problems; the risks associated with single source suppliers; the uncertainty of
patent and proprietary technology protection and reliance on technology licensed
from third parties; the risks of third party claims of infringement; the
Company's dependence on retention and attraction of key employees; the risks
associated with future acquisitions; the risks associated with international
licensing and operations; general economic and business conditions; and other
factors referenced in this Report.
ITEM 1. BUSINESS
Pinnacle Systems, Inc. (the "Company") designs, manufactures, markets
and supports computer-based video post-production products to serve the
broadcast, desktop and consumer markets. The Company's products use real time
video processing and editing technologies to apply a variety of video
post-production and on-air functions to multiple streams of live or recorded
video material. These editing applications include the addition of special
effects, graphics and titles. To address the broadcast market, the Company
offers high performance, specialized Windows NT-based solutions for high-end,
post-production and broadcast on-air applications. For the desktop market, the
Company provides real time video manipulation and editing tools to support
non-linear, computer-based, editing environments. To address the consumer
market, the Company offers low cost, easy to use video editing solutions that
allow consumers to edit their home videos using a personal computer, camcorder
and VCR. Used in conjunction with standard computer platforms, these
technologies provide high quality, cost effective, computer-based video
processing solutions for the post-production and on-air markets.
Industry Background
The development of a video program involves three distinct processes:
pre-production, which involves planning and preparation for the recording of the
video program; production, which involves the acquisition of video material
(shooting); and post-production, which involves the organization of raw video
segments acquired in the production phase into a cohesive and appealing program
(editing). During the post-production phase, elements such as titles, graphics,
and transitions between video segments are incorporated to enhance the overall
quality and impact of a video program.
Historically, the video production industry has focused on providing
program material for broadcast television and advertising. To create high
quality video programs for these channels, producers have traditionally used
expensive, dedicated video production equipment linked together in a complex
interconnected system to form a video "editing suite." Typical editing suites
incorporate video recorders, switchers, digital video effects systems, still
image management systems, character generators, electronic
2
<PAGE>
paint systems and other products, often provided by multiple manufacturers.
These editing suites require highly skilled personnel to operate and maintain.
Recently, new and expanding channels of video content distribution,
including cable television, direct satellite broadcast, video rentals, CD-ROM,
DVD, video-on-demand, and now the Internet, have led to a rapid increase in
demand for video content for a wide variety of applications. This demand has
driven the market for editing approaches that are less expensive and easier to
use. New commercial and industrial applications for this market include
multimedia entertainment, video games, music videos, special event videos,
education and training and corporate communications. In addition, the popularity
of camcorders, VCRs and personal computers has fueled the growth of an emerging
consumer market for low cost video production technology that enables consumers
to create and edit home videos. These expanding channels of video content
distribution and new applications are increasing the demand for video content
production and distribution tools.
Computer-based video solutions combining personal computers with
specialized video processing technology can now provide video quality comparable
to that of traditional editing suites at significantly lower cost. As a result,
these computer-based video solutions are replacing the traditional editing
suites. In addition, such solutions are often easier to use since they
incorporate common graphical user interfaces. The lower cost and ease of use of
computer-based video tools enables large numbers of creative individuals,
previously untrained in video production, to produce professional quality video
programming. A complete computer-based video solution generally includes four
components: a computer, specialized audio and video processing hardware, an
associated application programmers interface, or API, and specific editing
applications. A single vendor has often supplied these components. However, as
the computer-based video industry develops, it is shifting toward Windows
NT-based open architecture solutions.
As a result of these changes, the broadcast market is transitioning to
computer-based solutions, the desktop market is expanding rapidly and, more
recently, a consumer market has emerged. These changes have created
opportunities for companies that focus on computer-based editing solutions for
the video production industry.
The Pinnacle Approach
The Company designs, manufactures, markets and supports computer-based
video post-production products to serve the broadcast, desktop and consumer
markets. The Company's products are based on its proprietary video manipulation
technologies that offer the following benefits:
Sophisticated Video Processing. Pinnacle's products provide advanced
video processing and manipulation capabilities, such as special effects,
graphics and titles. Videographers constantly seek effects to give their
programs a new look and to allow them to differentiate and enhance their end
product.
Real Time Interactivity. Pinnacle's products allow users to edit in
real time. This real time interactivity gives users the flexibility to try many
different effects and fine-tune the resulting content.
Open Systems. Pinnacle's products conform to generally accepted
industry standards for video input/output and control, allowing interoperability
with a wide variety of video processing and storage equipment. Furthermore, the
Company has developed and published, and is encouraging others to adopt, open
interface specifications for computer-based video post-production products.
These specifications include video input/output, manipulation and control.
Ease of Use. Pinnacle's products include menu-driven interfaces for
selecting and controlling the various video manipulation functions. This reduces
technical obstacles to the operation of the system, permitting the user to focus
on the artistic aspects of the post-production process.
Favorable Price/Performance Ratio. Pinnacle's products have a favorable
price to performance ratio, in part because the Company uses the same
proprietary components across its product lines. The
3
<PAGE>
Company intends to continue lowering the cost of its products by further
integrating its video manipulation and video capture technologies into
application specific integrated circuits ("ASICs").
Operating Structure. The Company is organized into three separate
business groups to serve the broadcast, desktop and consumer markets. The
Company believes this organizational structure enables it to effectively address
varying product requirements, rapidly implement its core technologies,
efficiently manage different distribution channels and anticipate and respond to
changes in each of these markets.
Company Strategy
Pinnacle's goal is to become the leading supplier of computer-based
video content creation and distribution products to the broadcast, desktop and
consumer markets. To pursue its goal, the Company intends to implement the
following strategies:
Expand and Leverage Core Technologies. The Company intends to expand
its core software and hardware technological base through both internal
development and acquisitions. The Company uses a modular approach to product
development. This allows it to leverage its investment in research and
development across multiple product designs and minimize time to market.
Establish an Industry Standard Video Processing Platform. The Company
believes that as the desktop market continues to move toward an open
architecture environment, companies will either provide an open architecture
video-processing platform or develop end user editing applications. The
Company's strategy is to establish an industry standard video-processing
platform compatible with a broad range of applications. The platform technology
will combine real time video manipulation, video capture technology and a
unified API.
Develop and Expand Worldwide Sales and Distribution Organization. The
Company's sales organization focuses on a variety of distribution channels,
including OEMs, value-added resellers, distributors, retail stores and other
resellers. The Company believes that its development of a worldwide sales and
distribution organization gives it a strategic advantage in the rapidly changing
video post-production industry. The Company intends to persist in strengthening
and developing this organization and to continue to develop strong strategic
relationships with key OEMs and resellers.
Acquire Complementary Businesses, Products and Technologies. The
Company has grown and intends to continue to grow both internally as well as
through the acquisition of complementary businesses, product lines or
technologies. The Company frequently evaluates strategic acquisition
opportunities that could enhance the Company's existing product offerings or
provide an avenue for developing new complementary product lines. The Company
believes that the video production industry is in a period of consolidation and
that strategic acquisition opportunities may arise. For example, Pinnacle
acquired certain video capture technology with its August 1997 acquisition of
the miroVideo products and technology from Miro Computer Products AG ("miro").
These technologies were further enhanced with the acquisition of specialized
video processing technology with the acquisition of Truevision, Inc. in March
1999. In August 1999, the company completed the acquisition of certain assets of
the Video Communications Division of the Hewlett-Packard Company. These assets
included digital video server products, and certain intellectual property and
technology.
Products
The Company offers a suite of video products aimed at the broadcast and
on-air market: the DVExtreme family, the Lightning family, the Deko family,
AlladinPRO, and the Thunder and MediaSteam line of digital video servers. 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, the DC30, DC50, DV200/300, DC1000
and the TARGA family. The Company offers a
4
<PAGE>
line of consumer editing and viewing products, which includes the Studio 400,
Studio DC10, Studio MP10, and the Studio PCTV.
Broadcast Market
For the broadcast market the Company currently offers products that
provide real time digital effects, still image management and storage, and real
time video character generation. The Company also offers digital video servers
for on-air video content distribution. These products generally include
proprietary hardware and software and specialized control panels and/or
keyboards for rapid execution, especially for on-air applications. The primary
broadcast products sold during fiscal 1999 were the DVExtreme, Lightning, Deko
and AlladinPRO family of products. During the year the Company introduced
BroadNet, which is a network technology that enables the Company's broadcast
products to be networked together for easy interoperability, and to exchange
information through the Internet. In June 1999, the Company expanded its product
line in the broadcast market with the introduction of Thunder, a new high
performance digital video server. The DVEextreme, Lightning, Deko and AlladinPRO
products are used to edit and create video content, while Thunder is used to
store, manage, and distribute video content. In August 1999, the company
completed the acquisition of certain assets of the Video Communications Division
of the Hewlett-Packard Company. The acquisition included key technologies,
intellectual property, the MediaStream server family of products as well as most
managers and employees from that division. The MediaSteam server family
complements the Company's Thunder family, to provide a more complete line of
broadcast quality video-server solutions.
DVExtreme Family. DVExtreme is the Company's high performance, real
time digital video effects system for broadcast and high-end, post-production
customers which seek to incorporate unique special effects into their
programming. DVExtreme, a Windows NT-based, multi-channel system, can
simultaneously manipulate up to three channels of live video and can generate
real time effects such as four-corner page peels and turns, highlights and
shadows, water ripples, ball effects, wave patterns and other effects. The
suggested list price for a DVEtreme ranges from $44,990 to $63,990, depending on
the configuration.
AlladinPRO Family. AlladinPRO is a Windows NT based digital video
effects system designed for live and on-line applications. AlladinPRO provides
users a broadcast quality single or dual channel digital video effects system,
plus a built-in still store. It performs many of the functions of the DVEtreme
family, but it is positioned in the market as a less expensive alternative to
the DVEtreme family of products. The suggested list price for an AlladinPRO
ranges from $19,990 to $29,990, depending on the configuration.
Lightning Family. Lightning is the Company's high performance,
networkable image management system designed for broadcast and high-end,
post-production applications such as news and sports programs. Lightning is a
Windows NT-based system that can accommodate up to three channels of video, plus
additional virtual channels for previewing. It has internal storage capacity for
over 10,000 images, and an interface to external disks for expanded capacity.
Lightning can also perform digital video effects on captured video images. The
suggested list price for a Lightning ranges from $25,990 to $31,780, depending
on the configuration
Deko Family. The Deko family of products is designed to provide high
performance titling, real time effects and character generation for broadcast
and on-air applications. Deko is a Windows NT-based system that includes
powerful text and graphics tools such as real time text scrolling, text
manipulation, font enhancement, multiple layers for text composition and
supports a wide range of standard and international character fonts. During
fiscal 1999, the Company introduced DekoHD, which is a high definition version
of the Deko product family. The suggested list price for a Deko ranges from
$26,900 to $31,900, depending on the configuration.
Thunder Family. The Thunder family of digital video servers is
designed to record, store, retrieve and process digital video content for
broadcast over conventional mediums or the Internet. The Thunder server family
currently includes the four-channel Thunder MCS 4000 server, the two-channel MCS
2000 server,
5
<PAGE>
and iThunder. Thunder uses MPEG-2 and native DV video formats. Thunder's on-air
application offers sophisticated asset management capabilities for identifying
clips, transitions and stills and sequencing their play-out to air. By pairing
the Thunder system with its Internet companion, iThunder, clips and programs can
be instantly 'broadcast' over the World Wide Web. Through the iThunder HTML
browser, remote Internet users can access and view video proxies via standard
streaming technologies directly from their remote desktop location. The Company
commenced the first production shipments of Thunder in June 1999. The suggested
list prices range from $11,000 to $69,000.
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 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,
DC30, DC50, DV200/300, and the DC1000 family which was introduced in June 1999.
In March 1999, the Company completed the acquisition of Truevision, Inc., which
was also a provider of desktop digital video capture and editing products. As a
result of the acquisition, Pinnacle added the Truevision TARGA products to its
suite of desktop editing products.
Alladin Family. The Alladin product family is designed to provide high
quality, real time video manipulation capabilities for desktop video
post-production. The Alladin was first introduced in June 1994.
Genie Family. The Genie family of products offers a complete set of
professional quality, real time 3D digital effects, switching, character
generation, paint and still storage on a single personal computer interface
("PCI") board. While offering much of the functionality of Alladin, Genie does
so at a much lower price point and is installed inside the computer rather than
through an external port. GeniePlus integrates into linear desktop editing
environments and includes input/output and software allowing the user to process
up to two simultaneous streams of live video. In addition, a non-linear version
of Genie is sold to OEM vendors who integrate and sell it with their non-linear
editing products. The suggested list price for a Genie is $5,990.
ReelTime and ReeltimeNitro Family. ReelTime is a dual stream video and
audio capture and playback card with real time special effects. ReelTime will
support the Adobe Premiere editing software. Additionally, ReelTime's open
architecture is intended to support a wide variety of third-party video
applications. ReelTime features real time transitions, along with real time
chroma, luma and linear keying, titling, and a scalable architecture that
supports the Company's Genie RT option. The Genie RT option incorporates the
Pinnacle Genie add-in card and enables picture-in-picture motion and real time
3D effects, including page turns, ripples, spheres and hourglasses. This
combined product has been named ReeltimeNitro. The suggested list price for
Reeltime is $4,990 for an NTSC version and $5,990 for a PAL version.
ReeltimeNitro lists for between $7,990 and 8,990.
DC30 Family. The DC30 family is a non-linear video and audio editing
system offering composite video input and output connections, targeted at the
professional videographer. In April 1999, the Company introduced an upgraded
version of the product called DC30Pro. It is a single stream PCI-bus video
product that captures, compresses and decompresses video signals and stores and
retrieves such compressed video signals using a standard computer. It also
features high bandwidth audio capture and playback. DC30Pro comes bundled with a
software-editing package that allows videographers to edit and create
high-quality video productions. The suggested list price for a DC30Pro is $790.
DC-50 Family. The DC50 is a non-linear video and audio editing system
offering component, composite and S-Video input and output connections, targeted
at the professional videographer. It has similar functionality as the DC30 with
the addition of a professional breakout box for a variety of video input and
output options including component video. The suggested list price for a
miroVIDEO DC50 is $1,950.
DV200/DV300 Family. The DV200 and DV300 are all digital non-linear
video and audio editing system offering DV (digital video) input and output
connections, targeted at the professional videographer. It has
6
<PAGE>
similar functionality as the DC30 except that it uses the DV video format. The
DV200 is a lower cost and functionality version of the DV300. Suggested list
price for a DV200 is $499and $699 for a DV300.
DC1000/DVD1000 Family. The DC1000 is a two stream non-linear video and
audio editing system targeted at the professional videographer. The dual stream
nature of the product allows significantly higher productivity by reducing the
need to render video segments to finish a production. The product uses MPEG-2
compression technology, and is capable of real time processing of titles and
transitions and provides more than 300 real time effects. The DC1000 can use
analog or DV video input and can output video in a DVD format. Concurrent with
the introduction of the DC1000, the Company introduced a companion product named
the DVD1000. The DVD1000 is a complete DVD creation system for corporate, event,
and professional digital video artists to create corporate product
demonstrations, training, entertainment, or educational DVDs. The suggested list
price for the DC1000 is $2,490 and the suggested list price for the DVD1000 is
$7,990.
TARGA Family. The TARGA family was acquired as part of the Truevision
acquisition in March 1999, and consists of non-linear video and audio editing
products targeted at the professional videographer. It is a single stream
PCI-bus video product which captures, compresses and decompresses video signals,
but with higher video processing performance. The product stores and retrieves
compressed video signals from a standard computer, and features high bandwidth
audio capture and playback. It comes bundled with a software-editing package
that allows videographers to edit and create high-quality video productions. The
suggested list price for the TARGA products ranges from $3,995 to $20,500.
Consumer Market
The Company's consumer products provide video capture, editing and
playback solutions. Its consumer video editing solutions allow consumers to edit
their home videos using a personal computer, camcorder and VCR. The Company has
developed an easy to use software interface called the Studio application, which
serves as the primary interface for all of the Studio products. The Company
currently has four Studio products: Studio 400 which was introduced in June
1998, Studio DC10 which was introduced in November 1998, Studio MP10 introduced
in March 1999, and Studio PCTV introduced in July 1999.
Studio 400. Studio 400 is a video editing system which replaced the
VideoDirector Studio 200. The Studio connects to an external port of a Windows
95 or Windows 98 computer, a VCR, and camcorder. It is easy to install and
requires only limited hard disk storage space. The product incorporates the
Company's "Studio" application and is aimed at the developing consumer market.
The Studio 400 allows users to simply cut-and-paste together their best video
scenes, add music, titles, special effects and transitions. Users can create
content that has many of the same effects found in far more expensive
professional video editing systems. The suggested list price for Studio 400 is
$229.
Studio DC10. The Studio DC10 is a consumer non-linear editing system,
which uses JPEG compression technology. It allows the users to load their video
on to a computer hard drive using a single stream PCI-bus video product which
captures, compresses and decompresses video signals using a standard computer.
