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, 2000
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 5, 2000 was
approximately 50,819,965.
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INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations -
Three Months Ended - September 30, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended - September 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended - September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3 - Quantitative and Qualitative Disclosures About
Market Risk 23
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands; unaudited)
<CAPTION>
September 30, June 30,
2000 2000(1)
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 45,160 $ 58,433
Marketable securities 11,046 19,366
Accounts receivable, net 53,743 55,072
Inventories 38,278 36,824
Deferred income taxes 17,103 17,103
Prepaid expenses and other assets 4,393 4,100
--------- ---------
Total current assets 169,723 190,898
Marketable securities -- 4,346
Property and equipment, net 15,905 16,143
Goodwill and other intangibles 102,674 109,810
Other assets 2,249 1,602
--------- ---------
$ 290,551 $ 322,799
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 16,756 $ 22,422
Accrued expenses 24,011 30,146
--------- ---------
Total current liabilities 40,767 52,568
--------- ---------
Deferred income taxes 10,611 10,611
--------- ---------
Total liabilities 51,378 63,179
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares;
none issued and outstanding -- --
Common stock, no par value; authorized 120,000 shares;
50,750 and 51,293 issued and outstanding as of
September 30 and June 30, 2000, respectively 269,045 257,496
Treasury shares at cost; 645,000 and -0- shares at
September 30 and June 30, 2000, respectively (5,102) --
Retained earnings (accumulated deficit) (14,557) 7,198
Accumulated other comprehensive loss (10,213) (5,074)
--------- ---------
Total shareholders' equity 239,173 259,620
--------- ---------
$ 290,551 $ 322,799
========= =========
<FN>
(1) Numbers are derived from the Company's audited financial statements for the fiscal year ended June 30, 2000.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<CAPTION>
Three-months Ended
September 30,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales $ 62,775 $ 50,447
Cost of sales 36,242 22,300
-------- --------
Gross profit 26,533 28,147
-------- --------
Operating expenses:
Engineering and product development 8,356 5,969
Sales and marketing 15,589 11,726
General and administrative 3,755 2,711
Amortization of acquisition related intangible assets 7,852 3,061
Acquisition settlement 13,250 --
In-process research and development -- 2,000
-------- --------
Total operating expenses 48,802 25,467
-------- --------
Operating income (loss) (22,269) 2,680
Interest income and other, net 514 807
-------- --------
Income (loss) before income taxes (21,755) 3,487
Income tax expense -- 697
-------- --------
Net income (loss) $(21,755) $ 2,790
======== ========
Net income (loss) per share
Basic $ (0.43) $ 0.06
======== ========
Diluted $ (0.43) $ 0.05
======== ========
Shares used to compute net income (loss) per share
Basic 50,962 46,600
======== ========
Diluted 50,962 52,984
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands; unaudited)
Three-months Ended
September 30,
------------------------
2000 1999
-------- --------
Net income (loss) $(21,755) $ 2,790
Foreign currency translation adjustment (5,139) 1,117
-------- --------
Comprehensive income (loss) $(26,894) $ 3,907
======== ========
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
<CAPTION>
Three Months Ended
September 30
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(21,755) $ 2,790
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
In-process research and development -- 2,000
Acquisition settlement - equity portion 10,877 --
Depreciation and amortization 9,076 3,890
Changes in operating assets and liabilities:
Accounts receivable (230) (6,572)
Inventories (2,876) (4,024)
Accounts payable (5,967) (377)
Accrued expenses (3,032) (455)
Other (1,557) 34
-------- --------
Net cash used in operating activities (15,464) (2,714)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,147) (2,927)
Acquisition payments net of cash acquired (3,309) (12,597)
Proceeds from maturity of marketable securities, net of purchases 12,667 6,305
Other investments (300) --
-------- --------
Net cash provided by (used in) investing activities 7,911 (9,219)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (5,102) --
Proceeds from issuance of common stock 67 2,193
Payments on note payable -- (82)
-------- --------
Net cash provided by (used in) financing activities (5,035) 2,111
-------- --------
Effects of exchange rate changes on cash (685) 434
-------- --------
Net decrease in cash and cash equivalents (13,273) (9,388)
Cash and cash equivalents at beginning of period 58,433 48,654
-------- --------
Cash and cash equivalents at end of period $ 45,160 $ 39,266
======== ========
Supplemental disclosures of cash paid during the period for:
Interest $ 1 $ 0
======== ========
Income taxes $ 674 $ 0
======== ========
Non-cash transactions:
Common stock issued in business acquisitions $ -- $ 20,632
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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Notes To Condensed Consolidated Financial Statements (unaudited)
1. General
The accompanying unaudited 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 for interim
financial information and in accordance with the instructions of Form 10-Q and
Rule 10 of Regulation S-X. 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.
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, 2000 included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 28, 2000. 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.
Derivative Instruments and Hedging Activities
As of July 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. The adoption of SFAS No.
