UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 No. 0-24784
PINNACLE SYSTEMS, INC.
----------------------
(Exact name of Registrant as specified in its charter)
California
------------------------------- 94-3003809
(State or other jurisdiction of -------------------------------------
incorporation or organization) (I.R.S. Employer Identification No.)
280 N. Bernardo Ave.
Mountain View, CA 94043
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(650) 237-1600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares of common stock outstanding as of November 8, 1999 was
23,874,552.
Page 1
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - September 30,
1999 and June 30, 1999 3
Condensed Consolidated Statements of Operations -
Three Months Ended - September 30, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive
Income Three Months Ended - September 30, 1999 and
1998 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended - September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3 - Quantitative and Qualitative Disclosures About Market
Risk 22
PART II - OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds 24
ITEM 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, June 30,
1999 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,266 $ 48,654
Marketable securities 25,721 31,058
Accounts receivable, net 42,874 35,442
Purchased receivables and other, net 3,440 7
Inventories 25,533 22,221
Deferred income taxes 10,653 10,653
Prepaid expenses and other assets 2,151 2,500
--------- ---------
Total current assets 149,638 150,535
Marketable securities 8,298 9,266
Property and equipment, net 13,244 10,809
Goodwill and other intangibles 54,378 25,503
Other assets 701 356
--------- ---------
$ 226,259 $ 196,469
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 12,354 $ 12,744
Accrued expenses 16,575 14,530
Accrued income taxes 2,799 2,936
--------- ---------
Total current liabilities 31,728 30,210
--------- ---------
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares;
none issued and outstanding -- --
Common stock, no par value; authorized 60,000 shares;
23,766 and 22,763 issued and outstanding as of
September 30 and June 30, 1999, respectively 193,443 169,078
Retained earnings (accumulated deficit) 2,401 (389)
Accumulated other comprehensive losses (1,313) (2,430)
--------- ---------
Total shareholders' equity 194,531 166,259
--------- ---------
$ 226,259 $ 196,469
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 50,447 $ 32,273
Cost of sales 22,300 15,013
-------- --------
Gross profit 28,147 17,260
-------- --------
Operating expenses:
Engineering and product development 5,969 3,301
Sales and marketing 11,726 8,312
General and administrative 2,711 1,509
Amortization of acquisition related intangible assets 3,061 275
In-process research and development 2,000 --
-------- --------
Total operating expenses 25,467 13,397
-------- --------
Operating income 2,680 3,863
Interest income and other, net 807 1,147
-------- --------
Income before income taxes 3,487 5,010
Income tax expense (697) (1,002)
-------- --------
Net income $ 2,790 $ 4,008
======== ========
Net income per share
Basic $ 0.12 $ 0.20
======== ========
Diluted $ 0.11 $ 0.18
======== ========
Shares used to compute net income per share
Basic 23,300 20,404
======== ========
Diluted 26,492 22,226
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
September 30,
1999 1998
------ ------
Net income $2,790 $4,008
Foreign currency translation adjustment 1,117 846
------ ------
Comprehensive income $3,907 $4,854
====== ======
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,790 $ 4,008
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
In-process research and development 2,000 --
Depreciation and amortization 3,890 1,039
Changes in operating assets and liabilities:
Accounts receivable (6,572) (2,401)
Inventories (4,024) (1,069)
Accounts payable (377) 1,010
Accrued expenses (1,560) 542
Accrued income taxes 1,105 983
Other 34 (64)
-------- --------
Net cash provided (used) by operating activities (2,714) 4,048
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,927) (1,946)
Cash paid for acquisitions (12,597) --
Net proceeds (payments) from maturity (purchase) of marketable securities 6,305 (19,742)
-------- --------
Net cash used in investing activities (9,219) (21,688)
-------- --------
Cash flows from financing activities:
Payments on note payable (82) (75)
Proceeds from issuance of common stock 2,193 622
-------- --------
Net cash used in financing activities 2,111 547
-------- --------
Effects of exchange rate changes on cash 434 544
-------- --------
Net decrease in cash and cash equivalents (9,388) (16,549)
Cash and cash equivalents at beginning of period 48,654 47,478
-------- --------
Cash and cash equivalents at end of period $ 39,266 $ 30,929
======== ========
Non-cash transactions:
Common stock issued in business acquisitions $ 20,632 $ 7,834
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
Notes To Condensed Consolidated Financial Statements
1. General
The accompanying condensed consolidated financial statements include
the accounts of Pinnacle Systems, Inc. and its wholly owned subsidiaries
("Pinnacle" or the "Company"). Intercompany transactions and related balances
have been eliminated in consolidation. These financial statements have been
prepared in conformity with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reported periods. The
most significant estimates included in these financial statements include
accounts receivable and sales allowances, inventory valuation and the income tax
valuation allowance. Actual results could differ from those estimates. These
condensed consolidated financial statements reflect all adjustments that, in the
opinion of management, are necessary for a fair statement of the consolidated
financial position, results of operations and cash flows as of and for the
interim periods. Such adjustments consist of items of a normal recurring nature.
Certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain prior period amounts have been
reclassified to conform to the current period's presentation.
The condensed consolidated financial statements included herein should
be read in conjunction with the financial statements and notes thereto, which
include information as to significant accounting policies, for the fiscal year
ended June 30, 1999 included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 27, 1999. Results
of operations for interim periods are not necessarily indicative of results for
a full year.
Currency Translation
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 the translation of
foreign subsidiary financial statements are reported within accumulated other
comprehensive losses which is reflected as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included in results of
operations.
Comprehensive Income (Loss)
The Company's comprehensive income (loss) includes net income and
foreign currency translation adjustments.
Recent Accounting 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 its fiscal year ending June 30, 2001. The Company
has not determined the impact that SFAS No. 133 will have on its results of
operations.
7
<PAGE>
2. Acquisitions
Hewlett-Packard
On August 2, 1999, the Company completed the purchase of the Video
Communications Division ("VID") of the Hewlett-Packard Company ("HP"). Under the
terms of an asset purchase agreement dated June 30, 1999, Pinnacle Systems
acquired substantially all of the assets of HP's Video Communications Division,
including key technologies and intellectual property, the MediaStream family of
products and selected additional assets, as well as most managers and employees.
In consideration, Pinnacle paid HP $12.6 million in cash and issued 773,172
shares of its common stock valued at $20.6 million. The Company incurred
acquisition costs of approximately $0.4 million for a total purchase price of
$33.6 million and assumed liabilities totaling $4.7 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 acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of VID and the fair market
value of the acquired assets and assumed liabilities have been included in the
financial statements of the Company as of August 2, 1999. As of August 2, 1999,
the Company recorded $4.4 million in assets, $2.0 million in in-process research
and development, $19.1 million in other identifiable intangibles including
core/developed technology, customer base, trademarks and assembled workforce,
assumed $4.7 million in liabilities and allocated $12.8 million to goodwill.
Goodwill represents the amount by which the cost of acquired net assets exceeds
the fair values of the net assets on the date of purchase. Goodwill and other
intangibles are being amortized using the straight-line method over periods
ranging from six months to five years.
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 in the high-technology
industry. Such allocations, as well as those made to the remaining net assets,
are preliminary and subject to further analysis. Subsequent changes to the
purchase price allocation, if any, will be recorded as adjustments to goodwill.
APB 16 requires the preparation of pro-form condensed statements of
operations. Pro-forma statements are intended to represent historical financial
statements as though a current event occurred at an earlier date. Separate,
historical statements of operations of VID were never prepared by HP due to the
de minimus nature of the VID business in proportion to HP as a whole. Thus, in
order to derive such historical pro-forma information, Pinnacle would need to
make assumptions based on its current and forward-looking estimates. Such
estimates could bear little relation to historical reality and could be
misleading. Therefore, disclosure of such pro-forma condensed statements of
operations have been omitted.
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 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 as of 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
recorded $3.8 million in 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. Goodwill and other intangibles are being
amortized using the straight-line method over periods ranging from three to
seven years.