As with the Studio 400, the product incorporates the Company's "Studio" software
application. The suggested list price for the Studio DC10 is $229.
Studio MP10. The Studio MP10 is a consumer non-linear editing system,
which uses MPEG1 compression technology. It allows the user to load their video
on to a computer hard drive using an external device to the PC and can capture,
compress and decompress video signals using a standard computer. Since MPEG
compression technology is used, the video output can be in the form of a CD-ROM
or it can be saved
7
<PAGE>
as a computer file and transmitted over the Internet. As with the other Company
consumer products, the Studio MP10 also uses the "Studio" interface application.
The suggested list price for the Studio MP10 is $269.
Studio PCTV. The Studio PCTV is targeted at the consumer market and
allows users to view a television programming on their computer monitor.
Throughout fiscal 1999, this product was primarily sold into the European
market, but was re-introduced into the North American market in July 1999. The
suggested list price is $99.
Technology
The Company is a technological leader in digital video processing,
which includes real time video manipulation, video capture and digital video
editing, and storage. The National Academy of Television Arts and Sciences'
Outstanding Technical Achievement EMMY award has been awarded to Pinnacle
Systems, Inc. on three occasions. In 1990, the Company received an EMMY for
pioneering the concept of the video workstation. In 1994, the Company received
an EMMY for developing technology which allows real time mapping of live video
onto animated 3D surfaces and, in 1997, the Company received an EMMY for
utilization of real time video manipulation technology in non-linear editing
applications. In addition, the technology that the Company acquired from Digital
Graphix and Hewlett-Packard was awarded three Emmy's prior to their acquisition
by the Company.
Many of the Company's products share a common internal architecture.
This design approach allows the Company to leverage its research and development
expenditures by utilizing similar hardware and software modules in multiple
products. The Company's video manipulation architecture is fundamental to the
performance and capabilities of the Company's products. As a result of the
acquisition of Miro Computer Products AG in August 1997, the Company acquired
video capture technology which allows high quality live video and audio to be
captured and played back from a standard personal computer. This technology was
further developed within Pinnacle, and further augmented with the acquisition of
Truevision in March 1999.
All of the Company's products use or work with a standard personal
computer for control of video manipulation functions. In all products targeting
the broadcast market, the control microprocessor is embedded within the product.
The desktop and consumer products are inserted into or connect externally to a
personal computer. The use of industry standard microprocessors offers three
main advantages over traditional video products: lower software development
costs due to the availability of powerful off-the-shelf software development
tools; lower product manufacturing costs due to the low costs of standard
microprocessors; and the ability to integrate third party software such as
networking or 3D rendering software to provide additional functionality.
Essentially all real time video manipulation must be performed on
uncompressed video data. Since uncompressed digital video rates are too high to
be processed by a microprocessor in real time, video signals are internally
distributed over a separate high-speed digital video bus ("DVB") and processed
using the Company's proprietary real time video manipulation hardware. The video
data on the DVB is processed in the standard digital component format that fully
complies with the highest digital component video standards of the International
Radio Consultation Committee, an organization that develops and publishes
standards for international telecommunication systems.
The software in the Company's video capture and video manipulation
products is divided into two layers: the user interface application and the API.
The user interface application is different and has been optimized for each
product family. The API is, for the most part, common to most of the Company's
products and incorporates all the proprietary low level routines that allow the
Company's products to perform high quality, real time video manipulations. This
software architecture has three main advantages: real time video manipulation
algorithms that are complex and difficult to develop can be used in multiple
products; the user interface can be tailored to meet specific user requirements;
and applications can be quickly ported to the Company's products using the API.
8
<PAGE>
The Company's core technical expertise is in real time digital video
processing, video capture technology, real time software algorithms, video
input/output, advanced user interfaces and software control of commercially
available camcorders and VCRs.
Real Time Digital Video Processing. The Company has devoted significant
resources to the development of proprietary technology for real time video
processing, including high-speed digital filters, image transformation buffers,
plane and perspective addressing, and non-linear image manipulation. The Company
has patented technology related to real time mapping of live video onto
multiple, complex, animated 3D shapes and surfaces. This technology includes a
proprietary data compression algorithm that compresses the address information
and allows decompression of this data in real time.
CODEC Technology. The Company has devoted significant resources to
developing and acquiring hardware and software for real time video capture. This
technology includes audio/video effect synchronization methodologies,
compression algorithms, drivers and software for real time playback from disks.
Real Time Software Algorithms. The digital video manipulation functions
of the Company's products use common core software that performs complex
computations in real time under user control. The Company has developed certain
algorithms that enable the high-speed computation of multiple complex equations
which are required for real time video effects.
Video Input/Output. The Company has developed technology for video
input and output of composite analog, component analog and component digital
video data streams. All of the Company's products work with NTSC and PAL video
standards. In addition, the Company has developed interfaces to support
input/output of video streams stored on computer disks.
User Interface Design. The Company has extensive experience in the
design of graphical user interfaces for video control and manipulation. The
Company uses interactive, menu-driven user interfaces to control video
manipulation functions.
Camcorder and VCR Control. With the acquisition of the VideoDirector
product line from Gold Disk, Inc. in June 1996, the Company obtained software
code which enables a computer to control most commercially available camcorders
and VCRs.
The Company has historically devoted a significant portion of its
resources to engineering and product development programs and expects to
continue to allocate significant resources to these efforts. In addition, the
Company has acquired certain products and technologies which have aided the
Company's ability to more rapidly develop and market new products. The Company's
future operating results will depend to a considerable extent on its ability to
continually develop, acquire, introduce and deliver new hardware and software
products that offer its customers additional features and enhanced performance
at competitive prices. Delays in the introduction or shipment of new or enhanced
products, the inability of the Company to timely develop and introduce such new
products, the failure of such products to gain market acceptance or problems
associated with product transitions could adversely affect the Company's
business, financial condition and results of operations, particularly on a
quarterly basis.
As of June 30, 1999, the Company had 162 people engaged in engineering
and product development. The Company's engineering and product development
expenses (excluding purchased in-process research and development) in fiscal
1999, 1998 and 1997 were $16.1 million, $11.7 million and $7.6, respectively,
and represented 10.1%, 11.1% and 20.2%, respectively, of net sales.
Customers
End users of the Company's products range from individuals to major
corporate and government entities, and to video production and broadcast
facilities worldwide. Broadcast customers include domestic and international
television and cable networks, local broadcasters and program creators. Desktop
customers include corporations seeking to develop internal video post-production
capabilities, professional
9
<PAGE>
videographers including those who cover weddings and other special events, and
small production houses serving cable and commercial video markets.
Marketing, Sales and Service
Marketing
The Company's marketing efforts are targeted at users of broadcast and
desktop post-production suites, and home video editing enthusiasts. In order to
increase awareness of its products, the Company attends a number of trade shows,
the major ones being the National Association of Broadcasters ("NAB") show and
the COMDEX exhibition, both in the United States, and the International
Broadcasters Convention ("IBC") show and the CEBIT show in Europe. Pinnacle also
uses targeted direct mail campaigns and advertisements in trade and computer
publications for most of its product lines and also participates in joint
marketing activities with its OEM partners and other desktop video companies.
Sales
The Company maintains a sales organization consisting of regional sales
managers in the United States, Europe and other international territories. The
Company currently has sales offices in 9 countries worldwide. The regional sales
managers are primarily responsible for supporting independent dealers and value
added resellers (VARs) and making direct sales in geographic regions without
dealer coverage. They also service customers who prefer to transact directly
with the Company.
The Company sells its broadcast and desktop products to end users
through an established domestic and international network of independent video
product dealers and VARs in addition to direct sales. The independent dealers
and VARs are selected for their ability to provide effective field sales and
technical support to the Company's customers. Dealers and VARs carry the
Company's broadcast and desktop products as demonstration units, advise
customers on system configuration and installation and perform ongoing
post-sales customer support. The Company believes that many end users depend on
the technical support offered by these dealers in making product purchase
decisions. The Company continues to invest resources in developing and
supporting its network of independent dealers and VARs. These groups eagerly
promote the Company's products and considerably expand its market coverage.
The Company also sells and distributes its desktop products to OEMs
that incorporate the Company's products into their video editing products and
resell these products to other resellers and end users. These OEMs generally
purchase the Company's products and are responsible for conducting their own
marketing, sales and support activities. The Company attempts to identify and
align itself with OEMs that are market share and technology leaders in the
Company's target markets. In recent years the Company has been dependent on
sales of Alladin and Genie to Avid Technologies, Inc. ("Avid,") which is a
leading supplier of digital, non-linear video and audio editing systems for the
professional video and film editing market. However, sales to Avid as a
percentage of total Company sales has declined during the last three years.
Sales to Avid accounted for approximately 6.8% of net sales in fiscal 1999,
10.7% of net sales in fiscal 1998 and 26.4% of net sales in fiscal 1997. Though
the concentration of the net sales to a single OEM customer has decreased
substantially during the last three years, it still subjects the Company to
risks, in particular the risk that its operating results can vary on a
quarter-to-quarter basis as a result of variations in the ordering patterns of
OEM customers.
The Company's consumer or Studio products and certain lower priced
desktop products are sold primarily through the consumer retail channel via
large distributors, such as Ingram Micro Inc., and large computer and electronic
retailers in addition to direct telemarketing, mail order and over the Internet.
The consumer retail channel is characterized by long payment terms and sales
returns. There can be no assurance that any particular computer retailers will
continue to stock and sell the Company's consumer products. If a significant
number of computer retailers were to discontinue selling those products or if
sales returns are higher than anticipated, the Company's results of operations
would be adversely affected. Sales into the
10
<PAGE>
consumer retail channel entail a number of risks including the limited
experience of the Company in this market, inventory obsolescence, product
returns and potential price protection obligations.
The Company's acquisition of Miro's European sales organization in
August 1997, significantly increased the Company's desktop and consumer channel
outside North America. The Company continues to expand this organization. Sales
outside of North America represented approximately 60.8%, 57.6% and 39.7% of the
Company's net sales for fiscal 1999, 1998 and 1997, respectively. The Company
expects that sales outside of the United States will continue to account for a
significant portion of its net sales.
The Company makes foreign currency denominated sales in many
countries, especially in Europe, exposing itself to risks associated with
foreign currency fluctuations, though this risk is partially hedged since all
local selling and marketing expenses are also denominated in those same
currencies. 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, 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.
Service and Support
The Company believes that its ability to provide customer service and
support is an important element in the marketing of its products. Its customer
service and support operation also provides the Company with a means of
understanding customer requirements for future product enhancements. The Company
maintains an in-house repair facility and also provides telephone access to its
technical support staff. The Company's technical support engineers not only
provide assistance in diagnosing problems, but also work closely with customers
to address system integration issues and to assist customers in increasing the
efficiency and productivity of their systems. The Company supports its customers
in Europe and Asia primarily through its international sales offices, European
logistic center and local dealers. The Company has recently expanded its service
network through the Hewlett-Packard acquisition in August 1999. The Company
intends to expend additional resources to meet the needs of its growing service
operation. The Company is also planning on offering extended warranty and
service plans to its customers.
The Company typically warrants its products against defects in
materials and workmanship for varying periods depending on the product and the
nature of the purchaser. The Company believes its warranties are similar to
those offered by other video production equipment suppliers. To date, the
Company has not encountered any significant product maintenance problems.
Competition
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over the
life of a product. Competition is fragmented with several hundred manufacturers
supplying a variety of products to this market. The Company anticipates
increased competition in the video post-production equipment market from both
existing manufacturers and new market entrants. Increased competition could
result in price reductions, reduced margins and loss of market share, any of
which could materially and adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully against current and future competitors.
Competition for the Company's broadcast products is generally based on
product performance, breadth of product line, service and support, market
presence and price. The Company's principal competitors in this market include
Accom, Inc., Chyron Corporation, Leitch Technology Corporation, Matsushita
Electric Industrial Co. Ltd. ("Matsushita"), Quantel Ltd. (a division of Carlton
Communications
11
<PAGE>
Plc) SeaChange Corporation, Sony Corporation ("Sony"), and Tektronix Inc., some
of whom have greater financial, technical, marketing, sales and customer support
resources, greater name recognition and larger installed customer bases than the
Company. In addition, some of these companies have established relationships
with current and potential customers of the Company. Some of the Company's
competitors also offer a wide variety of video equipment, including professional
video tape recorders, video cameras and other related equipment. In some cases,
these competitors may have a competitive advantage based upon their ability to
bundle their equipment in certain large system sales.
The Company's competition in the desktop and consumer markets comes
from a number of groups of video companies such as traditional video equipment
suppliers, providers of desktop editing solutions, video software application
companies and others. Suppliers of traditional video equipment such as
Matsushita and Sony have the financial resources and technical know-how to
develop high quality, real time video manipulation products for the desktop
video market. Suppliers of desktop video editing systems or components such as
Avid, Matrox Electronics Systems, Ltd., Media100, Inc., have established desktop
video distribution channels, experience in marketing video products and
significant financial resources.
The Company believes that the consumer video editing market is still
emerging and as well the sources of competition. 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 may also face
competition from other computer companies that lack experience in the video
production industry but that have substantial resources to acquire or develop
technology and products for the video production market. There can be no
assurance that any of these companies will not enter into the video production
market or that the Company could successfully compete against them if they did.
Manufacturing and Suppliers
The Company's manufacturing and logistics operations, located in
Mountain View, California and Braunschweig, Germany, consist primarily of
testing printed circuit assemblies, final product assembly, configuration and
testing, quality assurance and shipping for the Company's broadcast and desktop
products. Manufacturing of the Company's consumer and desktop products is
performed by independent subcontractors from where products are often shipped
directly to the distributor or retailer. Each of the Company's products
undergoes quality inspection and testing at the board level and final assembly
stage. The Company manages its materials with a software system that integrates
purchasing, inventory control and cost accounting.
The Company relies on independent subcontractors who manufacture to the
Company's specifications its consumer and desktop products and major
subassemblies used in the Company's broadcast and other desktop products. This
approach allows the Company to concentrate its manufacturing resources on areas
where it believes it can add the most value, such as product testing and final
assembly, and reduces the fixed costs of owning and operating a full scale
manufacturing facility. The Company has manufacturing agreements with a number
of U.S.-based subcontractors which include Pemstar, Flash Electronics and Sales
Link (formerly PacLink), for the manufacture of Company's consumer and desktop
products, and with Streiff & Helmold GmbH, which is located in Braunschweig,
Germany. The Company's reliance on subcontractors to manufacture products and
major subassemblies involves a number of significant risks including the loss of
control over the manufacturing process, the potential absence of adequate
capacity, the unavailability of or interruptions in access to certain process
technologies and reduced control over delivery schedules, manufacturing yields,
quality and costs. In the event that any significant subcontractor were to
become unable or unwilling to continue to manufacture these products or
subassemblies in required volumes, the Company's business, financial condition
and results of operations would be materially adversely affected.
12
<PAGE>
To the extent possible, the Company and its manufacturing
subcontractors use standard parts and components available from multiple
vendors. However, the Company and its subcontractors are dependent upon single
or limited source suppliers for a number of key components and parts used in its
products, including integrated circuits manufactured by Altera Corporation,
AuraVision Corporation, C-Cube Microsystems, LSI Logic Corp., Maxim Integrated
Products, Inc., National Semiconductor Corporation, Philips Electronics, Inc.,
Raytheon Corporation and Zoran Corporation, boards and modules manufactured by
Adaptec, Inc., and Sony, field programmable gate arrays manufactured by Altera
Corporation, serial RAM memory modules manufactured by Hitachi, Ltd. and
software applications from Adobe. The Company's manufacturing subcontractors
generally purchase these single or limited source components pursuant to
purchase orders placed from time to time in the ordinary course of business, do
not carry significant inventories of these components and have no guaranteed
supply arrangements with such suppliers. In addition, the availability of many
of these components to the Company's manufacturing subcontractors is dependent
in part on the Company's ability to provide its manufacturers, and their ability
to provide suppliers, with accurate forecasts of its future requirements. The
Company and its manufacturing subcontractors endeavor to maintain ongoing
communication with their suppliers to guard against interruptions in supply. The
Company and its subcontractors have in the past experienced delays in receiving
adequate supplies of single source components. Also, because of the reliance on
these single or limited source components, the Company may be subject to
increases in component costs which could have an adverse effect on the Company's
results of operations. Any extended interruption or reduction in the future
supply of any key components currently obtained from a single or limited source
could have a significant adverse effect on the Company's business, financial
condition and results of operations in any given period.
The Company's broadcast and desktop customers generally order on an
as-needed basis. The Company typically ships its products within 30 days of
receipt of an order, depending on customer requirements, although certain
customers, including OEMs, may place substantial orders with the expectation
that shipments will be staged over several months. A substantial majority of
product shipments in a period relate to orders received in that period, and
accordingly, the Company generally operates with a limited backlog of orders.