133 did not have material affect on the Company's financial statements.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. The Company
is in the process of assessing the impact, if any, that the adoption of SAB No.
101 will have on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25" ("FIN 44"). This interpretation clarifies the application of
Opinion 25 for certain issues including: (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for
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determining whether a plan qualifies as a non-compensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or warrant, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Company adopted FIN 44 on
July 1, 2000. The adoption of FIN 44 did not have a material effect on the
Company's financial position or results of operations.
In July 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." The EITF concluded that amounts billed to a customer related to shipping
and handling represent revenues. Issue No. 00-10 is expected to be implemented
in the same quarter as SAB No. 101. The Company does not expect the adoption of
Issue No. 00-10 to have a material impact on its financial position or results
of operations.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives." Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of a single
exchange transaction. Issue No. 00-14 is expected to be implemented in the same
quarter as SAB No. 101. The Company does not expect the adoption of Issue No.
00-14 to have a material impact on its financial position or results of
operations.
2. Acquisitions
(a) Avid Sports, Inc.
On June 30, 2000, the Company acquired all the outstanding common stock
of Avid Sports, Inc., a leading provider of sports editing and online sports
media management solutions ("ASports"). On September 30, 2000, the Company
entered into an agreement with the former shareholders and option holders of
ASports wherein Pinnacle agreed to compensate each of them if the closing price
of Pinnacle's common stock does not equal or exceed $23 per share for four
consecutive trading days prior to May 31, 2001. If Pinnacle's share price does
not reach this level, the value of the compensation to be paid shall be equal to
the number of shares issued and options assumed in the acquisition (944,213 and
138,158, respectively) multiplied by the difference between Pinnacle's average
closing stock price during the month of May, 2001 and $23 per share. Former
shareholders of ASports would be compensated in shares of Pinnacle's common
stock while the former option holders will be compensated in cash. On September
30, 2000, the Company recorded a charge of $13.3 million which represents the
fair value of the arrangement on September 30, 2000 including $0.1 million in
transaction fees. The Company recorded a liability of $1.7 million which
represents the estimated cash payout to the option holders with the remaining
$11.5 million recorded as an increase in common stock. The value assigned was
determined by an independent appraiser using the Black-Scholes method.
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(b) Pro Forma Financial Information
The following unaudited pro forma results of operations for the
three-month period ended September 30, 1999 are as if the acquisitions of
Synergy, Puffin, DES, Montage, Propel and ASports had occurred at the beginning
of fiscal 1999, after giving effect to certain adjustments, including
amortization of goodwill and related income tax effects. The pro forma
information excludes charges for acquired in-process research and development.
The pro forma information has been prepared for comparative purposes only and is
not indicative of what operating results would have been if the acquisitions had
taken place at the beginning of fiscal 1999 or of future operating results.
Three Months Ended
September 30,
(In thousands, except per share data) 1999
----------
Net sales .............................................. $ 57,769
Net loss ............................................... $ (2,423)
Basic net loss per share ............................... $ (0.05)
Diluted net loss per share ............................. $ (0.05)
3. Per Share Information
The following tables reconcile the denominator of the basic and diluted earnings
per share computations shown on the Condensed Consolidated Statements of
Operations:
September 30,
-----------------
(In thousands) 2000 1999
------ ------
Basic EPS - weighted average shares of common stock
outstanding 50,962 46,600
Effect of dilutive common equivalent shares - stock
options and warrants outstanding -- 6,384
------ ------
Diluted EPS - weighted average shares and common
equivalent shares outstanding 50,962 52,984
====== ======
The Company excludes potentially dilutive securities from its diluted
net income (loss) per share computation when either the Company reports a net
loss or the exercise price of the securities exceeds the average fair value of
the Company's common stock because the effect would be anti-dilutive. For the
three-month periods ended September 30, 2000 and 1999, the Company excluded
options to purchase 6,159,197 and 82 shares of common stock, respectively, from
the diluted earnings per share computation as their exercise prices exceeded the
average fair value of the Company's common stock during the respective periods
and, accordingly, their inclusion would have been anti-dilutive.
For the three-month period ended September 30, 2000, the Company
excluded options to purchase 3,676,037 shares of common stock from the diluted
earnings per share computation, as the Company experienced a net loss in that
period, and as such, their inclusion would have been antidilutive.
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4. Segment Information
Prior to July 1, 2000, the Company's organizational structure was based
on three strategic business groups that sold various products into the Company's
principle markets. These business groups equated to three reportable segments:
Broadcast, Desktop, and Consumer. Beginning on July 1, 2000, the Company
reorganized and implemented a plan to divide the operations of the Company into
three distinct divisions: Broadcast Solutions, Professional .Media and Personal
Web Video. The reorganization was performed to provide a structure that would
meet the growing demands of the Company and to provide divisional managers the
ability to focus and manage their own operations and resources. Prior to this,
resources for sales, marketing, operations and logistics were managed
independently outside of the business groups. The reorganization also provided
the Company an opportunity to re-evaluate its product offerings and better align
them within its distribution channels.