8
<PAGE>
The following table presents unaudited pro forma information as if
Pinnacle and Truevision had been combined as of the beginning of the three month
period ended September 30, 1998. The pro forma data are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have resulted had Pinnacle and Truevision been a combined
company during said period. The pro forma results include the effects of the
purchase price allocation from amortization of acquisition-related intangible
assets and exclude the charge for the purchased in-process technology.
Pro Forma Unaudited
(in thousands, except per share amounts)
Quarter Ended
September 30, 1998
-------------------
Net revenue $ 39,860
Net income 3,188
Net income per common share - basic $ 0.15
Net income per common share - diluted $ 0.14
Weighted average common share outstanding - basic 21,222
Weighted average common share outstanding - diluted 23,044
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 $754,000 including related goodwill of $375,000. The transaction was
accounted for by the purchase method of accounting. Pro forma comparative
results of operations are not presented because they are not material to the
Company's consolidated results.
Analysis of In-Process Research and Development
The portion of the Hewlett-Packard, Truevision and Shoreline purchase
prices allocated to in-process research and development represent 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 products 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; discounting the net
cash flows back to the time of acquisition and applying an attribution rate
based on the estimated percent complete considering the approximate stage of
completion of the in-process technology at the date of acquisition. Based on
this analyses and computations, $2.0 million, $6.2 million and $0.4 million was
charged to operations at the date of acquisition for the Hewlett-Packard,
Truevision and Shoreline acquisitions, respectively.
9
<PAGE>
3. Supplemental Cash Flow Information
<TABLE>
The following table reflects supplemental cash flow from investing
activities related to the Truevision and Shoreline acquisitions combined and the
VID acquisition from Hewlett-Packard.
<CAPTION>
Fair value of (in thousands): Truevision Shoreline Total HP
- ---------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets acquired and goodwill $ 24,981 $ 754 $ 25,735 $ 38,294
Liabilities assumed and fees incurred (13,062) (250) (13,312) (5,065)
Common stock, stock options and
warrants issued (12,856) -- (12,856) (20,632)
-------- -------- -------- --------
Cash paid 504 504 12,597
Cash acquired (937) (937)
-------- -------- -------- --------
Net cash (received) paid on acquisitions $ (937) $ 504 $ (433) $ 12,597
======== ======== ======== ========
</TABLE>
4. Per Share Information
The following tables reconcile the numerator and denominator of the basic and
diluted earnings per share computations shown on the Condensed Consolidated
Statements of Operations:
Three Months Ended
September 30,
(In thousands) 1999 1998
------ ------
Basic EPS - weighted average shares of common stock
outstanding 23,300 20,404
Effect of dilutive common equivalent shares - stock
options outstanding 3,192 1,822
------ ------
Diluted EPS - weighted average shares and common
equivalent shares outstanding 26,492 22,226
====== ======
5. Customers and Credit Concentrations
During the three months ended September 30, 1999, Avid Technology Inc.
and Ingram Micro Inc. accounted for approximately 10.2% and 9.2% of net sales,
respectively, compared to 8.8% and 13.0% for the comparable periods ending
September 30, 1998. No other customer accounted for greater than 10% of sales.
Ingram Micro Inc. accounted for approximately 20.8% and 23.2% of
accounts receivable at September 30, 1999 and June 30, 1999, respectively.
6. Inventories
A summary of inventories follows:
(in thousands)
September 30, June 30,
1999 1999
------- -------
Raw materials $11,164 $12,018
Work in process 5,230 4,186
Finished goods 9,139 6,017
------- -------
$25,533 $22,221
======= =======
Raw materials inventory represents purchased materials, components and
assemblies, including fully assembled circuit boards purchased from outside
vendors.
10
<PAGE>
7. Development of Software for Internal Use
Beginning in fiscal 1999, the Company commenced development and
implementation of a worldwide information system based on SAP enterprise
software. In January 1999 the Company reached the application development stage
of the software implementation and began capitalizing costs associated with the
SAP implementation project. As of September 30, 1999, the Company had
capitalized approximately $1.9 million. The project is expected to be completed
in the quarter ending March 31, 2000
8. Segment Information
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 groups equate to three reportable
segments: Broadcast, Desktop, and Consumer. Management evaluates the performance
of these business groups based on revenues, gross profit, and operating income
before income taxes, interest income, interest expenses, other income, and the
effects of nonrecurring charges including in process research and development.