The absence of a significant historical backlog means that quarterly results are
difficult to predict and delays in product delivery and in the closing of sales
near the end of a quarter can cause quarterly revenues to fall below anticipated
levels. In addition, customers may cancel or reschedule orders without
significant penalty and the prices of products may be adjusted between the time
the purchase order is booked into backlog and the time the product is shipped to
the customer. As a result of these factors, the Company believes that the
backlog of orders as of any particular date is not necessarily indicative of the
Company's actual sales for any future period.
Proprietary Rights and Licenses
The Company's ability to compete successfully and achieve future
revenue growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company
relies on a combination of patent, copyright, trademark and trade secret laws
and other intellectual property protection methods to protect its proprietary
technology. In addition, the Company generally enters into confidentiality and
nondisclosure agreements with its employees and OEM customers and limits access
to and distribution of its proprietary technology. The Company currently holds a
number of United States patents covering certain aspects of its technologies.
Although the Company intends to pursue a policy of obtaining patents for
appropriate inventions, the Company believes that the success of its business
will depend primarily on the innovative skills, technical expertise and
marketing abilities of its personnel, rather than upon the ownership of patents.
Certain technology used in the Company's products is licensed from third parties
on a royalty-bearing basis. Such royalties to date have not been, and are not
expected to be, material. Generally, such agreements grant to the Company
nonexclusive, worldwide rights with respect to the subject technology and
terminate only upon a material breach by the Company.
In the course of its business, the Company may receive and in the past
has received communications asserting that the Company's products infringe
patents or other intellectual property rights of third parties.
13
<PAGE>
The Company's policy is to investigate the factual basis of such communications
and to negotiate licenses where appropriate. While it may be necessary or
desirable in the future to obtain licenses relating to one or more of its
products, or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms or at all. There can be no assurance that such communications can be
settled on commercially reasonable terms or that they will not result in
protracted and costly litigation.
There has been substantial industry litigation regarding patent,
trademark and other intellectual property rights involving technology companies.
In the future, litigation may be necessary to enforce any patents issued to the
Company, to protect its trade secrets, trademarks and other intellectual
property rights owned by the Company, or to defend the Company against claimed
infringement. Any such litigation could be costly and a diversion of
management's attention, either of which could have material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Employees
As of June 30, 1999, the Company had 460 full-time employees, including
162 engaged in engineering and product development activities, 75 in
manufacturing and operations, 186 in marketing and sales and 37 in
administration and finance. The Company believes that its future success will
depend, in part, on its continuing ability to attract, retain and motivate
qualified technical, marketing and managerial personnel. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. In Germany, certain of the Company's
employees are represented by statutory worker councils, which are representative
bodies to which employees appoint representatives. In general, the employer is
required to seek the approval and/or advice of the worker council before making
certain significant decisions affecting the employees and the business. The
Company believes that its relations with its employees are good.
Executive Officers
<TABLE>
The executive officers of the Company and their ages as of September
17, 1999 are as follows:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Name Age Position
---- --- --------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark L. Sanders .............................. 56 President, Chief Executive Officer and Director
Ajay Chopra .................................. 42 Chairman of the Board, Vice President, General Manager, Desktop Products
Arthur D. Chadwick ........................... 42 Vice President, Finance and Administration and Chief Financial Officer
Georg Blinn .................................. 51 Vice President, General Manager, Pinnacle Systems GmbH
Patrick Burns ................................ 52 Vice President, Broadcast and Professional Sales, Americas and Japan
Tavy A. Hughes ............................... 44 Vice President, Operations
William Loesch ............................... 45 Vice President, General Manager, Consumer Products
Robert Wilson ................................ 45 Vice President, General Manager, Broadcast Products
James E. Dunn ................................ 54 Vice President, Business and Consumer Marketing and Sales, Americas
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There is no family relationship between any director or executive
officer of the Company.
14
<PAGE>
Mr. Sanders has served as President, Chief Executive Officer and a
director of the Company since January 1990. From 1988 to 1990, Mr. Sanders was
an independent business consultant. Prior to that time, Mr. Sanders served in a
variety of management positions, most recently as Vice President and General
Manager of the Recording Systems Division of Ampex Incorporated, a manufacturer
of video broadcast equipment.
Mr. Chopra, a founder of the Company, has served as Chairman of the
Board of Directors since January 1990, and has served as a director of the
Company since its inception in May 1986. Mr. Chopra has served as Vice
President, General Manager, Desktop Products since April 1997. He previously
served as Chief Technology Officer from June 1996 to April 1997, Vice President
of Engineering from January 1990 to June 1996, and President and Chief Executive
Officer of the Company from its inception to January 1990.
Mr. Chadwick has served as Vice President, Finance and Administration
and Chief Financial Officer of the Company since January 1989. From February
1987 to January 1989 he served as Plant Manager for the Philippines facility of
Gould Semiconductor, a semiconductor company and as Corporate Controller from
February 1984 to February 1987.
Mr. Blinn has served as Vice President, General Manager, Pinnacle
Systems GmbH since August 1997. Prior to joining the Company, Mr. Blinn was the
Chief Financial Officer of Miro AG, a provider of video capture cards, from
December 1996 to August 1997. From January 1993 to December 1996, Mr. Blinn was
an independent business consultant. From January 1987 to December 1992, Mr.
Blinn served as a General Manager of Hitachi Data Systems GmbH, a mainframe
computer distributor.
Mr. Burns has served as Vice President, Broadcast and Professional
Sales, the Americas and Japan since April 1999. He served as Vice President of
Corporate Marketing from February 1998 until March 1999. He served as Vice
President of North American Sales and Corporate Marketing of the Company since
December 1996. From March 1996 to November 1996, Mr. Burns served as a marketing
and strategy consultant to software developers in the film and video markets.
From April 1995 to February 1996, he served as Vice President and General
Manager of Video and Graphics products at Radius, Inc., a graphics company. From
May 1994 to April 1995, Mr. Burns served as Vice President and General Manager
of Chyron's West Coast operations. From April 1993 to May 1994, Mr. Burns served
as Director of International Marketing for VeriFone, Inc., a financial
transaction company. From November 1991 through January 1993, Mr. Burns was Vice
President of Macrovision, Inc., a video encryption company.
Ms. Hughes has served as Vice President, Operations since July, 1998,
as Vice President, Manufacturing of the Company since January 1995, Director of
Manufacturing from April 1994 to January 1995 and a Manager from September 1993
until April 1994. From July 1991 to September 1993, Ms. Hughes served as an
independent business consultant. From 1985 to June 1991, Ms. Hughes served as
Manufacturing Manager of Alta Group, Inc., a manufacturer of digital video
post-production equipment.
Mr. Loesch has served as Vice President, General Manager, Consumer
Products since April 1997. Prior to that Mr. Loesch served as Vice President,
New Business Development of the Company from May 1994 to April 1997. From July
1993 to May 1994, Mr. Loesch served as an independent business consultant. From
June 1990 to November 1992, Mr. Loesch co-founded and served as President of
SHOgraphics Inc., a 3D graphics systems company, and from November 1992 until
July 1993 served as its Executive Vice President and Chief Technical Officer.
Mr. Wilson has served as Vice President, Broadcast Products since April
1997. From May 1994 to April 1997, Mr. Wilson served as Executive Vice
President, Chief Operating Officer and Chief Financial officer of Accom, Inc., a
video company. From March 1991 to April 1994, Mr. Wilson served as President and
Chief Executive Officer of The Grass Valley Group (a subsidiary of Tektronix,
Inc.), which provides video systems to the high-end production, post-production
and broadcast market.
Mr. Dunn has served as Vice President, Business and Consumer Marketing
and Sales, Americas, since August 1999. From August 1996 to May 1999, Mr. Dunn
served as Chief Operating Officer of the Automotive Performance Group, an
automotive aftermarket marketing and distribution company. From April 1988 to
February 1996, Mr. Dunn served as the Director of Business and Government
Marketing for Apple Computer, Inc., a computer manufacturer.
15
<PAGE>
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, manufacturing and
product development facility is located in Mountain View, California. This
facility occupies approximately 106,000 square feet pursuant to a lease which
commenced August 15, 1996 and which will terminate December 31, 2003. The
Company also leases approximately 26,000 square feet of engineering,
administrative, logistics and marketing space in Braunschweig, Germany. The
Braunschweig lease expires in April 2004.
In addition, the Company occupies sales and customer support facilities
in Uxbridge, United Kingdom; Munich, Germany; Singapore; Tokyo, Japan; Beijing,
China; Taipei, Taiwan; Nijmegen, Netherlands; Paris, France; and Upplands Vasby,
Sweden. The Company has six engineering and development sites, one at the
corporate headquarters in Mountain View, California plus facilities in
Indianapolis, Indiana; Gainesville, Florida; Paramus, New Jersey; Grass Valley,
California and Braunschweig, Germany.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pinnacle Systems made its initial public offering on November 8, 1994.
Its Common Stock is traded on the Nasdaq National Market under the symbol PCLE.
The following table sets forth for the fiscal periods indicated the range of
high and low sales prices per share of the common stock as reported on the
Nasdaq National Market.
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal Year Ended June 30, 1999
- --------------------------------------------------------------------------------
First Quarter ............................... 19.125 9.282
- --------------------------------------------------------------------------------
Second Quarter .............................. 19.125 9.500
- --------------------------------------------------------------------------------
Third Quarter ............................... 23.625 16.094
- --------------------------------------------------------------------------------
Fourth Quarter .............................. 33.875 20.250
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fiscal Year Ended June 30, 1998
- --------------------------------------------------------------------------------
First Quarter ............................... 15.875 8.563
- --------------------------------------------------------------------------------
Second Quarter .............................. 16.750 10.000
- --------------------------------------------------------------------------------
Third Quarter ............................... 18.938 10.000
- --------------------------------------------------------------------------------
Fourth Quarter .............................. 21.750 13.000
- --------------------------------------------------------------------------------
As of September 15, 1999, there were approximately 297 stockholders of
record of the common stock.
On April 15, 1999, the Company announced a two-for-one stock split of
the Company's common shares. This was paid in the form of a 100% stock
distribution on June 4, 1999 to stockholders of record on
16
<PAGE>
May 14, 1999. Accordingly, all share and per share data for prior periods
presented have been restated to reflect the stock split.
The Company has never paid cash dividends on its capital stock. The
Company currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data for
each of the years in the five-year period ended June 30, 1999. The consolidated
statements of operations data and balance sheet data are derived from the
consolidated financial statements of Pinnacle Systems Inc. and its subsidiaries,
which have been audited by KPMG LLP, independent auditors. The results for the
fiscal year ended June 30, 1999 are not necessarily indicative of the results
for any future period. The selected consolidated financial data set forth below
should be read in conjunction with the consolidated financial statements as of
June 30, 1999 and June 30, 1998 and for each of the years in the three year
period ended June 30, 1999 and notes thereto set forth on Pages F-1 to F-24 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
17
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share data) FISCAL YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales $ 159,098 $ 105,296 $ 37,482 $ 46,151 $ 22,193
Cost of sales 74,022 48,715 23,997 23,854 11,291
--------- --------- --------- --------- ---------
Gross profit 85,076 56,581 13,485 22,297 10,902
--------- --------- --------- --------- ---------
Operating expenses:
Engineering and product development 16,137 11,652 7,579 5,140 2,405
Sales and marketing 41,160 29,301 12,667 8,907 5,340
General and administrative 6,840 5,342 3,702 2,186 1,088
In process research and development 6,579 16,960 4,894 3,991 --
--------- --------- --------- --------- ---------
Total operating expenses 70,716 63,255 28,842 20,224 8,833
--------- --------- --------- --------- ---------
Operating income (loss) 14,360 (6,674) (15,357) 2,073 2,069
Interest income, net 4,742 3,139 2,867 3,345 738
--------- --------- --------- --------- ---------
Income (loss) before income taxes 19,102 (3,535) (12,490) 5,418 2,807
Income tax expense (666) (2,685) (2,445) (1,734) (567)
--------- --------- --------- --------- ---------
Net income (loss) $ 18,436 $ (6,220) $ (14,935) $ 3,684 $ 2,240
========= ========= ========= ========= =========
Net income (loss) per share
Basic $ 0.86 $ (0.35) $ (1.01) $ 0.26 $ 0.26
========= ========= ========= ========= =========
Diluted $ 0.79 $ (0.35) $ (1.01) $ 0.24 $ 0.21
========= ========= ========= ========= =========
Shares used to compute net income (loss) per share
Basic 21,390 17,814 14,804 14,316 8,532
========= ========= ========= ========= =========
Diluted 23,483 17,814 14,804 15,606 10,440
========= ========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) JUNE 30,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 120,325 $ 100,496 $ 57,662 $ 72,337 $ 26,588
Total assets 196,469 132,937 70,007 84,561 32,724
Long-term debt -- 163 475 -- --
Retained earnings (deficit) (389) (18,825) (12,605) 2,330 (1,354)
Shareholders' equity 166,259 114,392 62,711 80,198 27,743
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain Forward-Looking Information
Certain statements in this Management's Discussion and Analysis and
elsewhere in this Annual Report on Form 10-K 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"
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 the broadcast, desktop and the consumer video markets. Pinnacle
distributes and sells its products to end users through the combination of
independent domestic and international dealers and value added resellers
("VARs"), retail distributors, OEMs and, to a lesser extent, a direct sales
force. Sales to dealers, VARs, 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 by them into editing
systems sold 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. Currently, DVExtreme, Lightning,
Deko, AlladinPRO and Thunder and Media stream servers comprise the Company's
suite of high performance real time products designed for on-air, broadcast and
high-end, post-production applications.
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, the primary broadcast
products sold throughout fiscal 1997. In April 1997, the Company completed the
acquisition of the Deko titling and character generation product line from
Digital Graphix, Inc. ("Deko Acquisition"). Currently the Company sells three
products in the Deko line, FXDeko, TypeDeko and WriteDeko, and has recently
announced the release of six additional products including FXDekoHD, a high
definition character and graphics generator. In fiscal 1998, substantially all
of the broadcast revenue 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 effect technology. In June 1999, the
Company introduced Thunder, the Company's first multi-channel video and audio
clip server and iThunder, a real time video server for Internet broadcasting. In
August 1999, the Company completed the acquisition of certain of the assets of
the Hewlett-Packard Company including the Media Stream server family. Media
Stream compliments the Thunder family in providing a complete line of broadcast
quality video
19
<PAGE>
server solutions. The broadcast market accounted for approximately 16.9%, 24.2%,
and 25.4% of net sales in the years ended June 30, 1999, 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 DV300/200
families. In September 1998, the Company commenced shipment of ReelTime Nitro
which combines the video capture and editing capabilities of ReelTime with the
digital video effects capabilities of Genie. In March 1999, the Company
completed its acquisition of Truevision, Inc. and added Truevision's TARGA
branded products to its catalog. In April 1999, the Company began shipping
DV200, its new low-cost DV-based video capture and editing solution. In June
1999, the Company began shipping DC1000, a new dual stream MPEG2 editing product
and a companion DVD authoring option. The desktop market accounted for
approximately 56.5%, 57.5% and 59.8% of net sales in the fiscal years ended June
30, 1999, 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. In March 1999, the Company commenced shipment of Studio MP10,
the company's third product in the Studio line. As of June 30, 1999, the
Company's consumer product line included Studio 400, Studio DC10, Studio MP10
and Studio 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 consumer products are marketed as computer peripheral products. The
consumer market accounted for approximately 26.6%, 18.3% and 14.8% of net sales
in the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
Acquisitions
To further Pinnacle's strategy of providing an expanded line of easy to
use computer based video production products, in August 1997 the Company
acquired the miro Digital Video Products Group (the "Miro Acquisition") from
miro Computer Products AG ("Miro"). In the Miro Acquisition, the Company
acquired the miroVIDEO product line, certain technology and other assets. The
Company paid $15.2 million in cash in October 1997, issued 407,130 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 related to the acquisition in the year ended June
30, 1998. The
20
<PAGE>
terms of the Miro Acquisition also included an earnout provision pursuant to
which Miro received additional consideration based on sales and operating profit
targets. On September 1, 1998, the Company issued 615,068 shares of Common Stock
in consideration of such earnout payment which was recorded as goodwill and
amortized over nine years beginning September 1, 1998.
On March 12, 1999, the Company acquired all the outstanding common
stock of Truevision, Inc. , a supplier of digital video products ("Truevision").
In connection with the acquisition, Pinnacle issued 824,206 shares of common
stock valued at $11.5 million. In addition, Pinnacle issued to Truevision
employees and directors 139,678 options, valued at $0.7 million, to purchase
common stock at an exercise price of $11.98. The Company also assumed 53,836
warrants valued at $0.1 million. The Company incurred acquisition costs of
approximately $0.5 million for a total purchase price of $12.8 million. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Truevision, Inc. and the fair market
value of the acquired assets and assumed liabilities have been included in the
financial statements of the Company since March 12, 1999.
In March, 1999, the Company acquired Shoreline Studios, Inc., a leading
provider of innovative real-time 3D graphics software for use in live
broadcasts, in a transaction intended to strengthen Pinnacle's position in the
broadcast graphics market. The total purchase price of the acquisition totaled
$0.8 million of which approximately $0.5 million was paid in the quarter ended
March 31, 1999. The balance is expected to be paid during the fiscal year ending
June 30, 2000.