The Company's chief operating decision maker evaluates the performance
of these divisions based on revenues, gross profit, 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 and amortization of goodwill and other intangibles related to the
Company's acquisitions. Operating results also include allocations of certain
corporate expenses.
The following is a summary of the Company's operations by operating
segment for the three-month period ended September 30, 2000 and 1999. Only
revenue information is being provided on a comparative basis. Due to the
reorganization of the Company and the addition and realignment of operational
departments and personnel, restatement of prior years segment results would be
impractical.
(in thousands): September 30,
--------------------------
2000 1999
-------- --------
Broadcast Solutions:
Revenues $ 24,137 $ 17,009
Gross profit 11,600
Operating income (loss) $ (1,171)
Professional .Media:
Revenues $ 13,265 $ 11,608
Gross profit 6,034
Operating income (loss) $ (927)
Personal Web Video:
Revenues $ 25,373 $ 21,830
Gross profit 8,899
Operating income $ 1,311
Consolidated:
Revenues $ 62,775 $ 50,447
Gross profit 26,533
Operating income (loss) $ (787)
The following table reconciles operating income (loss) to total consolidated
amounts for the three-month period ended September 30, 2000 (in thousands):
Total operating loss for reportable segments $ (787)
Unallocated amounts:
Unallocated expenses (380)
Amortization of acquisition intangibles (7,852)
Acquisition settlement (13,250)
--------
Consolidated operating loss $ (22,269)
========
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5. Customers and Credit Concentrations
During the three months ended September 30, 2000, no one customer
accounted for more than 10% of net sales. During the three-month period ended
September 30, 1999, Avid Technology Inc. accounted for approximately 10.2% of
net sales.
6. 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, 2000 and 1999, the Company
purchased materials from Bell totaling $1,171,504 and $880,000, respectively.
7. Commitments and Contingencies
On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle Systems, Inc.
et al., No. 00-CV-2596 was filed in the United States District Court for the
Northern District of California against the Company and certain officer and
director defendants. The action is a putative class action and alleges that
defendants violated the federal securities laws by making false and misleading
statements concerning the Company's business prospects during an alleged class
period of April 18, 2000 through July 10, 2000. The complaint does not specify
damages. The Company intends to defend the case vigorously.
On August 29, 2000, a lawsuit entitled Athle-Tech Computer Systems,
Incorporated v. Montage Group, Ltd. and Digital Editing Services, Inc. No.
00-005956-C1-021 was filed in the Sixth Judicial Circuit Court for Pinellas
County, Florida (the "AT Claim"). The AT Claim alleges that Montage breached a
purported software development agreement between Athle-Tech Computer Systems,
Incorporated ("AT") and Montage (the "AT Agreement"). The AT Claim also alleges
that DES intentionally interfered with AT's claimed rights with respect to the
purported AT Agreement and was unjustly enriched as a result. Finally, the AT
Claim requests that the court impose a constructive trust on at least 50% of the
proceeds of the purported AT Agreement and render a declaratory judgement in
favor of AT. The Company has engaged counsel to defend the AT Claim. Montage and
DES believes it has meritorious defenses and intends to vigourously defend AT's
claim.
On June 30, 2000, the Company acquired all the outstanding common stock
of Avid Sports, Inc., a leading provider of sports editing and online sports
media management solutions ("ASports"). On September 30, 2000, the Company
entered into an agreement with the former shareholders and option holders of
ASports wherein Pinnacle agreed to compensate each of them if the closing price
of Pinnacle's common stock does not equal or exceed $23 per share for four
consecutive trading days prior to May 31, 2001. If Pinnacle's share price does
not reach this level, the value of the compensation to be paid shall be equal to
the number of shares issued and options assumed in the acquisition (944,213 and
138,158, respectively) multiplied by the difference between Pinnacle's average
closing stock price during the month of May, 2001 and $23 per share. Former
shareholders of ASports would be compensated in shares of Pinnacle's common
stock while the former option holders will be compensated in cash. On September
30, 2000, the Company recorded a charge of $13.3 million which represents the
fair value of the arrangement on September 30, 2000 including $0.1 million in
transaction fees. The Company recorded a liability of $1.7 million which
represents the estimated cash payout to the option holders with the remaining
$11.5 million recorded as an increase in common stock. The value assigned was
determined by an independent appraiser using the Black-Scholes method.
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
or liquidity, although there can be no assurance as to the outcome of such
litigation.
