UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
280 N. Bernardo Ave.
Mountain View, CA 94043
- ---------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(650) 237-1600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock outstanding as of May 5, 2000 was
50,027,626.
<PAGE>
<TABLE>
INDEX
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2000 and June 30, 1999 3
Condensed Consolidated Statements of Operations -
Three-month and Nine-month Periods Ended
March 31, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income
Three-month and Nine-month Periods Ended
March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flow -
Nine months Ended - March 31, 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 12
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 24
ITEM 2 - Changes in Securities and Use of Proceeds 24
ITEM 6 - Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 78,663 $ 48,654
Marketable securities 11,092 31,058
Accounts receivable, net 44,856 35,449
Inventories 34,780 22,221
Deferred income taxes 12,573 10,653
Prepaid expenses and other assets 4,655 2,500
--------- ---------
Total current assets 186,619 150,535
Marketable securities 5,041 9,266
Property and equipment, net 15,177 10,809
Goodwill and other intangibles 74,512 25,503
Other assets 668 356
--------- ---------
$ 282,017 $ 196,469
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 25,058 $ 12,744
Accrued expenses 21,758 14,530
Accrued income taxes 386 2,936
--------- ---------
Total current liabilities 47,202 30,210
--------- ---------
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares;
none issued and outstanding -- --
Common stock, no par value; authorized 120,000 shares;
49,658 and 45,526 issued and outstanding as of
March 31, 2000 and June 30, 1999, respectively 229,190 169,078
Retained earnings (accumulated deficit) 9,458 (389)
Accumulated other comprehensive losses (3,833) (2,430)
--------- ---------
Total shareholders' equity 234,815 166,259
--------- ---------
$ 282,017 $ 196,469
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements 3
</FN>
</TABLE>
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three-months Ended Nine-months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 61,246 $ 40,147 $174,254 $111,592
Cost of sales 27,960 18,442 80,674 51,652
-------- -------- -------- --------
Gross profit 33,286 21,705 93,580 59,940
-------- -------- -------- --------
Operating expenses:
Engineering and product development 7,447 4,282 19,660 10,935
Sales and marketing 14,699 9,795 40,244 28,255
General and administrative 4,212 1,671 9,181 5,065
Amortization of acquisition - related intangible assets 4,757 505 11,839 1,194
In-process research and development 1,100 6,579 3,100 6,579
-------- -------- -------- --------
Total operating expenses 32,215 22,832 84,024 52,028
-------- -------- -------- --------
Operating income (loss) 1,071 (1,127) 9,556 7,912
Interest income and other, net 952 1,135 2,564 3,410
-------- -------- -------- --------
Income before income taxes 2,023 8 12,120 11,322
Income tax expense 354 -- 2,273 2,264
-------- -------- -------- --------
Net income $ 1,669 $ 8 $ 9,847 $ 9,058
======== ======== ======== ========
Net income per share
Basic $ 0.03 $ 0.00 $ 0.21 $ 0.22
======== ======== ======== ========
Diluted $ 0.03 $ 0.00 $ 0.18 $ 0.20
======== ======== ======== ========
Shares used to compute net income per share
Basic 48,655 43,084 47,703 41,988
======== ======== ======== ========
Diluted 56,424 47,708 54,691 46,060
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements 4
</FN>
</TABLE>
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<CAPTION>
Three-months Ended Nine-months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,669 $ 8 $ 9,847 $ 9,058
Foreign currency translation adjustment (337) (2,051) (1,403) (1,262)
------- ------- ------- -------
Comprehensive income (loss) $ 1,332 $(2,043) 8,444 $ 7,796
======= ======= ======= =======
<FN>
See accompanying notes to condensed consolidated financial statements 5
</FN>
</TABLE>
<PAGE>
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<CAPTION>
Nine months Ended March 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,847 $ 9,058
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
In-process research and development 3,100 6,579
Depreciation and amortization 15,050 3,301
Deferred taxes (1,442) --
Changes in operating assets and liabilities:
Accounts receivable (6,174) (8,124)
Inventories (10,055) (6,634)
Accounts payable 3,629 (2,825)
Accrued expenses (634) 316
Accrued income taxes 3,244 1,095
Prepaid and Other (2,394) (1,151)
-------- --------
Net cash provided by operating activities 14,171 1,615
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (7,234) (4,192)
Cash paid for acquisitions (12,526) 120
Net proceeds (payment) from maturity (purchase) of marketable securities 24,191 (27,274)
-------- --------
Net cash used in investing activities 4,431 (31,346)
-------- --------
Cash flows from financing activities:
Payments on note payable (163) (2,237)
Proceeds from issuance of common stock 9,928 4,872
-------- --------
Net cash provided from financing activities 9,765 2,635
-------- --------
Effects of exchange rate changes on cash 1,642 (788)
-------- --------
Net increase (decrease) in cash and cash equivalents 30,009 (27,884)
Cash and cash equivalents at beginning of period 48,654 47,478
-------- --------
Cash and cash equivalents at end of period $ 78,663 $ 19,594
======== ========
Supplemental disclosures of cash paid during the period for:
Interest $ 0 $ 5
======== ========
Income taxes $ 83 $ 1,088
======== ========
Non-cash transactions:
Common stock issued in business acquisitions $ 40,900 $ 7,834
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements 6
</FN>
</TABLE>
<PAGE>
1. Notes To Condensed Consolidated Financial Statements
General
The accompanying condensed consolidated financial statements are
unaudited and 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 statements pursuant to the rules of the
Securities and Exchange Commission. 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,
comprehensive income, 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. Results of operations for
interim periods are not necessarily indicative of results for a full year.
Comprehensive Income (Loss)
The Company's comprehensive income (loss) includes net income and
foreign currency translation adjustments.
Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board 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, as amended, in the first quarter of its fiscal year
ending June 30, 2001. The Company has not determined the impact if any that SFAS
No. 133 will have on its results of operations or financial position.
Stock Split
On February 4, 2000, the Company announced a two-for-one stock split to
be paid on March 27, 2000 for shareholders of record on March 2, 2000. All
references in the financial statements to number of shares, per share amounts,
and stock option data of the Company's common stock have been restated to give
effect to the stock split.
7
<PAGE>
2. Acquisitions
Digital Editing Services, Inc.
On March 30, 2000, the Company acquired all the outstanding common
stock of Digital Editing Services, Inc. , a provider of real-time video analysis
and database solutions ("DES"). In connection with the acquisition, Pinnacle
paid $300,000 in cash and issued 287,752 shares of its common stock valued at
$9.1 million ("initial payment"). The terms of the acquisition also included an
earnout provision wherein the former shareholders of DES could receive
additional consideration, net of the initial payment, upon achieving certain
profitability levels for the one year period ending March 30, 2001 ("earnout
period"). Operating profits ranging between 10% to 20% of revenues would result
in an additional payout of between 100% to 175% of those revenues. No earnout
payment will be made if operating profit does not exceed 10% of revenues during
the earnout period. Any earnout will be paid in shares of the Company's common
stock.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of DES 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 30, 2000. As of March 30, 2000,
the Company recorded $1.4 million in tangible assets, $0.5 million in in-process
research and development, $7.7 million in other identifiable intangibles
including core/developed technology, customer base and other intangibles,
assumed $4.3 million in liabilities, including $2.5 million in deferred taxes,
and allocated $4.5 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 identifiable intangibles are being amortized
using the straight-line method over 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, within one year of the acquisition date, if any, will
be recorded as adjustments to goodwill.
Puffin Designs, Inc.