On June 30, 1999, the Company announced that it had signed a definitive
agreement to purchase certain assets of the Video Communications Division of the
Hewlett-Packard Company ("HP"). Under the terms of the agreement, Pinnacle
Systems would acquire substantially all of the assets of HP's Video
Communications Division, including key technologies and intellectual property,
the Media Stream family of products and selected assets, as well as most
managers and employees. On August 2, 1999, the Company completed the purchase.
Pursuant to the terms of the Agreement, the Company paid HP approximately $12.6
million in cash and issued 773,172 shares of Pinnacle's common stock valued at
approximately $19.5 million. Pursuant to a stock restriction and registration
rights agreement included in the definitive agreement, Pinnacle filed with the
Securities and Exchange Commission a registration statement on Form S-3 with
respect to one-half of the Pinnacle Shares issued to HP. HP has agreed to
certain restrictions with respect to the disposition of the remainder of such
shares.
The Company will account for the HP acquisition as a purchase.
Accordingly, the results of operations and the fair market value of the acquired
assets and assumed liabilities will be included in the financial statements of
the Company as of August 2, 1999. The Company estimates that it will assume
liabilities of approximately $3.0 million and expects to incur approximately
$0.5 million in expenses associated with executing the transaction. The Company
is currently in the process of valuing amounts to be allocated to indentifiable
intangible assets and acquired in-process research and development. These
valuations are being performed by an independent appraiser using established
valuation techniques. Charges for in-process research and development and
amortization of intangibles and goodwill will be included in the Company's
statement of operations for the quarter ending September 30, 1999. Goodwill
represents the amount by which the cost of acquired net assets exceeds the fair
value of the net assets acquired on the date of purchase.
Foreign Exchange
The Company transacts business in various foreign currencies but
primarily in those of Germany, France and the United Kingdom. During the fiscal
year ended June 30, 1999, the Company experienced significant fluctuations in
the exchange rate of the German mark. These fluctuations resulted in a
translation adjustment loss of approximately $2.0 million at June 30, 1999. This
amount is included in Shareholder's equity as accumulated other comprehensive
loss.
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data as a percentage of net sales:
21
<PAGE>
- --------------------------------------------------------------------------------
Fiscal Year Ended June 30,
---------------------------
1999 1998 1997
----- ----- -----
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 46.5 46.3 64.0
----- ----- -----
Gross profit 53.5 53.7 36.0
Operating expenses:
Engineering and product development 10.1 11.1 20.2
Sales and marketing 25.9 27.8 33.8
General and administrative 4.3 5.1 9.9
In process research and development 4.1 16.1 13.1
----- ----- -----
Total operating expenses 44.4 60.1 77.0
----- ----- -----
Operating income (loss) 9.1 (6.4) (41.0)
Interest income, net 3.0 3.0 7.7
----- ----- -----
Income (loss) before income taxes 12.1 (3.4) (33.3)
Income tax expense (0.4) (2.5) (6.5)
----- ----- -----
Net income (loss) 11.7% (5.9)% (39.8)%
===== ===== =====
- --------------------------------------------------------------------------------
<TABLE>
Comparison of sales by business group for the years ended June 30,
<CAPTION>
'99 - '98 '98 - '97
Group 1999 1998 1997 % Change % Change
- ----- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Broadcast $ 26,917 $ 25,521 $ 9,520 5.5% 168.1%
Desktop 89,798 60,335 22,414 48.8% 169.2%
Consumer 42,383 19,440 5,548 118.0% 250.4%
-------- -------- --------
$159,098 $105,296 $ 37,482 51.1% 180.9%
======== ======== ========
</TABLE>
Net Sales. The Company's net sales increase 51.1% to $159.1 million in
fiscal 1999 from $105.3 million in fiscal 1998. The increase is primarily
attributable to increases in desktop and consumer product sales. Broadcast sales
increased slightly and were augmented by the release of Thunder and FXDeko.
Desktop sales in fiscal 1999 increased 48.8% over fiscal 1998. This was driven
primarily by increased sales from existing products including the DC30, DC50,
Reeltime and DV300 in addition to sales generated from new product releases
notably the DC1000. Desktop sales also increased due to the acquisition of
Truevision in March 1999 which added the TARGA and Ready-to-Edit products.
Consumer sales increased 118.0% due to a full year of sales of the Studio 400
which was released at the end of fiscal 1998. Consumer sales also grew due to
increased sales of PCTV and the introduction of Studio DC10 and Studio MP10.
International Sales (sales outside of North America) were approximately
60.8% and 57.6% of the Company's net sales in fiscal 1999 and 1998,
respectively. The increase in fiscal 1999 was primarily attributable to an
increase in European sales of consumer products. The Company expects that
international sales will continue to represent a significant portion of its net
sales.
Gross Profit. Cost of revenues consists primarily of costs associated
with the procurement of components; tooling, assembly, testing, and distribution
of finished products; warehousing; warranty and service costs; product reworks,
provisions for inventory obsolescence and shrinkage, and royalties. The
resulting gross profit fluctuates based on factors such as product mix,
licensing fees or royalties paid to third
22
<PAGE>
parties, the offering of product upgrades, price discounts and other sales
promotion programs, and the distribution channels through which products are
sold. Gross profit as a percentage of net sales was 53.5% and 53.7% in fiscal
1999 and 1998, respectively. Gross margins were aided in fiscal 1999 by a
favorable product mix. However, the Company has experienced and expects to
continue to experience pricing pressures on its products as the industry matures
and competition increases.
Engineering and Product Development. Engineering and product
development expenses increased 38.5% to $16.1 million for the fiscal year ended
June 30, 1999 from $11.7 million during fiscal 1998. As a percentage of sales,
engineering and product development expenses decreased to 10.1% in the fiscal
year ended June 30, 1999 from 11.1% in fiscal 1999. 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; Paramus, New Jersey; Gainsville, Florida;
Braunschweig, Germany; and Indianapolis, Indiana.
Sales and Marketing. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade shows, cooperative marketing and advertising
expenses and professional fees for marketing services. Sales and marketing
expenses increased by 40.5% to $41.2 million in fiscal 1999 from $29.3 million
in fiscal 1998. The increase in sales and marketing expenses was attributable to
promotional costs for the introduction of several new desktop and consumer
products in addition to the release of Thunder in June 1999. Sales and marketing
expenses as a percentage of net sales were 25.9% and 27.8% in fiscal 1999 and
1998, respectively. The decrease reflects a growth in sales exceeding
incremental sales and marketing expenditures.
General and Administrative. General and administrative expenses
increased by 28.0% to $6.8 million in fiscal 1999 compared to $5.3 million in
fiscal 1998. This increase in the June 99 fiscal year, is partly due to the
inclusion of a full twelve months of expenses from the German operations which
were acquired from Miro in August 1997. Additional increases were related to the
Company's overall growth. General and administrative expenses as a percentage of
net sales were 4.3% and 5.1%, respectively.
In-Process Research and Development. During the year ended June 30,
1999, the Company recorded an in-process research and development charge of
approximately $6.6 million mostly related to the acquistion of Truevision.
During the year ended June 30, 1998, the Company recorded an in-process research
and development charge of approximately $17.0 million related to the Miro
Acquisition.
The amounts to acquired in-process research and development, were based
on results of an independent appraisal using established valuation techniques in
the high-technology industry. The portion of the purchase price allocated to
in-process research and development represents development projects that have
not yet reached technological feasibility and have no alternative future use.
Technological feasibility was determined based on: (i) an evaluation of the
product's status in the development process with respect to utilization and
contribution of the individual products as of the date of valuation and (ii) the
expected dates in which the products would be commercialized. It was determined
that technologically feasibility was achieved when a product is at beta stage.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products; estimating the resulting net
cash flows from such projects; and discounting the net cash flows back to the
time of acquisition using a risk-adjusted discount rate. Discount rates of 35%
and 43% were used for the Truevision and Miro valuations respectively.
Interest Income Net. Net interest income increased 51.1% to $4.7
million in fiscal 1999 from $3.1 million in fiscal 1998. The increase was due to
an increase in cash and marketable securities due primarily to the completion of
a public offering in November 1997. Thus, fiscal 1999 includes one full year of
interest income from these proceeds.
23
<PAGE>
Income Tax Expense. The Company recorded provisions for income taxes of
$0.7 million and $2.7 million for the fiscal years ended 1999 and 1998,
respectively. The provision for income taxes as a percentage of pretax income
was 3.5% and 75.6% respectively. The tax rate in fiscal 1999 was significantly
lower than the rate in fiscal 1998 mainly due to the reduction of the Company's
valuation allowance as management determined that it was likely that the Company
would realize a portion of its deferred tax asset. The tax rate in fiscal 1998
reflects the exclusion of non-deductible expenses related to acquisitions.
As of June 30, 1998, the Company has federal research and
experimentation and alternative minimum tax credit carryforwards of $0.7 million
which expire between 2012 and 2014, and state research and experimentation
credit carryforwards of $0.6 million which have no expiration provision.
Comparison of Years Ended June 30, 1998 and 1997
Net Sales. The Company's net sales were $105.3 million in fiscal 1998
compared to $37.5 million in fiscal 1997. The increase 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 and Studio 400, which
commenced shipment in March 1997 and June 1998, respectively. Broadcast sales
increased as a result of increasing sales of DVExtreme and Lightning, which were
first shipped in June 1997, Deko, which was acquired in April 1997, and
AlladinPRO which commenced shipment in June 1998, partially offset by a decline
in sales of Prizm and FlashFile. Desktop sales increased as a result of
miroVideo DC30 sales, which was acquired from Miro in August 1997, sales of
DV300 which commenced shipment in February 1998, sales of ReelTime which
commenced shipment in March 1998, and sales of miroVIDEO DC50 which commenced
shipment in June 1998. Sales outside of North America were approximately 57.6%
and 39.7% of the Company's net sales in fiscal 1998 and 1997, respectively. The
increase in sales outside of North America in fiscal 1998 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 53.7%
and 36.0% in fiscal 1998 and 1997, respectively. The increase in gross profit
percentage is due primarily to a significant charge to cost of sales in fiscal
1997 totaling $4.0 million relating to inventory write downs.
Engineering and Product Development. Engineering and product
development expenses increased by 53.9% to $11.7 million in fiscal 1998 from
$7.6 million in fiscal 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 11.1% and 20.2% in fiscal 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show, cooperative marketing and advertising
expenses and professional fees for marketing services. Sales and marketing
expenses increased by 130.7% to $29.3 million in fiscal 1998 from $12.7 million
in fiscal 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 expenses as a
percentage of net sales were 27.8% and 33.8% in fiscal 1998 and 1997,
respectively.
24
<PAGE>
General and Administrative. General and administrative expenses
increased by 43.2% to $5.3 million in fiscal 1998 compared to $3.7 million in
fiscal 1997. General and administrative expenses as a percentage of net sales
were 5.1% and 9.9%, respectively. Included in general and administrative
expenses in fiscal 1998 were $465,000 of non-recurring spending related to the
acquisition of the Miro group. Included in general and administrative expenses
in fiscal 1997 were $315,000 of non-recurring spending related to the Deko
Acquisition and approximately $500,000 relating to the disposal of leasehold
improvements and other capital equipment, moving costs and rent overlap incurred
as a result of the move to the Company's facility in Mountain View, California.
In Process Research and Development. During the year ended June 30,
1998, the Company recorded an in process research and development charge of
approximately $17.0 million relating to the Miro Acquisition. During the year
ended June 30, 1997, the Company recorded an in process research and development
charge of approximately $4.9 million relating to the Deko Acquistion.
Interest Income Net. Net interest income increased 6.9% to $3.1 million
in fiscal 1998 from $2.9 million in fiscal 1997. The increase was due to an
increase in cash and marketable securities due primarily to the completion of a
public offering in November 1997.
Income Tax Expense. The Company recorded provisions for income taxes of
$2.7 million and $2.4 million for the fiscal years ended 1998 and 1997,
respectively. Income tax expense for the year ended June 30, 1997 included a
charge of $3,245,000 resulting from the establishment of a valuation allowance
against the Company's deferred tax asset due to significant operating losses and
the introduction of new products for which market acceptance was uncertain. As
of June 30, 1998, the Company has federal research and experimentation and
alternative minimum tax credit carryforwards of $1.3 million which expire
between 2009 and 2013, and state research and experimentation credit
carryforwards of $0.5 million which 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 June 30, 1999
Company's principal sources of liquidity included cash, cash equivalents and
marketable securities totaling approximately $89.0 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 current operations and growth for the foreseeable future.
The Company's operating activities used $215,000 in cash for the year
ended June 30, 1999. Cash was generated primarily from net income of $18.4
million after adjustment for in-process research and development charges,
depreciation and amortization, and deferred taxes net of stock option benefits.
This was offset by increases in accounts receivable and inventories. These
increases relate primarily to a 51% increase in product revenues from fiscal
1998 to 1999. In addition, the Company used cash to pay down notes and
liabilities of over $5.0 million assumed in its acquisition of Truevision in
March 1999.
During the year ended June 30, 1999, cash flow from investing
activities included $7.7 million invested in property and equipment, compared to
$2.5 million in the year ended June 30, 1998. The high level of expenditures for
the year ended June 30, 1999, was primarily for leasehold improvements,
furniture and equipment purchased for the Company's Mountain View facility
expansions in September 1998 and January and June 1999. The Company also
incurred expenditures of approximately $1.0 million in capitalized internal
software related to its SAP enterprise software implementation which began in
January 1999. The Company will continue to incur expenditures for the
implementation through March 2000. Cash
25
<PAGE>
flow from investing activities also increased due to the maturity of certain of
the Company's marketable securities. As the Company continues to grow, it
expects ongoing purchases of property and equipment. Such capital expenditures
will be financed from working capital.
On March 12, 1999, the Company acquired all the outstanding common
stock of Truevision, a supplier of digital video products. In connection with
the acquisition, Pinnacle issued 824,206 shares of common stock valued at $11.5
million. In addition, Pinnacle issued to Truevision employees and directors
139,678 options, valued at $0.7 million, to purchase common stock at an exercise
price of $11.98. The Company also assumed 53,836 warrants valued at $0.1
million. The Company incurred acquisition costs of approximately $0.5 million
for a total purchase price of $12.8 million and assumed liabilities totaling
$13.0 million.
On June 30, 1999, the Company announced that it had signed a definitive
agreement to purchase certain assets of the Video Communications Division of the
Hewlett-Packard Company ("HP"). Under the terms of the agreement, Pinnacle
Systems would acquire substantially all of the assets of HP's Video
Communications Division, including key technologies and intellectual property,
the Media Stream family of products and selected assets, as well as most
managers and employees. On August 2, 1999, the Company completed the purchase.
Pursuant to the terms of the Agreement, the Company paid HP approximately $12.6
million in cash and issued 773,172 shares of Pinnacle's common stock valued at
approximately $19.5 million. Pursuant to a stock restriction and registration
rights agreement set forth in the definitive agreement, Pinnacle filed with the
Securities and Exchange Commission a registration statement on Form S-3 with
respect to one-half of the Pinnacle Shares issued to HP. HP has agreed to
certain restrictions with respect to the disposition of the remainder of such
shares.
FACTORS AFFECTING OPERATING RESULTS
We have grown rapidly and expect to continue to grow rapidly. If we
fail to effectively manage this growth, our financial results could suffer.
We have experienced rapid growth and anticipate that we will continue
to grow at a rapid pace in the future. For example, net sales in fiscal 1999
were $159.1 million compared to $105.3 million in fiscal 1998. As a result of
internal growth and recent acquisitions, we have increased the number of
employees significantly over the last two fiscal years and many are
geographically dispersed, primarily throughout North America and Europe. This
growth places increasing demands on our management, financial and other
resources. We have built these resources and systems to account for such growth,
but continued or accelerated growth may require us to increase our investment in
such systems, or to reorganize our management team. Such changes, should they
occur, could cause an interruption or diversion of focus from our core business
activities and have an adverse effect on financial results.
Any failure to successfully integrate the businesses we have acquired
could negatively impact us.
In August 1999, we closed the transaction with the Hewlett-Packard
Company and in March 1999, we completed the acquisitions of Truevision, Inc and
Shoreline Studios, Inc. We may in the near- or long-term pursue acquisitions of
complementary businesses, products or technologies. Integrating acquired
operations is a complex, time-consuming and potentially expensive process. All
acquisitions involve risks that could materially and adversely affect our
business and operating results. These risks include:
- Distracting management from the day-to-day operations of our
business
26
<PAGE>
- Costs, delays and inefficiencies associated with integrating
acquired operations, products and personnel
- The potential to result in dilutive issuance of our equity
securities
- Incurring debt and amortization expenses related to goodwill
and other intangible assets
There are various factors which may cause our net revenues and
operating results to fluctuate.