8. Stock Repurchase
On July 25, 2000 the Company announced that the Board of Directors had
authorized the repurchase of up to 3.0 million shares of the Company's common
stock. As of September 30, 2000, the Company has repurchased a total of 645,000
shares of common stock at a cost of $5.1 million and approximately 2.355 million
shares remain authorized for repurchase.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain Forward-Looking Information
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"), including the first sentence of the fourth paragraph
under "Broadcast Solutions Division" relating to the Company's products, the
last sentence in the second paragraph under "Results of Operations" relating to
International sales , the last sentence in the third paragraph under "Results of
Operations" relating to pricing pressures, the last sentrence in the fourth
paragraph under "Results of Operations" relating to engineering and product
development resources, the last sentence of the sixth paragraph under "Results
of Operations" relating to general and administrative expenses, the last
sentence in the first paragraph under "Liquidity and Capital Resources" relating
to Capital resources, the third sentence in the third paragraph under "Liquidity
and Capital Resources" relating to investing securities, and the last sentence
in the fourth paragraph under "Liquidity and Capital Reources" relating to cash
proceeds from stock option securities. 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.
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Overview
Pinnacle Systems, Inc. (the "Company") is a supplier of video
authoring, storage, distribution and Internet streaming solutions for
broadcasters, business and professional "desktop" users, and consumers.
Pinnacle's products are used to create, store, and distribute video content from
television programs, TV commercials, pay-per-view, sports videos, corporate
films to home movies. In addition, Pinnacle's products are increasingly being
used to stream video over the Internet. Expanding distribution channels
including cable television, direct satellite broadcast, video-on-demand, digital
video disks (DVD) and the Internet have led to a rapid increase in demand for
video content. This increasing demand for content to supply new and existing
distribution channels is driving a need for affordable, easy-to-use video
creation, storage, distribution and streaming tools.
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 computer
based solutions for high-end, production, post-production, team sports analysis,
broadcast on-air and Internet streaming applications. For the professional
desktop market, the Company provides computer based video editing and media
creation products, products used to create video content and solutions used to
stream live and recorded video over the Internet. To address the consumer
marketplace, the Company offers low cost, easy to use video editing and viewing
solutions that allow consumers to view TV on their computer and to edit their
home videos using a personal computer, camcorder and VCR. Many of the Company's
consumer products enable content to be created that is suitable for the
Internet. To focus resources to address the needs of these markets, Pinnacle has
structured itself into three distinct divisions: Broadcast Solutions Division,
Professional .Media Division and the Personal Web Video Division.
Broadcast Solutions Division
The Broadcast Solutions Division currently offers products that provide
systems solutions to broadcasters. This includes products that provide real time
digital effects, still image management and storage, and real time video
character generation. Pinnacle also sells digital video servers for on-air video
content distribution. These products generally include proprietary hardware and
software and specialized control surfaces for rapid execution, especially for
on-air applications. The primary broadcast products sold during fiscal 2000 were
the DVExtreme, Lightning, Deko and Thunder and the Media Stream family of
products. In addition, the Company sells BroadNet solutions, 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 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.
In February 2000, the Company introduced MediaStream 300, the newest
member of the MediaStream family. The MediaStream 300 offers the high-quality,
reliable playback and the comprehensive networking needed by today's
broadcasters in an extremely compact, two-rack-unit package that is more
affordable and more space efficient than previous MediaStream servers. In March
2000, the Company began shipping Rocket for FXDEko, a template-based tool that
allows the generation of real-time 3D elements that can be automatically updated
by live data streams. In September 2000, Broadcast began shipping the PDS 9000
video production switcher. The PDS 9000 was designed for broadcasters producing
live video events such as news, sports and local interest programming.
During the fiscal year ended June 30, 2000, the Company acquired
Digital Editing Services, Inc. and Avid Sports, Inc. These companies supply
sports editing software used by professional and school teams around the world.
Combined, these businesses give Pinnacle a leading position in this important
video market. In addition, Pinnacle acquired Montage, a provider of networked
non-linear editing solutions including VorteXNews(TM) which gives users the
ability to process, edit, store, broadcast and stream to the Internet live news
and sports content entirely in the digital domain. These products are expected
12
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to form the basis of Broadcast's Totally Networked News(TM) solutions family to
create powerful and comprehensive media management, editing and streaming
solutions for broadcasters and sports organizations.
The Broadcast Solutions division accounted for approximately 38.5% and
33.7% of net sales in the three-month periods ended September 30, 2000 and 1999,
respectively.
Professional .Media Division
The Professional .Media Division designs, manufactures, and sells media
creation and delivery solutions combining powerful media production, editing,
and authoring tools with leading edge visual effects solutions. .Media enables
its customers to distribute rich integrated media content through traditional
and new, internet-based, delivery methods. By combining the power of the
Internet with Pinnacle Systems' rich media production and editing solutions
heritage, the .Media division offers customers new ways to create value for
their clients. .Media includes Pinnacle's webcasting solutions which emphasize
the Company's goal to be a leading provider of solutions for the internet
media-streaming marketplace. .Media's product offerings include Genie, Reeltime,
DVD 2000, Commotion, StreamGenie and the TARGA family of products.