On March 24, 2000, the Company acquired all the outstanding common
stock of Puffin Designs, Inc. , a provider of content creation solutions
("Puffin"). In connection with the acquisition, Pinnacle issued 360,352 shares
of its common stock valued at $11.2 million. In addition, Pinnacle assumed
outstanding stock options and warrants covering 51,884 and 4,155 shares of stock
respectively and valued at $336,000.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Puffin 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 24, 2000. As of March 24, 2000,
the Company recorded $0.6 million in assets, $0.6 million in in-process research
and development, $0.9 million in other identifiable intangibles including
core/developed technology, assumed $2.3 million in liabilities and allocated
$12.0 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 identifiable intangibles are being amortized using the
straight-line method over 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, within one year of the acquisition date, if any, will
be recorded as adjustments to goodwill.
8
<PAGE>
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 1,546,344
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.
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, favorable contracts 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, within one year of the acquisition date, if any, will
be recorded as adjustments to goodwill.
Truevision, Inc.
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 1,648,412 shares of common
stock valued at $11.5 million. In addition, Pinnacle issued to Truevision
employees and Directors 279,356 options, valued at $0.7 million, to purchase
common stock at an exercise price of $5.99. The Company also assumed 107,672
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.
APB 16 requires the preparation of pro-forma condensed statements of
operations. Pro-forma statements are intended to represent a modification of
historical financial statements as though a current event occurred at an earlier
date. Separate, historical statements of operations for 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 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. Pro forma results of operations have not been
presented for the DES and Puffin acquisitions because the effects of these
acquisitions were not material on either an individual or an aggregate basis.
9
<PAGE>
Analysis of In-Process Research and Development
The portion of the purchase prices allocated to in-process research and
development for the above acquisitions 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 these analyses and computations,
in the nine-month period ended March 31, 2000, $0.5 million, $0.6 million and
$2.0 million were charged to operations for the DES, Puffin and Hewlett-Packard
acquisitions, respectively. In the nine-month period ended March 31, 1999, $6.2
million was charged to operations related to the Truevision acquisition.
3. Subsequent Event
On April 6, 2000 the Company acquired all the outstanding common stock
of Montage Group, Ltd., a provider of networked non-linear editing solutions
("Montage"). In connection with the acquisition, Pinnacle issued 125,224 shares
of its common stock valued at $3.7 million ("initial payment"). The terms of the
acquisition also included an earnout provision wherein the former shareholders
of Montage could receive additional consideration, net of the initial payment,
upon achieving certain gross margin levels for each year of a two year period
beginning April 6, 2000. Gross margins ranging between 40% to 50% of revenues
would result in an additional payout of between 100% to 150% of related
revenues. However, in the second year of the earnout, assuming the 40% gross
margin threshold has been met, consideration will be paid only to the extent
that the second year earnout calculation exceeds that of the first year. No
earnout payment will be made in either year if gross margins do not exceed 40%
of revenues exclusively. Earnout payments, if any, will be paid in shares of the
Company's common stock.
The acquisition will be accounted for under the purchase method of
accounting. Accordingly, the results of operations of Montage and the fair
market value of the acquired assets and assumed liabilities will be included in
the financial statements of the Company as of April 6, 2000.