Our 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 our 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
- Dependence on distribution channels through which our products
are sold
- Increased competition and pricing pressure
- Accuracy of our and our resellers' forecasts of end user
demand
- Accuracy of inventory forecasts
- Ability to obtain sufficient supplies from our 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 recent economic downturn in Asia and Latin America.
We also experience 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, we attend a
number of annual trade shows which can influence the order pattern of products,
including CEBIT in March, the NAB convention held in April, the IBC convention
held in September and the COMDEX exhibition held in November. Our operating
expense levels are based, in part, on our expectations of future revenue and, as
a result, net income would be disproportionately affected by a shortfall in net
sales. Due to these factors, we believe that quarter-to-quarter comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance.
Our stock price may be volatile.
The trading price of our 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
us, our customers or competitors
- Changes in securities analysts' recommendations
- Announcements of acquisitions
- Earnings estimates for us
- General fluctuations in the stock market
Our 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 our common stock.
27
<PAGE>
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 our 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 us, it is
possible that similar litigation could be brought against us. Such litigation
could result in substantial costs and would likely divert management's attention
and resources. Any adverse determination in such litigation could also subject
us to significant liabilities.
We are dependent on contract manufacturers and single or limited source
suppliers for our components. If these manufacturers and suppliers do not meet
our demand either in volume or quality, then we could be materially harmed.
We rely on subcontractors to manufacture our desktop and consumer
products and the major subassemblies of our broadcast products. We and our
manufacturing subcontractors are dependent upon single or limited source
suppliers for a number of components and parts used in our products, including
certain key integrated circuits. Our 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
- 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, we will have to identify and
qualify acceptable replacements or redesign our 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 our 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 our business.
We may fail to sell products in the consumer market.
We entered the consumer market with the acquisition of the
VideoDirector product line from Gold Disk in June 1996. We began shipping our
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, we acquired Miro's
consumer products and European sales organization. We aim to continue to invest
resources to develop, market and sell products into the consumer market. In this
endeavor, we need to continue to develop and maintain the following
capabilities:
- Marketing and selling products through the consumer
distribution channels.
- Establish relationships with distributors and retailers
- A fully developed infrastructure to support electronic retail
stores and telephone and Internet orders.
28
<PAGE>
Additionally, factors beyond our control could hurt consumer product
sales and consequently our financial condition. These factors include:
- Potential compatibility problems with other manufacturers'
electronic components
- The risk of obsolete inventory and inventory returns
- The growth of the consumer video market is difficult to
predict
If our products do not keep pace with the technological developments in
the rapidly changing video post-production equipment industry, then we 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, our inability 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 our business,
particularly on a quarterly basis.
We are critically dependent on the successful introduction, market
acceptance, manufacture and sale of new products that offer our customers
additional features and enhanced performance at competitive prices. Once a new
product is developed, we 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 us 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 we do not effectively compete, our business will be harmed.
The market for our products is highly competitive. We compete in the
broadcast, desktop and consumer video production markets. We anticipate
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 our 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
Certain competitors in the broadcast, desktop and consumer video
markets have larger financial, technical, marketing, sales and customer support
resources, greater name recognition and larger installed customer bases than we
do. In addition, some competitors have established relationships with current
and potential customers of ours and offer a wide variety of video equipment that
can be bundled in certain large system sales.
29
<PAGE>
Principal competitors in the broadcast market include:
Chyron Corporation
Leitch Technology Corporation
Matsushita Electric Industrial Co. Ltd.
Quantel Ltd. (a division of Carlton Communications Plc)
Accom, Inc.
Sony Corporation
Tektronix, Inc.
SeaChange 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.
Hauppauge Digital, Inc.
Media 100, Inc.
Adobe Systems, Inc.
These lists are not all-inclusive.
The consumer market in which certain of our 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 our consumer products by
providing some or all of the same features and video editing capabilities. In
addition, we expect that existing manufacturers and new market entrants will
develop new, higher performance, lower cost consumer video products that may
compete directly with our consumer products. We expect 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 our business.
We rely heavily on dealers and oems to market, sell, and distribute our
products. In turn, we depend heavily on the success of these resellers. If these
resellers do not succeed in effectively distributing our products, then our
financial performance will be negatively affected.
These resellers may:
- Not effectively promote or market our products
- Experience financial difficulties and even close operations
Our dealers and retailers are not contractually obligated to sell our
products. Therefore, they may, at any time:
30
<PAGE>
- Refuse to promote or pay for our products
- Discontinue our products in favor of a competitor's product
Also, with these distribution channels standing between them and the
actual market, we may not be able to accurately gauge current demand for
products and anticipate demand for newly introduced products. 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, we have expanded our 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. We also sell our consumer products directly to certain
retailers. Rapid change and financial difficulties of distributors have
characterized distribution channels for consumer retail products. These
arrangements have exposed us to the following risks, some of which are out of
our control:
- We are obligated to provide price protection to such retailers
and distributors and, while the agreements limit the
conditions under which product can be returned to us, we may
be faced with product returns or price protection obligations.
- The distributors or retailers may not continue to stock and
sell our consumer products.
- Retailers and retail distributors often carry competing
products.
Any of the foregoing events could materially harm our business.
If certain of our key employees leave or are no longer able to perform
services for us, it could have a material adverse effect on our business. We may
not be able to attract and retain a sufficient number of managerial personnel
and technical employees to compete successfully.
We believe that the efforts and abilities of our senior management and
key technical personnel are very important to our continued success. Only one
has an employment agreement and none are the subject of key man life insurance.
Our success is dependent upon our 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. We may not be able to retain our 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 our employ and subsequently compete against us, or
contractors may perform services for competitors of ours. If we are unable to
retain key personnel, our business could be materially harmed.
We may be unable to protect our proprietary information and procedures
effectively.
We must protect our proprietary technology and operate without
infringing the intellectual property rights of others. We rely on a combination
of patent, copyright, trademark and trade secret laws and other intellectual
property protection methods to protect our proprietary technology. In addition,
we generally enter into confidentiality and nondisclosure agreements with our
employees and OEM customers and limit access to and distribution of our
proprietary technology. These steps may not protect our proprietary information
nor give us any competitive advantage. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property, or disclose such intellectual property
or trade secrets. If we are unable to protect our intellectual property, our
business could be materially harmed.
31
<PAGE>
We may be adversely affected if we are sued by a third party or if we
decide 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 us, to
protect our trade secrets, trademarks and other intellectual property rights
owned by us, or to defend us against claimed infringement. This litigation may
- Divert management's attention away from the operation of our
business
- Result in the loss of our proprietary rights
- Subject us to significant liabilities
- Force us to seek licenses from third parties
- Prevent us from manufacturing or selling products.
Any of these results could materially harm our business.
In the course of business, we have in the past received communications
asserting that our products infringe patents or other intellectual property
rights of third parties. We investigated the factual basis of such
communications and negotiated licenses where appropriate. It is likely that in
the course of our business, we 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 our products, or relating to current or future
technologies, we 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 we sell products internationally, we are subject to additional
risks.
Sales of our products outside of North America represented
approximately 60.8% of net sales in the year ended June 30, 1999, compared to
57.6% and 39.7% of net sales in the fiscal years that ended June 30, 1998 and
1997 respectively. We expect that international sales will continue to represent
a significant portion of our net sales. We make foreign currency denominated
sales in many, primarily European, countries. This exposes us 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 and 1999, especially for sales of
consumer and desktop products into Europe. In fiscal 1999 and beyond, we expect
that a majority of our European sales will be denominated in local foreign
currency including the Euro. The Company has developed natural hedges for some
of this risk in that most of the European selling expenses are also denominated
in local currency. 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
- Political instability
- Trade restrictions
- Changes in tariffs
- Difficulties in staffing and managing international operations
- Potential insolvency of international dealers and difficulty
in collecting accounts
We are also subject to the risks of generally poor economic conditions
in certain areas of the world, most notably Asia. These risks may harm our
future international sales and, consequently, our business.
32
<PAGE>
Computer software, components and systems used by or designed by us or
used by third parties with whom we regularly deal 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. Our
business could be interrupted materially as a result of such disruption or
failure.
Like many other companies, we are 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.
We are conducting a program to confront these potential problems. This
program involves assessing all areas that may be affected by or responsible for
a year 2000 problem and initiating changes wherever necessary.
Some of the activities include:
- Assessing all major categories of systems used by us,
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
- Discussing 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 our
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. Further, we have
contingency plans, but if these planning activities fail, our business could be
materially harmed. It is uncertain to what extent we will be affected by the
year 2000 problem, and if third parties or suppliers have year 2000 problems,
our business may be materially harmed.
To assist customers in evaluating their year 2000 issues, we have
assessed the capability of our current and discontinued products. Products have
been assigned to one of the four following categories: "Year 2000 Compliant,"
"Year 2000 Compliant with minor issues" "Year 2000 non-compliant," and "No
evaluation done--will not test." "Year 2000 Compliant" means that when used
properly and in conformity with the product information provided by us, 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 our product properly
exchanges date data with our product. Based on our tests, we believe that all
current products shipping, which run under Microsoft Windows NT or Windows 95,
will be "Year 2000 compliant." Final results of our complete product testing
will be published by fall 1999.
The cost which will be incurred by us 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
33
<PAGE>
is subject to change. If actual cost of year 2000 compliance materially exceeds
our current estimate, our business could be harmed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currencies
We transact business in various foreign currencies but primarily in
those of Germany, France and the U.K. Accordingly, we are subject to exposure
from adverse movements in foreign currency exchange rates. We currently do not
use financial instruments to hedge local currency activity at any of our foreign
locations. Instead, we believe that a natural hedge exists, in that local
currency revenues substantially offset the local currency denominated operating
expenses. We assess the need to utilize financial instruments to hedge foreign
currency exposure on an ongoing basis.
Fixed Income Investments
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio of marketable securities. We do not use
derivative financial instruments for speculative or trading purposes. We invest
primarily in US Treasury Notes and high-grade commerical paper and hold them to
maturity. Consequently, we do not expect any material loss with respect to our
investment portfolio.
We do not use derivative financial instruments in our investment
portfolio to manage interest rate risk. We do, however, limit our exposure to
interest rate and credit risk by establishing and strictly monitoring clear
policies and guidelines for our fixed income portfolios. At the present time,
the maximum duration of all portfolios is two years. The guidelines also
establish credit quality standards, limits on exposure to any one issue, as well
as the type of instruments. Due to the limited duration and credit risk criteria
established in these guidelines, our exposure to market and credit risk is low.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the independent
auditors' report appear on pages F-1 through F-24 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
directors is incorporated by reference from the section captioned "Election of
Directors" contained in the Company's Proxy Statement related to the Annual
Meeting of Shareholders to be held October 26, 1999, to be filed by the Company
with the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the
"Proxy Statement"). The information required by this item
34
<PAGE>
concerning executive officers is set forth in Part I of this Report. The
information required by this item concerning compliance with Section 16(a) of
the Exchange Act is incorporated by reference from the section captioned
"Compliance with Section 16(a) of the Exchange Act" contained in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section captioned "Executive Compensation and Other Matters" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the section captioned "Record Date and Principal Share Ownership" contained in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions With Management" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements are incorporated by reference in
Item 8 of this Report:
Independent Auditors' Report F-2
Consolidated Balance Sheets, June 30, 1999 and 1998 F-3
Consolidated Statements of Operations for years ended
June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Comprehensive Income (Loss) for years ended
June 30, 1999, 1998 and 1997 F-5
Consolidated Statement of Shareholders' Equity for the years ended
June 30, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997 F-7
Notes to Financial Statements F-8
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since the
required information is not present, or not present in amounts sufficient to
require submission of the schedule, is inapplicable, or because the information
required is included in the consolidated financial statements or the notes
thereto.
(a)(3) Exhibits
3.1(1) Restated Articles of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant, as amended to date.
4.1(2) Preferred Share Rights Agreement, dated December
12, 1996, between Registrant and ChaseMellon
Shareholder Services, L.L.C.
4.1.1(2) Amendment No.1 to Preferred Shares Right Agreement
dated as of April 30,
35
<PAGE>
1998 by and between the Registrant and ChaseMellon
Shareholder Services, L.L.C.
4.2(4) Stock Restriction and Registration Rights Agreement
dated August 2, 1999 by and between the Registrant
and the Hewlett-Packard Company.
10.1(1) 1987 Stock Option Plan, as amended, and form of
agreements thereto.
10.2(3) 1994 Employee Stock Purchase Plan, and form of
agreement thereto.
10.3(1) 1994 Director Stock Option Plan, and form of
agreement thereto.
10.4(1) Form of Indemnification Agreement between the
Registrant and its officers and directors.
10.5*(1) Development and Original Equipment Manufacturing
and Supply Agreement, dated March 16, 1994, between
Registrant and Avid Technology, Inc.
10.6(1) Master Agreement, dated March 4, 1994, between
Registrant and Bell Microproducts, Inc.
10.7*(1) Contract Services Agreement, dated May 31, 1994,
between Registrant and Liberty Contract Services, a
division of Wyle Laboratories.
10.8(1) Agreement, dated September 8, 1994, between
Registrant and Mark L. Sanders.
10.9.1*(5) OEM Agreement between Registrant and Data
Translation, Incorporated.
10.9.2*(5) Amendment to OEM Agreement between Registrant and
Data Translation, Incorporated.
10.10(6) Industrial Lease Agreement, dated November 19, 1996
between Registrant and CNC Grand Union Limited.
10.11(3) 1996 Stock Option Plan, and form of agreements
thereto.
10.12 1996 Supplemental Stock Option Plan, and form of
agreements thereto.
10.13(7) Lease Agreement, dated July 28, 1995, between
Digital Graphics Incorporated and Allied Securities
Co.
22.1 List of subsidiaries of the Registrant.
23.1 Consent of Independent Auditors and Report on
Statement Schedule.
24.1 Power of Attorney (See Page 38).
27.1 Financial Data Schedule.
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 33-83812) as declared
effective by the Commission on November 8, 1994.
(2) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 8-A (Reg. No. 000-24784) as declared
effective by the Commission on February 17, 1997 and as amended by
Amendment No.1 thereto on Form 8-A/A filed on May 19, 1998.
(3) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (Reg. No. 333-74071) as filed on
March 8, 1999.
(4) Incorporated by reference to the exhibits to the Registration Statement
on Form S-3 (File No. 333-84739) filed by the Registrant with the
Securities and Exchange Commission.
(5) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the three months ended September 27, 1996.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the three months ended December 27, 1996.
(7) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the last quarter of the fiscal year ended June
30, 1999.