In March 2000, the Company acquired Puffin, a provider of content
creation solutions. Puffin sells an advanced set of software tools that includes
Commotion(TM), an all-in-one solution that combines the power of the paintbrush
with intuitive compositing and effects tools to deliver superior performance on
the desktop. Commotion 3.0 began shipping in June 2000. Also in June 2000,
.Media began shipping TARGA 3000, the Company's newest content creation and
streaming platform. TARGA 3000 allows users to choose processing in DV, MPEG-2
or true uncompressed digital 601 format, and enables them to mix these formats
on a single timeline. In October 2000, .Media announced the availability of
CineWave, an uncompressed standard-definition (SD) video solution available for
Apple's Power Mac G4. Based on the award winning TARGA architecture, CineWave is
a powerful solution for the Power Mac G4.
For its class of webcasting solutions, .Media offers StreamGenie, a
portable Webcasting solution for streaming live video programming over the
Internet. The Company began shipping StreamGenie in June 2000. In March 2000,
the Company announced the StreamFactory(TM) Web Media Encoder that targets
Internet broadcasters who require real-time web encoding of live or previously
produced content. The Company expects to begin shipping StreamFactory in
December 2000.
The .Media division accounted for approximately 21.1% and 23.0% of net
sales in the three-month periods ended September 30, 2000 and 1999,
respectively.
Personal Web Video Division
The Personal Web Video Division ("Web") combines the Company's high-end
professional video product line with its consumer retail products. Professional
products , targeted to the sophisticated end-user, are designed to provide high
quality video capture, compression and decompression, editing and real time
video manipulation capabilities for computer based video post-production
systems. Professional products are integrated into the computer by a value-added
reseller, an OEM, or the end user. Web also maintains alliances with computer
manufacturers such as Dell and Compaq to provide professional workstations using
Pinnacle solutions. Web's class of professional video capture and editing
products includes miroVIDEO DC30, DC1000 and the DV500. Web's lower end consumer
products provide complete video editing solutions that allow consumers to edit
their home videos using their personal computer (PC), camcorder and VCR and
recently announced a solution for capturing, editing and sharing video over the
Internet. Web also sells products that allow consumers to watch TV, listen to FM
radio and create their own videos on a PC. Web's consumer product line includes
Studio DC10, Studio MP10, Studio PCTV and PCTV USB and Studio DV. Price points
of consumer products are the lowest of all the Company's product lines and are
marketed as computer peripherals.
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In September 2000, Web announced Studio OnLine, one of the first
consumer products to offer a complete integrated solution for capturing, editing
and sharing video over the Internet. Studio OnLine comes with Pinnacle's
powerful and easy-to-use video editing Studio software. In October 2000, Web
announced immediate availability of Studio Basic for RealVideo(R), an
easy-to-use video editing software for creating RealNetworks(R) RealVideo
content. This product is the result of an alliance between Pinnacle and
RealNetworks, Inc.
Web's products are mostly distributed directly to retail outlets,
through retail distributors such as Ingram Micro, and to value added resellers
("VARs"), and other resellers. Web also sells directly to end-users by accepting
orders via the telephone and Internet. The Personal Web Video Division accounted
for approximately 40.4% and 43.3% of net sales in the three-month periods ended
September 30, 2000 and 1999 respectively.
Results of Operations
<TABLE>
Net Sales. Net sales increased 24.4% to $62.8 million in the quarter
ended September 30, 2000, from $50.4 million in the quarter ended September 30,
1999. Net sales increased in all three divisions. Broadcast sales increased
41.9% primarily due to the sale of products obtained through the acquisition of
ASports. Broadcast sales also benefited from increased sales of its Deko line
and revenues generated from sales of its new production switcher, the PDS 9000.
In the .Media Division, net sales increased 14.3% to $13.3 million in the
quarter ended September 30, 2000, from $11.6 million in the quarter ended
September 30, 1999. This increase was due mostly to sales of the .Media's recent
product releases, TARGA 3000 and Stream Genie. In the Web division, sales
increased 16.2% to $25.4 million in the quarter ended September 30, 2000, from
$21.8 million in the quarter ended September 30, 1999. This increase is due
primarily to increased sales of the PCTV product line in Europe. In addition
sales of Studio DV outgrew a decline in sales of other Studio products including
the MP10 and DC10. Following is a summary of revenues from each division:
<CAPTION>
Increase
Quarter ended September 30: 2000 % 1999 % (Decrease)
-------- ----- -------- ----- ----------
<S> <C> <C> <C> <C> <C>
Division
Broadcast Solutions $24,137 38.5% $ 17,009 33.7% 41.9%
Professional .Media 13,265 21.1% 11,608 23.0% 14.3%
Personal Web Video 25,373 40.4% 21,830 43.3% 16.2%
-------- ----- -------- ----- ----
$ 62,775 100.0% $ 50,447 100.0% 24.4%
======== ====== ======== ====== -----
</TABLE>
International sales (sales outside of North America) increased 32.2% in
the three-month period ended September 30, 2000 compared to the same period last
year and accounted for approximately 51.8% and 48.8% of the Company's net sales,
respectively. As a percentage of Pinnacle's total net sales, international sales
The Company expects that international sales will continue to represent a
significant portion of its total net sales.