10
<PAGE>
4. Per Share Information
<TABLE>
For all periods presented, there were no adjustments to net income reported in
the condensed consolidated statements of operations for determining net income
used for basic and diluted earnings per share. The following table reconciles
the denominators of the basic and diluted earnings per share computations shown
on the Condensed Consolidated Statements of Operations:
<CAPTION>
Three-months Ended Nine-months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
(In thousands) 2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS - weighted average shares of common stock
outstanding 48,655 43,084 47,703 41,988
Effect of dilutive common equivalent shares - stock
options outstanding 7,769 4,624 6,988 4,072
------ ------ ------ ------
Diluted EPS - weighted average shares and common
equivalent shares outstanding 56,424 47,708 54,691 46,060
====== ====== ====== ======
Options to purchase shares of common stock
excluded due to anti-dilution 2 0 36 38
====== ====== ====== ======
</TABLE>
5. Segment Information
The Company's organizational structure is based on three strategic
business groups that sell various products into the principal 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, and other income,
excluding 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 (in thousands):
Three-months Ended Nine-months Ended
March 31, March 31,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Broadcast:
Revenues $ 22,628 $ 6,480 $ 58,987 $ 18,326
Gross profit 14,079 3,918 36,838 10,517
Operating income (loss) $ 1,203 $ (1,062) $ 4,797 $ (2,456)
Desktop:
Revenues $ 26,472 $ 23,034 $ 76,364 $ 62,626
Gross profit 13,705 13,381 40,772 37,215
Operating income $ 2,155 $ 5,695 $ 7,777 $ 14,897
11
<PAGE>
Consumer:
Revenues $ 12,146 $ 10,633 $ 38,903 $ 30,640
Gross profit 5,502 4,406 15,970 12,208
Operating income (loss) $ 915 $ 819 $ 2,184 $ 2,050
Combined:
Revenues $ 61,246 $ 40,147 $ 174,254 $ 111,592
Gross profit 33,286 21,705 93,580 59,940
Operating income $ 4,273 $ 5,452 $ 14,758 $ 14,491
<TABLE>
The following table reconciles revenues and operating income to total
consolidated amounts (in thousands):
<CAPTION>
Three-months Ended Nine-months Ended
------------------ -----------------
March 31 March 31,
-------- ---------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total operating income for reportable segments $ 4,273 $ 5,452 $14,758 $14,491
Less: In-process research and development 1,100 6,579 3,100 6,579
Legal settlement 2,102 -- 2,102 --
------- ------- ------- -------
Consolidated operating income (loss) $ 1,071 $(1,127) $ 9,556 $ 7,912
======= ======= ======= =======
</TABLE>
6. Commitments and Contingencies
On May 28, 1999, a complaint, Hot Key Pty Ltd. v. Pinnacle Systems,
Inc., No. C-99-20487 (RMW) was filed against the Company in the United States
District Court for the Northern District of California. The complaint was filed
by a former distributor of Pinnacle and alleges causes of action for breach of
contract, fraud and deceit, breach of the implied covenant of good faith and
fair dealing, and breach of express warranty. The parties to this matter reached
an out-of-court settlement in March 2000. The matter accordingly has been
dismissed with prejudice. The settlement amount plus legal fees totaled $2.1
million and is included in general and administrative expenses.
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 primarily designs, manufactures, markets and supports video
post-production tools for high quality real time video processing. These
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. The Company also manufactures, markets and sells products which
allow users to watch television programming on their personal computers and
recently, the Company introduced StreamGenie, a new portable webcasting solution
for streaming live video program over the Internet. The Company operates in
three strategic business groups - Broadcast, Desktop and Consumer - that target
the principal markets in which the Company's products are sold.
12
<PAGE>
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,
the Deko line and Thunder and MediaStream servers comprise the Company's suite
of high performance real time products designed for on-air, broadcast and
high-end, post-production applications. On April 7, 2000, Pinnacle announced the
acquisition of Digital Editing Services and Montage Group LTD. These newly
acquired companies are expected to form the basis of Pinnacle Systems' new
Totally Networked News(TM) solutions family for broadcasting and webcasting with
products such as VortexNews(TM) and Omega.
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, which began shipping in
September 1999, TypeDeko and WriteDeko - and has recently announced additional
products including FXDekoHD, a high definition character and graphics generator,
HDDeko500, a real-time high definition character generator, and ClipDeko, an
integrated clip option for the Company's complete line of character generators.
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 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
MediaStream server family. MediaStream compliments the Thunder family in
providing a 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.
VorteXNews(TM) from the Montage Group, gives users the ability to
ingest, edit, store, broadcast and stream to the Internet live news and sports
content entirely in the digital domain. The Omega sports package from Digital
Editing Services, Inc. has been chosen by many leading professional and college
teams for their video server and image database needs. Pinnacle began shipping
Omega in March 2000.
The broadcast market accounted for approximately 37.0% and 16.1% of net
sales in the three-month periods ended March 31, 2000 and 1999, respectively and
33.9% and 16.4% of net sales in the nine-month periods ended March 31, 2000 and
1999, respectively.