36
<PAGE>
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedule. See Item 14(a)(2) above.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
By: /s/ MARK L. SANDERS
--------------------------
Mark L. Sanders
President, Chief Executive
Officer and Director
Date: September 22, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark L. Sanders and Arthur D. Chadwick,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MARK L. SANDERS President, Chief Executive Officer and Director September 22, 1999
- ------------------------------- (Principal Executive Officer)
Mark L. Sanders
/s/ ARTHUR D. CHADWICK Vice President, Finance and Administration and September 22, 1999
- ------------------------------- Chief Financial Officer (Principal Financial and
Arthur D. Chadwick Accounting Officer)
/s/ AJAY CHOPRA Chairman of the Board, Vice President, Desktop September 22, 1999
- ------------------------------- Products
Ajay Chopra
/s/ L. GREGORY BALLARD Director September 22, 1999
- -------------------------------
L. Gregory Ballard
38
<PAGE>
/s/ JOHN LEWIS Director September 22, 1999
- -------------------------------
John Lewis
/s/ NYAL D. McMULLIN Director September 22, 1999
- -------------------------------
Nyal D. McMullin
/s/ GLENN E. PENISTEN Director September 22, 1999
- -------------------------------
Glenn E. Penisten
/s/ L. WILLIAM KRAUSE Director September 22, 1999
- -------------------------------
L. William Krause
/s/ CHARLES J. VAUGHN Director September 22, 1999
- -------------------------------
Charles J. Vaughn
</TABLE>
39
<PAGE>
INDEX TO FINANCIAL STATEMENTS
- - Independent Auditors' Report F-2
- - Consolidated Balance Sheets F-3
- - Consolidated Statements of Operations F-4
- - Consolidated Statements of Comprehensive Income (Loss) F-5
- - Consolidated Statements of Cash Flows F-6
- - Consolidated Statements of Shareholders' Equity F-7
- - Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Pinnacle Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Systems,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Mountain View, California
July 22, 1999, except as to Note 5(a), which is as of
August 2, 1999
F-2
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) June 30,
--------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 48,654 $ 47,478
Marketable securities 31,058 39,307
Accounts receivable, less allowance for doubtful
accounts and returns of $5,057 and $4,423 as of
June 30, 1999 and 1998, respectively 35,449 18,459
Inventories 22,221 11,960
Deferred income taxes 10,653 583
Prepaid expenses and other assets 2,500 1,091
--------- ---------
Total current assets 150,535 118,878
Marketable securities 9,266 4,521
Property and equipment, net 10,809 5,411
Goodwill and other intangibles 25,503 3,390
Other assets 356 737
--------- ---------
$ 196,469 $ 132,937
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 12,744 $ 8,143
Accrued expenses 17,466 10,239
--------- ---------
Total current liabilities 30,210 18,382
--------- ---------
Long-term obligations -- 163
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares;
none issued and outstanding -- --
Common stock, no par value; authorized 60,000 shares;
22,763 and 20,146 issued and outstanding as of
June 30, 1999 and 1998, respectively 169,078 133,332
Accumulated deficit (389) (18,825)
Accumulated other comprehensive losses (2,430) (115)
--------- ---------
Total shareholders' equity 166,259 114,392
--------- ---------
$ 196,469 $ 132,937
========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Year ended June 30,
-------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 159,098 $ 105,296 $ 37,482
Cost of sales 74,022 48,715 23,997
--------- --------- ---------
Gross profit 85,076 56,581 13,485
--------- --------- ---------
Operating expenses:
Engineering and product development 16,137 11,652 7,579
Sales and marketing 41,160 29,301 12,667
General and administrative 6,840 5,342 3,702
In-process research and development 6,579 16,960 4,894
--------- --------- ---------
Total operating expenses 70,716 63,255 28,842
--------- --------- ---------
Operating income (loss) 14,360 (6,674) (15,357)
Interest income, net 4,742 3,139 2,867
--------- --------- ---------
Income (loss) before income taxes 19,102 (3,535) (12,490)
Income tax expense (666) (2,685) (2,445)
--------- --------- ---------
Net income (loss) $ 18,436 $ (6,220) $ (14,935)
========= ========= =========
Net income (loss) per share:
Basic $ 0.86 $ (0.35) $ (1.01)
========= ========= =========
Diluted $ 0.79 $ (0.35) $ (1.01)
========= ========= =========
Shares used to compute net income (loss) per share:
Basic 21,390 17,814 14,804
========= ========= =========
Diluted 23,483 17,814 14,804
========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Year ended June 30,
------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 18,436 $ (6,220) $(14,935)
Foreign currency translation adjustment, net of tax(1) (2,315) (115) --
-------- -------- --------
Comprehensive income (loss) $ 16,121 $ (6,335) $(14,935)
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The tax effect of the components of other comprehensive loss is not
significant.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30,
-------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 18,436 $ (6,220) $ (14,935)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
In-process research and development 6,579 16,960 4,894
Depreciation and amortization 4,773 2,679 1,599
Deferred taxes (10,070) (583) 3,245
Tax benefit from exercise of common stock options 6,992 1,987 --
Loss on disposal of property and equipment -- -- 448
Changes in operating assets and liabilities:
Accounts receivable (17,771) (7,472) (3,120)
Inventories (8,281) (4,696) 4,649
Accounts payable 900 4,052 2,460
Accrued expenses (1,431) 2,767 618
Accrued income taxes 1,313 746 (1,130)
Other (1,655) (472) (314)
--------- --------- ---------
Net cash provided by (used in) operating activities (215) 9,748 (1,586)
--------- --------- ---------
Cash flows from investing activities:
Cash acquired (paid) for acquisitions 433 (15,150) (5,270)
Purchases of property and equipment (7,681) (2,469) (3,880)
Purchases of marketable securities (128,831) (53,804) (14,644)
Proceeds from maturity of marketable securities 132,335 25,000 32,908
--------- --------- ---------
Net cash provided by (used in) investing activities (3,744) (46,423) 9,114
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 8,831 51,677 1,041
Purchase of common stock -- -- (3,627)
Repayment of long-term obligations (2,319) (312) --
--------- --------- ---------
Net cash provided by (used in) financing activities 6,512 51,365 (2,586)
--------- --------- ---------
Effects of exchange rate changes on cash (1,377) -- --
Net increase in cash and cash equivalents 1,176 14,690 4,942
Cash and cash equivalents at beginning of year 47,478 32,788 27,846
--------- --------- ---------
Cash and cash equivalents at end of year $ 48,654 $ 47,478 $ 32,788
========= ========= =========
Cash paid during the year:
Interest $ 5 $ 2 $ 11
========= ========= =========
Income taxes $ 1,062 $ 1,839 $ 442
========= ========= =========
Non-cash financing and investing activities:
Common stock issued for acquisition of certain net assets$ 12,089 $ 4,352 $ --
========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common stock Retained other share-
----------------------- Deferred earnings compre- holders'
(In thousands) Shares Amount compensation (deficit) hensive loss equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of June 30, 1996 14,936 $ 77,902 $ (34) $ 2,330 $ -- $ 80,198
Issuance of common stock
related to stock plans 304 1,041 -- -- -- 1,041
Repurchase of common stock (634) (3,627) -- -- -- (3,627)
Amortization of deferred
compensation -- -- 34 -- -- 34
Net loss -- -- -- (14,935) -- (14,935)
--------- --------- --------- --------- --------- ---------
Balances as of June 30, 1997 14,606 $ 75,316 $ -- $ (12,605) $ -- $ 62,711
Issuance of common stock in
secondary public offering, net
of issuance costs of $3,078 4,000 46,922 -- -- -- 46,922
Issuance of common stock
related to stock plans 1,132 4,755 -- -- -- 4,755
Issuance of common stock
related to miro acquisition 408 4,352 -- -- -- 4,352
Tax benefit from common
stock option exercise -- 1,987 -- -- -- 1,987
Net loss -- -- -- (6,220) -- (6,220)
Foreign currency translation adjustment -- -- -- -- (115) (115)
--------- --------- --------- --------- --------- ---------
Balances as of June 30, 1998 20,146 $ 133,332 $ -- $ (18,825) $ (115) $ 114,392
Issuance of common stock
related to miro acquisition 615 7,834 -- -- -- 7,834
Issuance of common stock
related to stock plans 1,177 8,831 -- -- -- 8,831
Issuance of common stock
related to Truevision acquisition 825 12,089 -- -- -- 12,089
Tax benefit from common
stock option exercise -- 6,992 -- -- -- 6,992
Net income -- -- -- 18,436 -- 18,436
Foreign currency translation adjustment -- -- -- -- (2,315) (2,315)
========= ========= ========= ========= ========= =========
Balances as of June 30, 1999 22,763 $ 169,078 $ -- $ (389) $ (2,430) $ 166,259
========= ========= ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of the Company and Significant Accounting Policies
Organization and Operations 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 allow users to
create and distribute digital video content, by using real time video processing
and editing technologies to perform a variety of video post-production and
on-air functions such as the addition of special effects, graphics and titles to
multiple streams of live or recorded video material. To address the broadcast
market, the Company offers high performance, specialized Windows NT-based
solutions for high-end, post-production and broadcast on-air applications. For
the desktop market, the Company provides real time video manipulation and
editing tools to support non-linear, computer-based, editing environments. To
address the consumer market, the Company offers economical, easy to use video
editing solutions that allow consumers to edit their home videos using a
personal computer, camcorder and VCR. Used in conjunction with standard computer
platforms, these technologies provide high quality, cost effective,
computer-based video processing solutions for the post-production and on-air
markets.
Basis of Presentation The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation. The Company's
first three fiscal quarters end on the last Friday in September, December and
March, respectively. For financial statement presentation, the Company has
indicated its fiscal quarters as ending on the last day of the month.
Stock Split On April 15, 1999, the Company announced a two-for-one stock split
of the Company's common shares. This was paid in the form of a 100% stock
distribution on June 4, 1999 to stockholders of record on May 14, 1999.
Accordingly, all share and per share data for prior periods presented have been
restated to reflect the stock split.
Use of Estimates The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Translation of Foreign Currencies The Company considers the functional currency
of its foreign subsidiaries to be the local currency. These functional
currencies are translated into U.S. dollars using exchange rates in effect at
period end for assets and liabilities and average exchange rates during each
reporting period for the results of operations. Adjustments resulting from
translation of foreign subsidiary financial statements are reported within
accumulated other comprehensive income (losses) which is reflected as a separate
component of stockholders' equity. Foreign currency transaction gains and losses
are included in results of operations.
Revenue Recognition The Company recognizes revenue upon shipment of its
products. The Company estimates allowances for sales returns and bad debt based
on analysis and historical experience. The Company offers discounts on purchases
of certain products or on purchasing volume. These are accounted
F-8
<PAGE>
for as offsets to revenue upon shipment. When telephone support is provided at
no additional charge during the product's initial warranty period, and no other
product enhancements or upgrades are provided, the revenue allocated to the
telephone support is recognized at time of product shipment, and the costs of
providing the support are accrued.
Financial Instruments The Company considers all highly liquid investments with a
remaining maturity of three months or less at the date of purchase to be cash
equivalents. The Company maintains its cash balances in various currencies but
primarily in U.S. Dollars and Deutsche Marks. Marketable securities are
instruments that mature within three to eighteen months and consist principally
of U.S. Treasury bills, government agency notes and high-grade commerical paper.
These investments are typically short-term in nature and therefore bear minimal
interest rate risk.
All investments are classified as held-to-maturity and are carried at amortized
cost as the Company has both the positive intent and the ability to hold to
maturity. Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to "Interest income." Due to the
relatively short term until maturity, the fair value of marketable securities is
substantially equal to their carrying value as of June 30, 1999. Such
investments mature through June 2000.
Inventories Inventories are stated at the lower of cost (first-in, first-out) or
market. Raw materials inventory represents purchased materials, components and
assemblies, including fully assembled circuit boards purchased from outside
vendors.
Property and Equipment Purchased property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years. The
Company evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. The amount of any impairment is measured as the difference between the
carrying value and the fair value of the impaired asset. The Company does not
have any long-lived assets it considers to be impaired.
Acquisition-related Intangible Assets Acquisition-related intangible assets
result from the Company's acquisitions of businesses accounted for under the
purchase method and consist of the values of identifiable intangible assets
including completed technology, work force and trade name as well as goodwill.
Goodwill is the amount by which the cost of acquired net assets exceeded the
fair values of those net assets on the date of purchase. Acquisition-related
intangible assets are reported at cost, net of accumulated amortization.
Identifiable intangible assets and goodwill are amortized on a straight-line
basis over their estimated useful lives ranging from three to nine years.
Income Taxes Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Net Income (Loss) Per Share In accordance with SFAS No. 128, "Earnings per
Share" 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.
F-9
<PAGE>
The following is a reconciliation of the shares used in the computation of basic
and diluted EPS (in thousands):
YEAR ENDED JUNE 30,
------------------------
1999 1998 1997
------ ------ ------
Basic EPS - weighted average shares of common
stock outstanding 21,390 17,814 14,804
Effect of dilutive common equivalent shares - stock
options outstanding 2,093 -- --
------ ------ ------
Diluted EPS - weighted average shares and common
equivalent shares outstanding 23,483 17,814 14,804
====== ====== ======
The Company excludes potentially dilutive securities from its diluted net income
(loss) per share computation when either the exercise price of the securities
exceeds the average fair value of the Company's common stock or the Company
reported net losses because their effect would be anti-dilutive. For the fiscal
year ended June 30, 1999, the Company excluded 11,000 employee stock options
from the earnings per share computation as their exercise prices exceeded the
average fair value of the Company's common stock during the year and,
accordingly, their inclusion would have been anti-dilutive. For the fiscal years
ended June 30, 1998 and 1997, the Company excluded 2,024,000 and 1,134,000
employee stock options respectively from the earnings per share computation as
their inclusion would have been anti-dilutive due to the Company's reported net
loss.
Comprehensive Income (Loss) In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes rules for the
reporting of comprehensive income (loss) and its components. The Company's
comprehensive income (loss) includes net income (loss) and foreign currency
translation adjustments.
Recent Pronouncements 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 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 in fiscal 2001. The Company has not
determined the impact that SFAS No. 133 will have on its results of operations.
Stock-Based Compensation The Company accounts for its stock-based compensation
plans using the intrinsic value method. As such, compensation expense is
recorded on the date of grant if the current market price of the underlying
stock exceeds the exercise price.
Concentration of Credit Risk The Company distributes and sells its products to
end users primarily through a combination of independent domestic and
international dealers and original equipment manufacturers ("OEMs"). The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral. The Company maintains reserves for
potential credit losses, but historically has not experienced any significant
losses related to any one business group or geographic area. One customer
accounts for 10.5% of the Company's total revenues. The Company maintains cash
and cash equivalents, short- and long-term investments with various financial
institutions. Company policy is designed to limit exposure with any one
institution. As part of its cash and risk management
F-10
<PAGE>
process, the Company performs periodic evaluations of the relative credit
standing of the financial institutions.
Note 2 Financial Instruments
Marketable Securities The Company's policy is to diversify its investment
portfolio to reduce risk to principal that could arise from credit, geographic
and investment sector risk. At June 30, 1999, investments were placed with a
variety of different financial institutions or other issuers, and no individual
security, financial institution or obligation from a direct issuer exceeded ten
percent of total investments. All investments at June 30, 1999 and 1998 are
classified as held-to-maturity. Investments with a maturity of less than one
year have a rating of A1/P1 or better. Investment with a maturity of more than
one year have a minimum rating of AA/Aa2. The Company's investment portfolio
generally matures within one year or less. Long-term marketable securities have
maturity dates through March 2001. Cash, cash equivalents and short-term and
long-term investments consist of the following:
Gross
(In thousands) Amortized Unrealized
Cost Gain (Loss) Fair Value
-------- ----------- ----------
1999
Cash and cash equivalents
Cash $ 32,604 $ -- $ 32,604
Commercial paper 16,050 1 16,051
-------- -------- --------
$ 48,654 $ 1 $ 48,655
======== ======== ========
Short-term investments
Corporate bonds $ 10,253 $ -- $ 10,253
Commercial paper 14,526 -- 14,526
Governmental agencies 6,279 (7) 6,272
-------- -------- --------
Total short-term investments $ 31,058 $ (7) $ 31,051
======== ======== ========
Long-term investments
Governmental agencies 9,266 (50) 9,216
-------- -------- --------
Total long-term investments $ 9,266 $ (50) $ 9,216
======== ======== ========
1998
Cash and cash equivalents
Cash $ 28,606 $ -- $ 28,606
Commercial paper 18,872 -- 18,872
-------- -------- --------
$ 47,478 $ -- $ 47,478
======== ======== ========
Short-term investments
U.S. treasury notes $ 12,046 $ (24) $ 12,022
Commercial paper 27,261 -- 27,261
-------- -------- --------
Total short-term investments $ 39,307 $ (24) $ 39,283
======== ======== ========
Long-term investments
Corporate bonds $ 1,032 $ -- $ 1,032
Governmental agencies 3,489 -- 3,489
-------- -------- --------
Total long-term investments $ 4,521 $ -- $ 4,521
======== ======== ========
- --------------------------------------------------------------------------------
F-11
<PAGE>
Note 3 Balance Sheet Components
- --------------------------------------------------------------------------------
June 30,
In thousands 1999 1998
-------- --------
- --------------------------------------------------------------------------------
Inventories, net:
Raw materials $ 12,018 $ 6,418
Work in process 4,186 2,946
Finished goods 6,017 2,596
-------- --------
$ 22,221 $ 11,960
======== ========
Property and Equipment:
Machinery and equipment $ 7,685 $ 6,249
Office furniture and fixtures 6,879 2,941
Internal use software 951 0
Construction in progress 1,498 0
-------- --------
$ 17,013 $ 9,190
Accumulated depreciation (6,204) (3,779)
-------- --------
$ 10,809 $ 5,411
======== ========
Accrued expenses:
Payroll and commission related $ 3,067 $ 1,782
Taxes Payable 3,680 1,517
Warranty reserve 1,379 1,086
Other 9,340 5,854
-------- --------
$ 17,466 $ 10,239
======== ========
Note 4 Development of Software for Internal Use
Beginning in January 1999, the Company commenced development and
implementation of a worldwide information system based on enterprise software.
The project is expected to be completed in the quarter ending March 31, 2000. In
January 1999, the Company reached the application development stage of the
software implementation and began capitalizing costs associated with the
project. As of June 30, 1999, the Company had capitalized approximately $1.0
million.
Note 5 Acquisitions
(a) Hewlett-Packard
On June 30, 1999, the Company announced that it had signed a definitive
agreement to purchase certain assets of the Video Communications Division of the
Hewlett-Packard Company ("HP"). Under the terms of the agreement, Pinnacle
Systems would acquire substantially all of the assets of HP's Video
Communications Division, including key technologies and intellectual property,
the Media Stream family of products and selected additional assets, as well as
most managers and employees. On August 2, 1999, the Company completed the
purchase. Pursuant to the terms of the Agreement, the Company paid HP
F-12
<PAGE>
approximately $12.6 million in cash and issued 773,172 shares of Pinnacle's
common stock valued at approximately $19.5 million. Pursuant to a stock
restriction and registration rights agreement entered into by the parties,
Pinnacle filed with the Securities and Exchange Commission a registration
statement on Form S-3 with respect to one-half of the Pinnacle Shares issued to
HP. HP has agreed to certain restrictions with respect to the disposition of the
remainder of such shares.
The Company will account for the HP acquisition as a purchase.