Gross Profit. Pinnacle distributes and sells its products to end users
through the combination of independent domestic and international dealers and
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, the channel of distribution, the
volume of product purchased, and other factors. In addition to direct material
costs, cost of sales consists primarily of costs related to the procurement of
components and subassemblies, labor and overhead associated with procurement,
assembly and testing of finished products, inventory management, warehousing,
shipping, warranty costs, royalties and provisions for excess and shrinkage. In
the three-month period ended September 30, 2000, total blended gross profit
decreased to 42.3% from 55.8% in the three-month period ended September 30,
1999. Included in the cost of sales for the quarter ended September 30, 2000 is
a $2.5 million inventory charge related to discontinued products and accessories
primarily in the Broadcast and .Media divisions. Excluding the charge, blended
gross profit would have been 46.2% in the quarter ended September 30, 2000. The
decrease in margins was primarily reflected in the Broadcast division. Excluding
a $1.3 million portion of the inventory charge, Broadcast margins dropped to
53.3% from 63.8% in the three-month periods ended September 30, 2000 and 1999,
respectively. This decrease was due to a drop in MediaStream margins and a
decrease in service revenues which generally provide more favorable margins.
Pinnacle's margin also decreased due to changes in its overall mix of product
sales and competitive pricing pressures especially in the Web Division.
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Engineering and Product Development. Engineering and product
development expenses include costs associated with the development of new
products and enhancements of existing products and consist primarily of employee
salaries and benefits, prototype and development expenses, depreciation and
facility costs. Engineering and product development expenses increased 40.0% to
$8.4 million in the three-month period ended September 30, 2000 from $6.0
million in the same period last year. As a percentage of sales, engineering and
product development expenses were 13.3% in the three months ended September 30,
2000, versus 11.8% in the same period last year. The increase was due primarily
to the acquisitions of Puffin, Montage, DES, and ASports. Pinnacle believes that
investment in research and development is crucial to its future growth and
position in the industry and expects to continue to allocate significant
resources to all of its engineering and product development locations throughout
the world.
Sales and Marketing. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions, travel, advertising
and promotional expenses including channel marketing funds and trade shows, and
professional fees for marketing services. Sales and marketing expenses increased
32.9% to $15.6 million in the three-month period ended September 30, 2000, from
$11.7 million in the same period last year. The increase was due to acquisitions
of Puffin and ASports, expanded operations in Japan, and increased expenditures
in North America and Europe. These increases reflect expenditures to achieve the
Company's goal of increased sales and market share and expanded product
awareness in new and existing markets throughout the world. As a percentage of
net sales, expenditures increased to 24.8% in the three-month period ended
September 30, 2000, from 23.2% in the same period last year. This increase
reflects a growth in sales and marketing expenditures exceeding incremental
sales.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits for administrative, executive, finance and
MIS personnel, occupancy costs and other corporate administrative expenses.
General and administrative expenses increased 38.5% to $3.8 million in the three
months ended September 30, 2000, from $2.7 million in the three-month period
ended September 30, 1999. As a percentage of total revenue, general and
administrative expenses were 6.0% and 5.4% in each of the three-month periods
ended September 30, 2000 and 1999, respectively. The increase in the absolute
dollar amount of general and administrative expenses was primarily due to
increased investment necessary to manage and support the Company's increased
scale of operations. The increase also includes a reorganization charge of
approximately $342,000 primarily related to severance and associated costs that
were paid during the three-month period ended September 30, 2000. The Company
anticipates that for the near future, its general and administrative expenses,
as a percentage of net sales, should remain at approximately the same percentage
as in fiscal 2000.
Amortization of Acquisition-Related Intangible Assets. Amortization of
acquisition-related intangible assets consists of amortization of goodwill and
identifiable intangible assets mostly including core/developed technology,
customer base, trademarks, favorable contracts and assembled workforce. These
assets are being amortized using the straight-line method over periods ranging
from three to nine years. The amortization increased 156.5% from $3.1 million in
the three-month period ended September 30, 1999 to $7.9 million in the
three-month period ended September 30, 2000. The increase is primarily related
to amortization of additional goodwill and other intangibles resulting from the
six acquisitions Pinnacle made during fiscal 2000.