Amortization of goodwill and other intangibles related to the Company's
acquisitions is included in these results.
The following is a summary of the Company's operations by operating
segment for the three-month periods ended September 30, 1999 and 1998 (in
thousands):
September 30,
--------------
1999 1998
------- ------
Broadcast:
Revenues $17,009 $ 6,592
Gross profit 10,845 3,657
Operating income (loss) $ 2,285 $ (310)
Desktop:
Revenues $24,546 $19,256
Gross profit 13,656 11,403
Operating income $ 2,915 $ 4,765
Consumer:
Revenues $ 8,892 $ 6,425
Gross profit 3,646 2,200
Operating income (loss) $ (520) $ (592)
Consolidated:
Revenues $50,447 $32,273
Gross profit 28,147 17,260
Operating income $ 4,680 $ 3,863
The following table reconciles revenues and operating income (loss) to total
consolidated amounts for the period ended September 30, 1999 and 1998 (in
thousands):
1999 1998
------- -------
Total operating income for reportable segments $ 4,680 $ 3,863
Unallocated amounts:
In-process research and development (2,000) --
------- -------
Consolidated operating income $ 2,680 $ 3,863
======= =======
11
<PAGE>
9. Related Parties
Bell Microproducts Inc. ("Bell") performs certain services and builds
certain products for the Company. A director of the Company is also a director
of Bell. During the three months ended September 30, 1999 and 1998, the Company
purchased materials totaling $880,000 and $1,426,000, respectively, from Bell
pursuant to the Agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain Forward-Looking Information
Certain statements in this Management's Discussions and Analysis and
elsewhere in this Quarterly Report on Form 10-Q are forward-looking statements
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. Such risks and uncertainties are set forth below
under "Factors Affecting Operating Results".
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 1997, the Company commenced shipment of DVExtreme and Lightning. In
the same year, the Company also completed the acquisition of the Deko titling
and character generation product line from Digital Graphix, Inc. 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 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 1999, the Company commenced shipment of FXDeko; a 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 server
solutions. The broadcast market accounted for approximately 33.7% and 20.4% of
net sales in the three-month periods ended September 30, 1999 and 1998,
respectively.
12
<PAGE>
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 and in July began shipping the companion
product DVD1000 which adds the capability to author fully featured DVD titles,
one of the fastest growing delivery mediums for video. In October 1999, the
Company announced DV500 a complete real-time, dual-stream, digital video
production system based on the industry standard DV (IEEE 1394 or Firewire)
format, providing customers with a native DV editing environment. The desktop
market accounted for approximately 48.7% and 59.7% of net sales in the
three-month periods ended September 30, 1999 and 1998, 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. In September, the Company began shipping Studio DV. Studio DV
enables consumers to edit and create high-quality digital videos right on their
PCs; taking input directly from DV camcorders. In October 1999, the Company
announced the USB version of its Studio PCTV. The new USB version is an external
device that lets consumers watch TV, listen to FM radio and create their own
videos on a PC.
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 17.6% and 19.9% of net sales in the
three-month periods ended September 30, 1999 and 1998, respectively.
13
<PAGE>
Results of Operations
Net Sales. The Company's net sales increased 56.3% to $50.4 million in
the three-month period ended September 30, 1999 compared to $32.3 million in the
same period last year.