Accordingly, the results of operations and the fair market value of the acquired
assets and assumed liabilities will be included in the financial statements of
the Company as of August 2, 1999. The Company estimates that it will assume
liabilities of approximately $3.0 million and expects to incur approximately
$0.5 million in expenses associated with executing the transaction. The Company
is currently in the process of valuing amounts to be allocated to indentifiable
intangible assets and acquired in-process research and development. These
valuations are being performed by an independent appraiser using established
valuation techniques. Charges for in-process research and development and
amortization of intangibles and goodwill will be included in the Company's
statement of operations for the quarter ending September 30, 1999. Goodwill
represents the amount by which the cost of acquired net assets exceeds the fair
value of the net assets acquired on the date of purchase.
(b) Truevision
On March 12, 1999, the Company acquired all the outstanding common
stock of Truevision, Inc., a supplier of digital video products ("Truevision").
In connection with the acquisition, Pinnacle issued 824,206 shares of common
stock valued at $11.5 million. In addition, Pinnacle issued to Truevision
employees and Directors 139,678 options, valued at $0.7 million, to purchase
common stock at an exercise price of $11.98. The Company also assumed 53,836
warrants valued at $0.1 million. The Company incurred acquisition costs of
approximately $0.5 million for a total purchase price of $12.8 million and
assumed liabilities totaling $13.0 million.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Truevision and the fair
market value of the acquired assets and assumed liabilities have been included
in the financial statements of the Company since March 12, 1999. Goodwill
represents the amount by which the cost of acquired net assets exceeded the fair
values of net assets on the date of purchase. As of June 30, 1999, the Company
has recorded $3.8 million in tangible assets, $6.2 million in in-process
research and development, $2.7 million in other identifiable intangibles
including patents, trademarks and assembled workforce, assumed $13.0 million in
liabilities and allocated $13.2 million to goodwill.
The amounts allocated to identifiable intangible assets and acquired
in-process research and development, were based on results of an independent
appraisal using established valuation techniques.
The portion of the purchase price allocated to in-process research and
development represents development projects that have not yet reached
technological feasibility and have no alternative future use. Technological
feasibility was determined based on: (i) an evaluation of the product's status
in the development process with respect to utilization and contribution of the
individual products as of the date of valuation and (ii) the expected dates in
which the products would be commercialized. It was determined that technological
feasibility was achieved when a product is at beta stage. The value assigned to
purchased in-process research and development was determined by estimating the
costs to develop the purchased in-process research and development into
commercially viable products; estimating the resulting net cash flows from such
projects; discounting the net cash flows back to the time of acquisition using a
discount rate of 35% and then applying an attribution rate based on the
estimated percent complete
F-13
<PAGE>
considering the approximate stage of completion of the in-process technology at
the date of acquisition. Based on this analysis and computation, $6.2 million
was charged to operations at the date of acquisition.
The following unaudited pro forma financial information presents the
combined results of operations of Pinnacle and Truevision as if the acquisition
occurred as of the beginning of the periods presented. The unaudited pro forma
financial information is not necessarily indicative of the combined results of
operations of future periods or the results that actually would have occurred
had Pinnacle and Truevision been a combined company during the specified
periods. The pro forma results include the effects of the amortization of
acquisition-related intangible assets and exclude the charge for the purchased
in-process technology.
(in thousands, except per share amounts)
- -------------------------------------------------------------------
Year Ended June 30,
1999 1998
--------- ---------
Net revenue $ 174,144 $ 141,554
Net income (loss) 13,249 (5,855)
Net income (loss) per common share
-- basic $ 0.60 $ (0.63)
Net income (loss) per common share
-- diluted $ 0.55 $ (0.63)
Weighted average common share
outstanding -- basic 21,966 18,634
Weighted average common share
outstanding -- diluted 24,064 18,634
- -------------------------------------------------------------------
(c) Shoreline
In March 1999, the Company acquired Shoreline Studios, Inc., a provider of
real-time 3D graphics software for use in live broadcasts. The cash price was
$0.8 million including related goodwill of $0.4 million. The transaction was
accounted for by the purchase method of accounting. The results of operations of
Shoreline, Inc.
did not have a material effect on the Company's results of operations.
(d) Miro
In August 1997, the Company acquired the Digital Video Products Group from miro
Computer Products AG. In the acquisition, the Company acquired the miroVIDEO
product line, certain technology and other assets. The Company paid $15.2
million in cash in October 1997, issued 407,130 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 for the year ended June 30, 1998.
To determine the value of the software in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks include the inherent difficulties and
uncertainties in
F-14
<PAGE>
completing the project and thereby achieving technological feasibility and risks
related to the viability of and potential changes in future target markets. As a
result of this analysis, the Company recorded an expense of $17.0 million for in
process research and development on the August 1997 acquisition date.
The terms of the acquisition also 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 615,068 shares of its common stock
to miro Computer Products AG and recorded additional goodwill of $7.8 million to
be amortized into income over nine years using the straight-line method.
Note 6 Commitments and Contingencies
Lease Obligations
As of June 30, 1999, the Company leased facilities and vehicles under
noncancelable operating leases. Future minimum lease payments are as follows (in
thousands):
Year Ending June 30,
2000 $ 2,676
2001 2,376
2002 2,026
2003 1,575
2004 521
Thereafter 211
-------
Total $ 9,385
=======
Rent expense for the years ended June 30, 1999, 1998 and 1997, was $1.8 million,
$1.1 million and $0.8 million respectively.
Legal Actions
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
effect on the Company's consolidated financial position or results of
operations, although there can be no assurance as to the outcome of such
litigation.
Note 7 Shareholders' Equity
Shareholder Rights Plan In December 1996, the Company adopted a Shareholder
Rights Plan pursuant to which one Right was distributed for each outstanding
share of common stock. Each Right entitles stockholders to buy one
one-thousandth of a share of Series A Participating Preferred Stock at an
exercise price of $65.00 upon certain events.
F-15
<PAGE>
The Rights become exercisable if a person acquires 15% or more of the Company's
common stock or announces a tender offer that would result in such person owning
15% or more of the Company's common stock. If the Rights become exercisable, the
holder of each Right (other than the person whose acquisition triggered the
exercisability of the Rights) will be entitled to purchase, at the Right's
then-current exercise price, a number of shares of the Company's common stock
having a market value of twice the exercise price. In addition, if the Company
were to be acquired in a merger or business combination after the Rights became
exercisable, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, common stock of the acquiring company having a
market value of twice the exercise price. The Rights are redeemable by the
Company at a price of $0.001 per Right at any time within ten days after a
person has acquired 15% or more of the Company's common stock.
Note 8 Employee Benefit Plans
Stock Option Plans The Company's 1987 Stock Option Plan (the "1987 Plan")
provides for the grant of both incentive and nonstatutory stock options to
employees, directors and consultants of the Company. Pursuant to the terms of
the 1987 Plan, after April 1997 no further shares are available for future
grants.
In September 1994, the shareholders approved the 1994 Directors' Option Plan
(the "Director Plan"), reserving 200,000 shares of common stock for issuance.
The Plan provides for the granting of nonstatutory stock options to non-employee
directors of the Company. Under the Director Plan, upon joining the Board, each
non-employee director automatically receives an option to purchase 10,000 shares
of the Company's common stock vesting over four years. Following each annual
shareholders' meeting, each non-employee director receives an option to purchase
2,500 shares of the Company's common stock vesting over a twelve month period.
All Director Plan options are granted at an exercise price equal to fair market
value on the date of grant and have a ten-year term. There were 117,500 and
140,000 shares available for grants under the Director Plan at June 30, 1999 and
1998, respectively.
In October 1996, the shareholders approved the 1996 Stock Option Plan (the "1996
Plan"). The 1996 Plan provides for grants of both incentive and nonstatutory
common stock options to employees, directors and consultants to purchase common
stock at a price equal to the fair market value of such shares on the grant
dates. Options pursuant to the 1996 Plan are generally granted for a ten-year
term and generally vest over a four-year period. At June 30, 1999, there were
503,000 shares available for grant under the 1996 Plan. Subject to shareholder
approval at the 1999 annual meeting of shareholders, the Board of Directors
increased the number of shares available for grant by 800,000 shares.
In November 1996, the Board of Directors approved the 1996 Supplemental Stock
Option Plan (the "1996 Supplemental Plan). The 1996 Supplemental Plan provides
for grants of non-statutory common stock options to employees and consultants
other than officers and directors at a price determined by the Board of
Directors. Options pursuant to the 1996 Supplemental Plan are generally granted
for a ten-year term and generally vest over a four-year period. At June 30,
1999, there were no shares available for grant under the 1996 Supplemental Plan.
In July 1999, the Board of Directors approved an increase in the number of
shares available for exercise by 1,500,000. This increase will be used primarily
for grants to the employees hired pursuant to the acquisition of certain of the
assets of the Video Communications Division of Hewlett-Packard Company.
In addition to the above mentioned plans, an officer of the Company holds
197,586 options at an exercise price of $1.13, all of which are outside of the
Plan and were exercisable as of June 30, 1999. Also, pursuant to the acquisition
of Truevision, a former officer of Truvision holds 22,536 warrants to purchase
the Company's common stock at $11.98 per share.
F-16
<PAGE>
Stock option activity under these employee and director option plans was as
follows:
Weighted
Average
Available Options Exercise
(shares in thousands) For Grant Outstanding Price
- --------------------------------------------------------------------------------
Balance at June 30, 1996 400 2,516 $ 5.25
Additional shares reserved 1,440 -- --
Exercised -- (162) $ 2.36
Granted (1,416) 1,416 $ 5.61
Canceled 454 (496) $ 7.71
- --------------------------------------------------------------------------------
Balance at June 30, 1997 878 3,274 $ 5.18
Additional shares reserved 1,730 -- --
Exercised -- (906) $ 3.88
Granted (2,358) 2,358 $ 11.39
Canceled 436 (532) $ 9.09
- --------------------------------------------------------------------------------
Balance at June 30, 1998 686 4,194 $ 8.44
Additional shares reserved 1,600 -- --
Exercised -- (953) $ 7.28
Granted (1,948) 1,948 $ 14.98
Assumed from Truevision acquisition -- 140 $ 11.98
Canceled 284 (326) $ 11.33
- --------------------------------------------------------------------------------
Balance at June 30, 1999 622 5,003 $ 11.13
Assumptions used with the Black-Scholes Option-Pricing Model were as follows:
for fiscal 1999, a stock price volatility of 57.0%, no expected dividends, an
average risk-free interest rate of 4.93% and an average expected option term of
3.4 years; for fiscal 1998, a stock price volatility of 55.5%, no expected
dividends, an average risk-free interest rate of 5.80% and an average expected
option term of 4.4 years; and for fiscal 1997, a stock price volatility of
55.5%, no expected dividends, an average risk-free interest rate of 6.01% and an
average expected option term of 4.5 years. The weighted average fair value of
options granted for the fiscal years ended June 30, 1999, 1998 and 1997 was
$6.64, $5.76 and $2.88 respectively.
F-17
<PAGE>
<TABLE>
The following table summarizes stock options outstanding and exercisable at June
30, 1999.
<CAPTION>
Outstanding Exercisable
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Shares Remaining Exercise Shares Exercise
Price Range (In thousands) Life in years Price (In thousands) Price
- ----------- -------------- ------------- ----- -------------- -----
<S> <C> <C> <C> <C> <C>
$ 0.43 to 8.00 1,313 6.4 $ 5.14 823 $ 4.73
$ 8.50 to 10.31 1,308 8.5 $10.00 334 $ 9.71
$11.00 to 15.13 1,252 8.6 $12.81 356 $12.32
$15.88 to 34.45 1,130 9.6 $17.53 49 $16.51
- ------------------------------------------------------------------------------------------------------------
Total 5,003 8.2 $11.13 1,562 $ 7.90
</TABLE>
Had compensation expense for the Company's stock based compensation plans been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation" the Company's net income (loss) and net income (loss) per share
would have been as follows (in thousands except per share data):
Year ended June 30,
---------------------------------------------
1999 1998 1997
-------- --------- ---------
Net Income (loss);
As reported $ 18,436 $ (6,220) $ (14,935)
Pro forma $ 10,922 $ (12,100) $ (17,245)
Earnings per share:
Basic--As reported $ .86 $ (0.35) $ (1.01)
--Pro forma $ .51 $ (0.68) $ (1.17)
Diluted--As reported $ .79 $ (0.35) $ (1.01)
--Pro forma $ .47 $ (0.68) $ (1.17)
Stock Purchase Plan The Company has a 1994 Employee Stock Purchase Plan (the
"Purchase Plan") under which all eligible employees may acquire common stock at
the lesser of 85% of the closing sales price of the stock at specific,
predetermined dates. In October 1998, the shareholders increased the number of
shares authorized to be issued under the plan to 1,300,000 shares, of which
623,550 were available for issuance at June 30, 1999. The shareholders also
approved annual increases to the plan of the lesser of 600,000 shares or 2% of
the Company's outstanding shares of common stock. Employees purchased 224,000,
226,000 and 154,000 shares for the years ended June 30, 1999, 1998 and 1997,
respectively. The fair value of employees' stock purchase rights under the
Purchase Plan was estimated using the Black-Scholes model with the following
weighted average assumptions used for purchases in each of the following fiscal
years ended June 30,:
1999 1998 1997
---- ---- ----
Risk-free interest rate 4.8% 5.5% 5.9%
Expected life (in years) 0.5 0.5 0.5
Expected volatility 57.0% 55.5% 55.5%
F-18
<PAGE>
Retirement Plan The Company has a defined contribution 401(k) plan covering
substantially all of its domestic employees. Participants may elect to
contribute up to 15% of their eligible earnings to this plan (up to the
statutory maximum amount). The Company can make discretionary contributions to
the plan determined solely by the Board of Directors. The Company has not made
any such contributions to the plan to date.
Note 9 Income Taxes
A summary of the components of income tax expense follow (in thousands):
Year ended June 30,
--------------------------------
1999 1998 1997
-------- -------- --------
Current:
Federal $ 2,260 $ 1,511 $ (841)
State 2 120 5
Foreign 1,482 771 36
Less: benefit of net operating losses -- (1,121) --
-------- -------- --------
Total current 3,744 1,281 (800)
Deferred:
Federal (8,427) (583) 2,467
State (2,031) -- --
Foreign 388 -- 778
-------- -------- --------
Total deferred (10,070) (583) 3,245
Charge in lieu of taxes attributed to
employer stock option plans 6,992 1,987 --
-------- -------- --------
Total tax expense $ 666 $ 2,685 $ 2,445
======== ======== ========
- --------------------------------------------------------------------------------
<TABLE>
Total income tax expense differs from expected income tax expense (computed by
applying the U.S. federal corporate income tax rate of 35% for the year ended
June 30, 1999 and 34% for the years ended June 30, 1998 and 1997 to profit
(loss) before taxes) as follows (in thousands):
<CAPTION>
Year ended June 30,
---------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate $ 6,685 $(1,202) $(4,246)
State income taxes, net of federal income tax benefits 505 228 5
Unutilized net operating loss -- -- 3,305
Foreign tax rate differentials 288 182 --
Research tax credit (333) (430) --
Change in beginning of the year valuation allowance (6,400) 3,714 3,245
Other, net (79) 193 136
------- ------- -------
$ 666 $ 2,685 $ 2,445
======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
<TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities as of June 30, 1999, 1998
and 1997, are as follows (in thousands):
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30,
------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accrued expense and reserves $ 2,973 $ 3,873 $ 3,965
Acquired intangibles 12,787 9,614 3,410
Net operating loss carry forwards -- -- 1,121
Tax credit carry forwards 1,346 1,861 1,225
Other 132 60 53
-------- -------- --------
Total gross deferred tax assets 17,238 15,408 9,774
Less: valuation allowance (6,197) (14,385) (9,243)
-------- -------- --------
Net deferred tax assets 11,041 1,023 531
-------- -------- --------
Deferred tax liabilities:
Accumulated domestic international
sales corporation income (388) (440) (503)
Fixed assets and other assets -- -- (28)
-------- -------- --------
Total gross deferred tax liabilities (388) (440) (531)
-------- -------- --------
Net deferred tax assets $ 10,653 $ 583 $ --
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has provided a valuation allowance for a portion of its deferred tax
assets as it is presently unable to conclude that all of the deferred tax assets
are more likely than not to be realized. Total valuation allowance was $6.2
million, $14.4 million, and $9.2 million as of June 30, 1999, June 30, 1998, and
June 30, 1997, respectively. During fiscal year 1999, the valuation allowance
decreased by $8.2 million. Approximately $6.9 million was credited to additional
paid-in capital for tax benefits related to disqualifying dispositions of stock
options.
As of June 30, 1999, the Company has federal research and experimentation
carryforwards of $0.7 million which expire between 2012 and 2014, and state
research and experimentation credit carryforwards of $.06 million which have no
expiration provision.
As of June 30, 1999, the cumulative amount of unremitted earnings of non-U.S
subsidiaries on which the Company had not provided U.S taxes approximated $4.5
million. The additional taxes that could arise if those earnings were to be
remitted to the U.S would not be material. It is management's intent that these
earnings remain indefinitely invested.