Acquisition Settlement. On September 30, 2000, the Company entered into
an agreement with the former shareholders and option holders of ASports, Inc.
wherein Pinnacle agreed to compensate each of them if the closing price of
Pinnacle's common stock does not equal or exceed $23 per share for four
consecutive trading days prior to May 31, 2001. If Pinnacle's share price does
not reach this level, the value of the compensation to be paid shall be equal to
the number of shares issued and options assumed in the acquisition (944,213 and
138,158, respectively) multiplied by the difference between Pinnacle's average
closing stock price during the month of May, 2001 and $23 per share. Former
shareholders of ASports would be compensated in shares of Pinnacle's common
stock while the former option holders will be compensated in cash. On September
30, 2000, the Company recorded a charge of $13.3 million which represents the
fair value of the arrangement on September 30, 2000 including $0.1 million in
transaction fees. The Company recorded a liability of $1.7 million which
represents the estimated cash payout to the option holders with the remaining
$11.5 million recorded as an increase in common stock. The value assigned was
determined by an independent appraiser using the Black-Scholes method.
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 ("VID"). The
acquired in-process research and development from VID relates to the development
of the next generation of Media Stream products. 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 product's; estimating the resulting net cash flows from such
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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.
Interest Income, net. Net interest income and other consists primarily
of interest income generated from the Company's investments in money market
funds, government securities and commercial paper. In the three-month period
ended September 30, 2000, interest income decreased approximately 36.3% to
$514,000 from $807,000 in the same period last year. The decrease reflects a
reduction in the Company's cash and marketable securities due to cash paid for
acquisitions completed towards the end of fiscal 2000 in addition to cash paid
to repurchase common stock. In addition, positive 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 comprised of federal, state and
foreign income taxes. The Company did not record a provision for income taxes
for the three-month period ended September 30, 2000. The Company recorded a
provision for income taxes of $697,000 for the three-month periods ended
September 30, 1999. 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. On June 30, 2000,
the total valuation allowance was $9.3 million.
As of June 30, 2000, the Company had federal and state net operating
loss carryforwards of approximately $13.9 million and $5.7 million,
respectively. The Company's federal net operating loss carryforwards expire in
the years 2012 through 2020, if not utilized. The Company's state net operating
loss expires in the years 2002 through 2005, if not utilized. In addition, the
Company had federal research and experimentation credit carryforwards of $3.1
million which expire in the years 2001 through 2020, and state research and
experimentation credit carryforwards of $2.3 million which have no expiration
provision.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. The Company
is in the process of assessing the impact, if any, that the adoption of SAB No.
101 will have on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25" ("FIN 44"). This interpretation clarifies the application of
Opinion 25 for certain issues including: (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or warrant, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 on July 1, 2000. The adoption of FIN 44
did not have a material effect on the Company's financial position or results of
operations.
In July 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." The EITF concluded that amounts billed to a customer related to shipping
and handling represent revenues. Issue No. 00-10 is expected to be implemented
in the same quarter as SAB No. 101. The Company does not expect the adoption of
Issue No. 00-10 to have a material impact on its financial position or results
of operations.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives." Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of a single
exchange transaction. Issue No. 00-14 is expected to be implemented in the same
quarter as SAB No. 101. The Company does not expect the adoption of Issue No.
00-14 to have a material impact on its financial position or results of
operations.
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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,
2000, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $56.2 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 $15.5 million in cash
during the three months ended September 30, 2000. This was primarily
attributable to the Company's net loss for the period in addition to the
increase in inventories and the paydown of accounts payable and accrued
expenses. Inventory management is an area of focus as Pinnacle balances the need
to maintain strategic inventory levels to ensure competitive lead times and
provide timely customer service versus the risk of inventory obsolescence
because of rapidly changing technology and customer requirements. Cash was also
used to pay down accounts payable and accrued obligations assumed through
acquisitions and accrued through normal operations.
During the three month period ended September 30, 2000, cash flow from
investing activities increased primarily due to the maturation of the Company's
investments in marketable securities. Cash flow used in investing activities
included $1.1 million invested in property and equipment, compared to $2.9
million in the three months ended September 30, 1999. The high level of
expenditures in the three-month period ended September 30, 1999 primarily
reflects payments 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 VID acquisition and to fund the the Company's
SAP implementation. As the Company continues to grow, it expects to incur
ongoing purchases of property and equipment. Such capital expenditures will be
financed from working capital. Cash flow from investing activities also includes
payments related to acquisitions. In July 2000, the Company paid $3.4 million
for the acquisition of Propel Ahead, Inc. which closed in June 2000. In the
three-month period ended September 30, 1999, the Company paid $12.6 million
related to the VID acquisition.
Cash flows used in financing activities consisted mostly of cash paid
to repurchase stock on the open market. On July 25, 2000 the Company announced
that the Board of Directors had authorized the repurchase of up to 3.0 million
shares of the Company's common stock. As of September 30, 2000, the Company
repurchased a total of 645,000 shares of its common stock at a cost of $5.1
million. Approximately 2.355 million shares remain authorized for repurchase.
Cash flows from the exercise of employee stock options decreased from $2.2
million in the three-month period ended September 30, 1999 to $67,000 in the
three-month period ended September 30, 2000. This is due mainly to the recent
drop in the market price of the Company's common stock. The Company may continue
to experience a decrease in the cash proceeds from stock option exercises if the
stock maintains a moderately low price level.