Quarter end September 30: Increase
Product Group 1999 1998 (Decrease)
------------------------ ------- ------- ---------
Broadcast $17,009 $ 6,592 158.0%
Desktop 24,546 19,256 27.5%
Consumer 8,892 6,425 38.4%
------- -------
$50,447 $32,273 56.3%
======= =======
In the three-month period ended September 30, 1999, sales increased in
all three product groups compared to the same period last year. The increase in
the Broadcast group related to both an increase in sales of non-server broadcast
products and to the sale of Media Stream and other products acquired by the
Company from Hewlett-Packard. An increase in sales of FXDeko increased
substantially over the same period last year. In the Desktop group, the increase
was attributable to an increase in OEM sales of its Genie products, shipment of
DC1000 and an expanded product line including sales of TARGA products acquired
from Truevision in March 1999. Consumer sales increased due to higher sales of
Studio DC10 and new sales of Studio MP10, which began shipping in March 1999.
International Sales. International sales (sales outside of North
America) increased 36.2% in the three month period ended September 30, 1999
compared to the three month period ended September 30, 1998 and accounted for
approximately 48.8% and 56.0% of net sales in those periods, respectively. The
Company expects that international sales will continue to represent a
significant portion of its net sales.
Cost of Sales and Gross Profit. Cost of sales consists primarily of
costs related to the acquisition of components and subassemblies, labor and
overhead associated with procurement, assembly and testing of finished products,
warehousing, shipping, warranty costs and post sale customer support costs. For
the three month periods ended September 30, 1999 and 1998, cost of sales were
44.2% and 46.5%, respectively, while related gross margins were 55.8% and 53.5%
respectively. The improved margins were partly due to increased OEM sales in the
September 1999 quarter.
Engineering and Product Development. Engineering and product
development expenses increased 80.8% to $6.0 million in the three months ended
September 30, 1999 from $3.3 million during the comparable three month period in
the prior year. As a percentage of sales, engineering and product development
expenses increased to 11.8% in the quarter ended September 30, 1999 from 10.2%
in the quarter ended September 30, 1998. The increase was due primarily to the
personnel hired in connection with the Truevision and Hewlett-Packard
acquisitions. 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 located 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 show and advertising expenses and professional fees
for marketing services. Sales and marketing expenses increased by 41.1% to $11.7
million in the three months ended September 30, 1999 from $8.3 million during
the comparable three month period in the prior year. The increase is related to
Company's investment in infrastructure focused on increasing product awareness
and market share and on expanding product lines. Although sales and marketing
expenditures have increased significantly year to year in absolute dollars, as a
percentage of net sales expenditures fell to 23.2% from 25.8% in the three month
periods ending September 30, 1999 and 1998. These decreases reflect a growth in
sales exceeding incremental sales and marketing expenditures. Although
management continues to invest substantial amounts in the Company's sales and
marketing efforts, there can be no assurance that these current or increased
sales and marketing expenditures will enable the Company to maintain or grow its
current level of sales.
General and Administrative. General and administrative expenses
increased 79.7% to $2.7 million in the three months ended September 30, 1999
from $1.5 million during the comparable three month period in the prior year.
Increases
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are related to the Company's overall growth. As a percentage of net sales,
general and administrative expenses were 5.4% and 4.7% during the three months
ended September 30, 1999 and 1998, respectively.
Amortization of Acquisition Related Intangible Assets. Amortization of
acquisition related intangibles increased over 1000% from $275,000 in the three
month period ended September 30, 1998 to $3.1 million in the three month period
ended September 30, 1999. This increase is due to the amortization of goodwill
and other intangibles acquired in the Truevision and Shoreline acquisitions in
March 1999 and the VID acquisition from the Hewlett-Packard Company in August
1999.
In-Process Research and Development. During the three month period
ended September 30, 1999, the Company recorded an in process research and
development charge of $2.0 million relating to the acquisition of certain assets
of the Video Communications Division of the Hewlett-Packard Company ("HP"). 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 and applying an attribution rate based on the estimated percent
complete considering the approximate stage of completion of the in-process
technology at the date of acquisition.
The acquired in-process research and development from HP relates to the
development of the next generation of Media Stream products. At the date of
acquisition, revenues attributable to these future products were projected for
purposes of valuing the acquired in-process research and development. Though the
Company currently expects that the acquired in- process technology will be
successfully developed, there can be no assurance that commercial or technical
viability of the product will be achieved. If the project is not successfully
developed, the Company may not realize the value assigned to the in process
research and development project. In addition, the value of goodwill and other
acquired intangible assets may also become impaired. Ongoing operations and
financial results are subject to a variety of factors which may or may not have
been known or estimable at the time of the acquisition, and the estimates
discussed above are subject to change.