Note 10 Segment Information
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131), which is effective for
periods beginning after December 15, 1997. SFAS No. 131 requires that public
business enterprises report certain information about operating segments in
annual and interim financial statements filed with the SEC and issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Operating segments
are defined as components
F-20
<PAGE>
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing their performance.
The Company's organizational structure is based on three strategic business
groups that sell various products into the principle markets which the Company's
products are sold. These business units equate to three reportable segments:
Broadcast, Desktop or Professional, and Consumer . The Company's chief operating
decision maker ("CODM") reviews financial information presented on a
consolidated basis, accompanied by disaggregated information by business group
for purposes of making operating decisions and assessing financial performance.
The CODM evaluates the performance of the business groups based on revenues and
operating income before income taxes, interest income, interest expenses, and
other income, excluding the effects of nonrecurring charges including in process
research and development. Common costs not directly attributable to a particular
business group are allocated among segments based on management's best
estimates, including an allocation of depreciation expense without a
corresponding allocation of the related assets. Although the Company does
include depreciation expense in its segmented information, amounts allocated to
each business group are insignificant. The Company is not capital intensive as a
significant portion of its property and equipment is composed of leasehold
improvements and aggregate depreciation is approximately 2% of sales. The
Company does not present assets of the business groups as part of the assessment
of performance. Therefore such information is not being disclosed.
For the fiscal year ended June 30, 1997 and prior, the Company managed the
business and evaluated its performance on a consolidated basis. The Company did
not assess performance by business group and therefore did not produce such
statements of operations. Therefore information of this kind has been omitted
for the fiscal year ended June 30, 1997. The following is a summary of the
Company's operations by operating segment for the fiscal periods ended June 30,
1999 and 1998 (in thousands):
1999 1998
--------- ---------
Broadcast:
Revenues $ 26,917 $ 25,521
Gross profit 15,483 15,309
Operating income (loss) $ (2,398) $ 508
Desktop:
Revenues $ 89,798 $ 60,335
Gross profit 53,430 35,403
Operating income $ 20,352 $ 17,355
Consumer:
Revenues $ 42,383 $ 19,440
Gross profit 15,803 5,869
Operating income (loss) $ 1,985 $ (7,577)
Consolidated:
Revenues $ 159,098 $ 105,296
Gross profit 85,076 56,581
Operating income $ 20,939 $ 10,286
F-21
<PAGE>
The following table reconciles revenues and operating income (loss) to total
consolidated amounts for the years ended June 30, 1999 and 1998 (in thousands):
1999 1998
-------- --------
Total operating income for reportable segments $ 20,939 $ 10,286
Unallocated amounts:
In process research and development (6,579) (16,960)
-------- --------
Consolidated operating income (loss) $ 14,360 $ (6,674)
======== ========
The Company markets its products in North America and in foreign countries
through its sales personnel, dealers, distributors and subsidiaries. Export
sales account for a significant portion of the Company's net sales. The
following table presents a summary of revenue and long-lived assets by
geographic region for years ended June 30 (in thousands):
1999 1998 1997
-------- -------- --------
Revenues
- --------
North America (US and Canada) $ 62,393 $ 44,621 $ 22,603
Germany 20,430 9,596 692
Spain, Great Britain, Italy 19,103 8,585 1,007
France 12,501 6,753 2,368
Other foreign countries 44,671 35,741 10,812
-------- -------- --------
Total $159,098 $105,296 $ 37,482
======== ======== ========
Long-lived assets
- -----------------
North America (US and Canada) $ 22,006 $ 13,071 $ 9,539
Germany 9,715 3,834 --
Other foreign countries 1,309 466 353
-------- -------- --------
$ 33,030 $ 17,371 $ 9,892
======== ======== ========
Avid Technology, Inc. (Avid) accounted for approximately 6.8%, 10.7%, and 26.4%
of the Company's net sales for the years ended June 30, 1999, 1998, and 1997
respectively. Sales to Avid are included in the Company's desktop business
segment. Ingram Micro Inc. accounted for approximately 10.5% of the company's
net sales for the years ended June 30, 1999 and 1998. Sales to Ingram are
included in both the Company's desktop and consumer business segments.
In addition, Avid accounted for approximately 5.7%, 8.1% and 20.0% of net
accounts receivable at June 30, 1999, 1998, and 1997, respectively. Ingram Micro
Inc. accounted for 23.2% and 18.5 % of net account receivable at June 30, 1999
and 1998, respectively.
Note 11 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
F-22
<PAGE>
Company is also a director of Bell. During the years ended June 30, 1999, 1998
and 1997, the Company purchased materials totaling $11.3 million, $4.0 million
and $4.5 million respectively, from Bell pursuant to the Agreement.
Note 12 Supplemental Cash Flow Information
The following table reflects supplemental cash flow from investing activities
related to the Truevision and Shoreline acquisitions.
Fair value of: Truevision Shoreline Total
- -------------- ---------- --------- -----
Assets acquired and goodwill $ 24,981 $ 754 $ 25,735
Liabilities assumed (13,062) (250) (13,312)
Common stock, stock options
and warrants issued (12,856) -- (12,856)
-------- -------- --------
Cash paid -- 504 504
Cash acquired (937) (937)
-------- -------- --------
Net cash (received) paid on acquisitions $ (937) $ 504 $ (433)
======== ======== ========
F-23
<PAGE>
Note 13 Quarterly Financial Data (Unaudited)
<TABLE>
Summarized quarterly financial information for fiscal 1999 and 1998 is as
follows (in thousands except for per share data amounts):
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999:
- ------------
Net sales $ 32,273 $ 39,172 $ 40,147 $ 47,506
Gross profit 17,260 20,975 21,705 25,135
In process research and development -- -- 6,579 --
Income (loss) from operations 3,863 5,176 (1,127) 6,447
Net income 4,008 5,040 8 9,378
Net income per share
- basic 0.20 0.24 0.00 0.42
- diluted 0.18 0.22 0.00 0.37
Shares used to compute
net income per share
- basic 20,404 21,048 21,542 22,580
- diluted 22,226 23,002 23,854 25,327
Fiscal 1998:
- ------------
Net sales $ 16,514 $ 27,881 $ 29,332 $ 31,569
Gross profit 8,778 14,764 15,701 17,338
In process research and development 16,960 -- -- --
Income (loss) from operations (16,746) 2,550 3,134 4,388
Net income (loss) (16,347) 2,453 3,328 4,346
Net income (loss) per share
- basic (1.11) 0.15 0.17 0.22
- diluted (1.11) 0.13 0.16 0.20
Shares used to compute
net income (loss) per share
- basic 14,804 16,928 19,560 19,986
- diluted 14,804 18,646 21,620 22,246
</TABLE>
F-24
<PAGE>
Schedule II - Valuation and Qualifying Accounts (in thousands)
Balance at Balance at
beginning of end of
period period
-------------- --------------
Year ended June 30, 1999
Allowance for bad debt 1,469 1,899 (a)
Sales return allowances 2,954 3,158 (b)
Inventory obsolescence 3,112 5,719 (c)
Year ended June 30, 1998
Allowance for bad debt 800 1,469
Sales return allowances 954 2,954
Inventory obsolescence 5,728 3,112
Year ended June 30, 1997
Allowance for bad debt 495 800
Sales return allowances 345 954
Inventory obsolescence 1,800 5,728
(a) Ending amount includes an accrued balance of $0.3 million recorded upon the
acquisition of Truevision, Inc.
(b) Ending amount includes an accrued balance of $0.9 million recorded upon the
acquisition of Truevision, Inc.
(c) Ending amount includes an accrued balance of $2.3 million recorded upon the
acquisition of Truevision, Inc.
PINNACLE SYSTEMS, INC.
1996 SUPPLEMENTAL STOCK OPTION PLAN
(As amended September 1, 1999)
1. Purposes of the Plan. The purposes of this Supplemental Stock Option
Plan are:
o to attract and retain the best available personnel for
positions of substantial responsibility,
o to provide additional incentive to Employees and
Consultants, and
o to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees
as shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as
amended.
(e) "Committee" means a committee of Directors appointed by
the Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Pinnacle Systems, Inc., a California
corporation.
(h) "Consultant" means any person, including an advisor,
engaged by the Company or a Parent or Subsidiary to render services to such
entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, excluding Officers, employed
by the Company or any Parent or Subsidiary of the Company. A Service Provider
shall not cease to be an Employee in the case of (i) any leave of absence
approved by the Company or (ii) transfers between locations of the Company or
between the Company, its Parent, any Subsidiary, or any successor. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted
pursuant to the Plan, that is not intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(q) "Option Agreement" means an agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(r) "Option Exchange Program" means a program whereby
outstanding options are surrendered in exchange for options with a lower
exercise price.
-2-
<PAGE>
(s) "Optioned Stock" means the Common Stock subject to an
Option.
(t) "Optionee" means the holder of an outstanding Option
granted under the Plan.
(u) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1996 Supplemental Stock Option Plan.
(w) "Service Provider" means an Employee or Consultant who is
not also a Director or Officer.
(x) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 3,800,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. Administration of the Plan.
(a) The Plan shall be administered by (A) the Board or (B) a
Committee, which committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of
the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock;
(ii) to select the Service Providers to whom Options
may be granted hereunder;
(iii) to determine whether and to what extent Options
are granted hereunder;
(iv) to determine the number of shares of Common
Stock to be covered by each Option granted hereunder;
-3-
<PAGE>
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to
the then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(xi) to modify or amend each Option (subject to
Section 14(b) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(xii) to authorize any person to execute on behalf of
the Company any instrument required to effect the grant of an Option or
previously granted by the Administrator;
(xiii) to determine the terms and restrictions
applicable to Options;
(xiv) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable; and
(xv) to make all other determinations deemed
necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
-4-
<PAGE>
5. Eligibility. Options may be granted to Service Providers other than
Officers (except as set forth herein) and Directors. Officers shall not be
eligible to receive Options under this Plan; provided, however, that Options may
be granted to an Officer not previously employed by the Company, as an
inducement essential to the individual's entering into an employment contract
with the Company.
6. Limitation. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for ten (10) years, unless sooner
terminated under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the
Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option
is granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied before
the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine
the acceptable form of consideration for exercising an Option, including the
method of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company
liability to the Optionee, including any liability attributable to the
Optionee's participation in any Company-sponsored deferred compensation program
or arrangement;
-5-
<PAGE>
(vii) such other consideration and method of payment
for the issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of
payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable according to the terms of the Plan
and at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a
Service Provider as a result of the Optionee's Disability, the Optionee may
exercise his or her Option within such period of time as is specified in the
Option Agreement, to the extent the Option is vested on the date of
-6-
<PAGE>
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's estate or
by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Option previously granted based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Non-Transferability of Options. Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made
-7-
<PAGE>
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company, each outstanding Option shall be assumed or an
equivalent option or right substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option, the Optionee shall
fully vest in and have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option shall be fully vested and exercisable for a period of fifteen (15) days
from the date of such notice, and the Option shall terminate upon the expiration
of such period. For the purposes of this paragraph, the Option shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned
Stock, immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the merger or
sale of assets by holders of Common Stock for each Share held on the effective
date of the transaction (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger or
sale of assets is not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option,
for each Share of Optioned Stock to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
-8-
<PAGE>
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee and
the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to options
granted under the Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares shall comply with Applicable Laws and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise
of an Option the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-9-
<PAGE>
1996 SUPPLEMENTAL STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number ___________________________
Date of Grant ___________________________
Vesting Commencement Date ___________________________
Exercise Price per Share $__________________________
Total Number of Shares Granted ___________________________
Total Exercise Price $__________________________
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: ___________________________
Vesting Schedule:
Subject to the Optionee continuing to be a Service Provider on such
dates, this Option shall vest and become exercisable in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest twelve months after
the Vesting Commencement Date, and 1/48th of the Shares subject to the Option
shall vest upon the last day of each month thereafter, beginning with the first
full quarter after the one year anniversary of the Vesting Commencement Date.
<PAGE>
Termination Period:
This Option may be exercised for three (3) months after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 14(b) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery
of an exercise notice, in the form attached as Exhibit A (the "Exercise
Notice"), which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the Company pursuant to the provisions of the Plan. The Exercise Notice shall be
completed by the Optionee and delivered to the Secretary of the Company. The
Exercise Notice shall be accompanied by payment of the aggregate Exercise Price
as to all Exercised Shares. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied by
such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with Applicable Laws. Assuming
such compliance, for income tax purposes the Exercised Shares shall be
considered transferred to the Optionee on the date the Option is exercised with
respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) promissory note; or
-2-
<PAGE>
(d) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(e) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
(f) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement; or
(g) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular
federal income tax liability upon exercise of an NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
-3-
<PAGE>
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: PINNACLE SYSTEMS, INC.
______________________________ ______________________________
Signature By
______________________________ ______________________________
Print Name Title
______________________________
Residence Address
______________________________
-4-
<PAGE>
EXHIBIT A
1996 SUPPLEMENTAL STOCK OPTION PLAN
EXERCISE NOTICE
Pinnacle Systems, Inc.
280 N. Bernardo Avenue
Mountain View, CA 94043
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________, 199__,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Pinnacle Systems, Inc. (the "Company")
under and pursuant to the 1996 Supplemental Stock Option Plan (the "Plan") and
the Stock Option Agreement dated, 19___ (the "Option Agreement"). The purchase
price for the Shares shall be $, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
<PAGE>
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
OPTIONEE: PINNACLE SYSTEMS, INC.
______________________________ ______________________________
Signature By
______________________________ ______________________________
Print Name Title
______________________________
Date Received
Address: Address:
- -------- --------
______________________________ 280 N. Bernardo Avenue
Mountain View, CA 94043
______________________________
-2-
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 22.1--LIST OF SUBSIDIARIES OF THE REGISTRANT
1. Pinnacle Domestic International Sales Corporation, a California
Corporation
2. Pinnacle Systems Ltd., a United Kingdom Incorporated Company
3. Pinnacle Foreign Sales Corporation, U.S. Virgin Islands Corporation
4. PS Miro, Inc., a California Corporation
5. Pinnacle Systems C.V., a limited partnership formed under the laws of
the Netherlands
6. Pinnacle Systems GmbH, a corporation organized under the laws of
Germany
7. Miro Computer Products B.V., a corporation organized under the laws of
the Netherlands
8. Miro Computer Products S.A.R.L., a corporation organized under the laws
of France
9. Bernardo Merger Corporation, a Delaware Corporation
10. Truevision, Inc. , a Delaware Corporation
11. RasterOps GmbH, a corporation organized under the laws of Germany
12. RasterOps B.V., a corporation organized under the laws of the
Netherlands
13. Truevision France SARL, a corporation organized under the laws of
France
14. RasterOps U.K. Limited, a United Kingdom Incorporated Company
15. RasterOps Foreign Sales Corporation, a Barbados Corporation
Report on Financial Statement Schedule and Consent of Independent Auditors
The Board of Directors and Shareholders
Pinnacle Systems, Inc.:
The audits referred to in our report dated July 22, 1999, except as to Note
5(a), which is as of August 2, 1999, included the related financial statement
schedule as of June 30, 1999, and for each of the years in the three-year period
ended June 30, 1999, included in the annual report on Form 10-K for the year
ended June 30, 1999. This financial statement schedule is the responsiblity of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth herein.
We consent to incorporation by reference in the registration statements (Nos.
33-89706, 333-25697, 333-16999, 333-34759, 333-63759, 333-74071, 333-75117,
333-75935, 333-84739, and 333-85895) on Forms S-8 and S-3 of Pinnacle Systems
Inc. of our report dated July 22, 1999, except as to Note 5(a), which is as of
August 2, 1999, relating to the consolidated balance sheets of Pinnacle Systems,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, comprehensive income, shareholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1999, and
the related schedule, which report appears in the June 30, 1999, annual report
on Form 10-K of Pinnacle Systems, Inc.
KMPG LLP
Mountain View, California
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 48,654,000
<SECURITIES> 40,324,000
<RECEIVABLES> 35,449,000
<ALLOWANCES> 5,057,000
<INVENTORY> 22,221,000
<CURRENT-ASSETS> 150,535,000
<PP&E> 17,013,000
<DEPRECIATION> 6,204,000
<TOTAL-ASSETS> 196,469,000
<CURRENT-LIABILITIES> 30,210,000
<BONDS> 0
0
0
<COMMON> 169,078,000
<OTHER-SE> (2,819,000)
<TOTAL-LIABILITY-AND-EQUITY> 196,469,000
<SALES> 159,098,000
<TOTAL-REVENUES> 159,098,000
<CGS> 74,022,000
<TOTAL-COSTS> 74,022,000
<OTHER-EXPENSES> 70,716,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,742,000)
<INCOME-PRETAX> 19,102,000
<INCOME-TAX> 666,000
<INCOME-CONTINUING> 18,436,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,436,000
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.79
</TABLE>