17
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Factors Affecting Operating Results
|X| 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:
- Increased competition and pricing pressure
- Timing of significant orders from and shipments to major
customers, including OEM's and our large broadcast accounts.
- 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
- 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.
|X| 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 supplier
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.
|X| We must retain key employees to remain competitive.
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. Our success is dependent upon our ability to
attract and
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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 are 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.
|X| 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 2000
were $238.0 million compared to $159.1 million in fiscal 1999, a 49.6% increase.
In the three month period ended September 30, 2000, net sales increased 24.4%
over the same period last year. 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 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.
|X| Any failure to successfully integrate the businesses we have
acquired could negatively impact us.
In June 2000, we acquired Avid Sports, Inc. and Propel Ahead, Inc., and
in April 2000, we acquired Montage Group, Ltd. In January 2000, we acquired
Synergy, Inc. In March 2000, we acquired Digital Editing Services, Inc. and
Puffin Designs, Inc. Also, in 1999, we acquired the Video Communications
Division of the Hewlett-Packard Company, Truevision, Inc. and Shoreline Studios,
Inc. We may in the near- or long-term pursue additional 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
|X| 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. In July 2000, we announced that
financial results for the fourth quarter of fiscal 2000, which ended June 30,
2000, would be lower than the then current analyst consensus estimates regarding
Pinnacle's quarterly results. In the day following this announcement, our share
price lost more than 59% of its value and our shares continue to trade in a
price range significantly lower than the range held by our shares before this
announcement.
With the advent of the Internet, new avenues have been created for the
dissemination of information. Pinnacle has no control over the information that
is distributed and discussed on electronic bulletin boards and investment chat
rooms. The motives of the people or organizations that distribute such
information may not be in the best interest of Pinnacle 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.
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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. On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle
Systems, Inc., et al., No. 00-CV-2596 was filed in the United States District
Court for the Northern District of California against Pinnacle and certain
officer and director defendants.
We have publicly announced that we intend to defend the case
vigorously. It is possible that additional similar litigation could be brought
against us in the future. The securities class action lawsuit described above
and any similar litigation which may be brought against Pinnacle could result in
substantial costs and will likely divert management's attention and resources.
Any adverse determination in such litigation could also subject us to
significant liabilities.
|X| 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.
|X| 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:
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Accom, Inc.
Chyron Corporation
Grass Valley Group
Leitch Technology Corporation
Matsushita Electric Industrial Co. Ltd.
Quantel Ltd. (a division of Carlton Communications Plc)
SeaChange Corporation
Sony Corporation
Tektronix, Inc.
Principal competitors in the desktop and consumer markets are:
Accom, Inc.
Adobe Systems, Inc.
Apple Computer
Avid Technology, Inc.
Dazzle Multimedia
Digitel Processing Systems, Inc.
Fast Multimedia
Hauppauge Digital, Inc.
Matrox Electronics Systems, Ltd.
Media 100, Inc.
Sony Corporation
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 or
they may 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 us 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:
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- 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
|X| 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.
|X| We may be adversely affected if we are sued by a third party or if
we decide to sue a third party.
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. We are also exposed
to litigation arising from disputes in the ordinary course of business. 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.
|X| Because we sell products internationally, we are subject to
additional risks.
Sales of our products outside of North America represented
approximately 55% of net sales in the period ended June 30, 2000 and 61% 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. In fiscal 2001 and
beyond, we expect that a majority of our European sales will continue to be
denominated in local foreign currency, including the Euro. Pinnacle has
developed natural hedges for some of this risk in that most of the European
operating 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
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- 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company transacts business in various foreign currencies but
primarily the Euro and those of the U.K., and Japan. 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 offsets 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. The Company invests primarily in US Treasury Notes and high-grade
commercial paper and generally holds them to maturity. Consequently, 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.23 Settlement agreement by and among Pinnacle Systems
Inc. and those former stockholders of Avid Sports,
Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On July 14, 2000, the Company filed a report on Form 8-K announcing the
Company's acquisition of Avid Sports, Inc.
On July 27, 2000, the Company filed a report on Form 8-K announcing its
preliminary sales and earnings figures for the fourth quarter of fiscal 2000,
its final earnings for the fourth quarter of fiscal 2000, and the filing of a
securities class action lawsuit against the Company and certain of its officers.
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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 14, 1999 By: /s/Mark L. Sanders
---------------------------------
Mark L. Sanders
President, Chief Executive
Officer and Director
Date: November 14, 1999 By: /s/Arthur D. Chadwick
---------------------------------
Arthur D. Chadwick
Vice President, Finance and
Administration and
Chief Financial Officer
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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 14, 1999 By:
---------------------------------
Mark L. Sanders
President, Chief Executive
Officer and Director
Date: November 14, 1999 By:
---------------------------------
Arthur D. Chadwick
Vice President, Finance and
Administration and
Chief Financial Officer