Interest Income, Net. Interest income, net consists primarily of
interest income generated from the Company's low risk investments in money
market funds, government securities and high-grade commercial paper. In the
three months ended September 30, 1999 and 1998, net interest income was $0.8
million and $1.1 million respectively. The decrease reflects a reduction in the
Company's cash and marketable securities due primarily to the payment of $12.6
million to HP in connection with the Company's acquisition of HP's video server
business. In addition cash flows generated from Pinnacle's foreign operations
and invested overseas obtain lower interest yields than investments made
domestically.
Income Tax Expense. Income taxes are composed for federal, state and
foreign income taxes. The Company recorded a provision for income taxes of $0.7
million and $1.0 million for the three month periods ended September 30, 1999
and 1998, respectively. 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 as of June 30, 1999.
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 $60,000
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.
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 September 30,
1999, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $73.3 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 consumed $2.7 million in cash during
the three months ended September 30, 1999. This was primarily attributable to an
increase in the Company's accounts receivable and inventories. Accounts
receivable has increased due to the Company's sales growth and the timing of
sales within the quarter. Sales in
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September 1999 were particularly strong compared to mid-summer sales
occurring earlier in the quarter. This timing brought about an increase in the
Company's measure of days sales outstanding. Inventories also increased due to
corporate sales growth in addition to the staging of inventory for shipment in
the December sales quarter.
During the three month period ended September 30, 1999, cash flow from
investing activities included $2.9 million invested in property and equipment,
compared to $1.9 million in the three months ended September 30, 1998. The high
level of expenditures for the three months ended September 30, 1999 were
primarily for leasehold improvements, furniture and equipment purchased for the
Company's Mountain View facility expansion in August 1999 to accommodate
increased headcount related to the HP acquisition. The Company also incurred
approximately $1.0 million in capitalized expenditures related to the
implementation of an SAP enterprise software system. The Company will continue
to incur expenditures for the software implementation through March 2000. As the
Company continues to grow, it expects to incure ongoing purchases of property
and equipment. Such capital expenditures will be financed from working capital.
Cash flow from investing activities also increased due to the maturation and
redemption of the Company's investment in marketable securities. These proceeds
were used to fund the HP acquisition payment, which totaled $12.6 million.
On August 2, 1999, the Company completed the purchase of HP's Video
Communications Division. Under the terms of an asset purchase agreement dated
June 30, 1999, Pinnacle Systems acquired substantially all of the assets of the
Video Communications Division, including key technologies and intellectual
property, the MediaStream family of products and selected additional assets, as
well as most managers and employees. In consideration, Pinnacle paid HP $12.6
million in cash and issued 773,172 shares of Pinnacle's common stock valued at
$20.6 million. The Company incurred acquisition costs of approximately $0.4
million for a total purchase price of $33.6 million and assumed liabilities
totaling $4.7 million.
Factors Affecting Operating Results
o 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, a 51% increase,
and net sales in the first quarter of fiscal 2000 were $50.4 million compared
with $32.3 million in the first quarter of fiscal 1999. 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.
o Any failure to successfully integrate the businesses we have acquired
could negatively impact us.
In August 1999, we acquired the Video Communications Division of 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
- 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
o 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
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- 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 downturns 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, and the IBC
convention held in September. 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.
o 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
- Changes in earnings estimates made by independent analysts
- 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.
With the advent of the Internet, a new avenue has been created for the
dissemination of information. The Company has no control over the information
that is distributed and discussed on electronic bulletin boards and in
investment chat rooms. Such information may be false or misleading and may not
be in the best interest of the Company and its shareholders. This, in addition
to other forms of investment information including newsletters and research
publications, could result in a sharp decline in the market price of our common
stock and/or increase volatility of our common stock.
In addition, stock markets have from time to time experienced extreme
price and volume fluctuations. The market prices for high technology companies
have been particularly affected by these market fluctuations and such effects
have often been unrelated to the operating performance of such companies. These
broad market fluctuations may cause a decline in the market price of 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.
o 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.
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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.
o 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 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.
- Establishing relationships with distributors and retailers
- A fully developed infrastructure to support electronic retail
stores and telephone and Internet orders.
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
- Difficulty in predicting the growth of the consumer video market
o 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. 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.
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o 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.
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
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.
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o 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:
- 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.
o 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.
o 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.
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o 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.
o Because we sell products internationally, we are subject to additional
risks.
Sales of our products outside of North America represented
approximately 49% of net sales in the three month period ended September 30,
1999 and 60.8% of net sales in the year ended June 30, 1999. 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.
o 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.
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We are continually assessing all areas that may be affected by or
responsible for a year 2000 problem and initiating changes wherever necessary.
Some of these 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
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."
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 is subject to change. If
actual cost of year 2000 compliance materially exceeds our current estimate, our
business could be harmed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currencies
The Company transacts business in various foreign currencies but
primarily in those of Germany, France and the U.K. Accordingly, the Company is
subject to exposure from adverse movements in foreign currency exchange rates.
The Company currently does not use financial instruments to hedge local currency
activity at any of its foreign locations. Instead, the Company believes that a
natural hedge exists, in that local currency revenues substantially offset the
local currency denominated operating expenses. The Company assesses the need to
utilize financial instruments to hedge foreign currency exposure on an ongoing
basis.
Fixed Income Investments
The Company's exposure to market risk for changes in interest rates
relates primarily to its investment portfolio of marketable securities. The
Company does not use derivative financial instruments for speculative or trading
purposes.
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The Company investments primarily in U.S. Treasury Notes and high-grade
commercial paper. The Company does not expect any material loss with respect to
its investment portfolio.
The Company does not use derivative financial instruments in its
investment portfolio to manage interest rate risk. The Company does, however,
limit its exposure to interest rate and credit risk by establishing and strictly
monitoring clear policies and guidelines for its 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 the Company's guidelines, the exposure to
market and credit risk is not expected to be material.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In connection with the registrant's acquisition of the Video
Communications Division of the Hewlett-Packard Company ("HP") pursuant to an
asset purchase agreement date June30, 1999, the Registrant issued to HP 773,172
shares of common stock (the "shares") on August 2, 1999. The shares were a
portion of the consideration paid by the Company for substantially all of the
assets of the Video Communications Division including key technologies and
intellectual property, the Media Stream family of products and selected
additional assets. The issuance of the shares was exempt from registration under
the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof. The
issuance did not involve any underwriters, underwriting discounts or
commissions, or any public offering. HP represented its intention to acquire the
shares for investment only and not with a view to, or for sale in connection
with any, distribution thereof. Appropriate legends were affixed to the share
certificates issued to HP. HP had adequate access to information about the
Registrant through its relationship with the Registrant.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On August 13, 1999 the Company filed a report on Form 8-K announcing the
Company's acquisition of the Video Communications Division of the
Hewlett-Packard Company. On October 15, 1999 the Company filed a report on Form
8-K/A relating to the Company's acquisition of the Video Communications Division
of the Hewlett-Packard Company. The filing amended the Form 8-K filing made on
August 13, 1999 in order to file required financial statement disclosure of the
acquired business and pro-forma financial statement disclosure.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
Date: November 12, 1999 By: /s/Mark L. Sanders
-----------------------------------
Mark L. Sanders
President, Chief Executive Officer
and Director
Date: November 12, 1999 By: /s/Arthur D. Chadwick
-----------------------------------
Arthur D. Chadwick
Vice President, Finance
and Administration and
Chief Financial Officer
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
Date: November 12, 1999 By: /s/Mark L. Sanders
-----------------------------------
Mark L. Sanders
President, Chief Executive Officer
and Director
Date: November 12, 1999 By: /s/Arthur D. Chadwick
-----------------------------------
Arthur D. Chadwick
Vice President, Finance and
Administration and
Chief Financial Officer
26
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