Desktop Market
The Company's desktop products 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. 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 traditionally has had two general classes
of desktop products - digital video effects products and video capture and
editing products. In January 2000, Pinnacle announced the formation of its new
webcasting solutions business within its Desktop Products Group, emphasizing the
Company's drive to introduce a suite of solutions for the internet media
streaming marketplace.
Digital video effects products which include the Alladin and Genie
product families were released in 1994 and 1996 respectively. The Company's
class of video capture and editing products, including ReelTime, ReelTime Nitro,
miroVIDEO DC30, miroVIDEO DC50, miroVIDEO DV300/200 families and the TARGA
family. In June 1999, the Company began shipping DC1000, a dual stream MPEG2
editing product and a companion DVD authoring option and in July 1999 began
shipping the companion product DVD1000, which adds the capability to author
fully featured DVD titles. In December 1999, the Company began shipping 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. In January 2000, Pinnacle acquired Synergy
International, makers of Hollywood FX software for video content creation
applications. Hollywood FX products are currently being bundled with Pinnacle's
DV500 and are being sold separately. In March 2000, the Company acquired Puffin
Designs, Inc. a provider of content creation solutions. Puffin Designs has
developed and sells an advanced set of software tools for real-time paint,
rotoscoping and visual motion tracking. In April 2000 , the Company introduced
Commotion 3.0, TARGA 3000 and TARGA Cine, and the DC2000 and
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DVD2000. Commotion 3.0, developed by Puffin designs, is all-in-one solution that
combines the power of the paintbrush with intuitive compositing and effects
tools to deliver superior performance on the desktop. The TARGA 3000 is the
Company's newest content creation and streaming platform. The TARGA 3000 allows
users to choose processing in DV, MPEG-2 or true uncompressed 601, and even lets
them mix these formats on a single timeline. The system delivers three realtime
uncompressed video streams, plus five realtime graphics streams simultaneously.
TARGA Cine delivers uncompressed standard-definition and uncompressed
high-definition video solutions available only on the Macintosh(R). Pinnacle
Systems' TARGA Cine, designed to take advantage of the incredible performance of
the Power Mac(TM) G4.
For its class of webcasting solutions, in December 1999, the Company
announced StreamGenie, a new portable Web casting solution for streaming live
video programming over the Internet. The Company intends to initiate shipment of
Stream Genie before the end of fiscal 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 desktop market accounted for approximately 43.2% and 57.4% of net
sales in the three-month periods ended March 31, 2000 and 1999, respectively and
43.8% and 56.1% of net sales in the nine-month periods ended March 31, 2000 and
1999, 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 (PC), camcorder and VCR. The Company also sells products that allow the
consumer to watch TV, listen to FM radio and create their own videos on a PC. As
of March 31, 2000, the Company's consumer product line included Studio DC10,
Studio MP10, Studio PCTV and PCTV USB, and Studio DV. The Company began shipping
Studio DV in September 1999. Studio DV enables consumers to edit and create
high-quality digital videos right on their PC by taking input directly from DV
camcorders. In November 1999, the Company began shipping 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. In April 2000,
Pinnacle introduced PC-HDTV. PC-HDTV will allow viewers to watch, record, and
play back a HDTV program on a PC monitor at full resolution and high definition
at a fraction of the cost of standalone HD television set.
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 19.8% and 26.5% of net sales in the
three-month periods ended March 31, 2000 and 1999, respectively and 22.3% and
27.5% of net sales in the nine-month periods ended March 31, 2000 and 1999,
respectively.
Results of Operations
Net Sales The Company's net sales increased 52.6% to $61.2 million in
the three-month period ended March 31, 2000 compared to $40.1 million in the
same period last year. Net sales increased 56.2% to $174.3 million in the
nine-month period ended March 31, 2000 compared to $111.6 million in the same
period last year.
Increase
Quarter ended March 31: 2000 1999 (Decrease)
---- ---- ----------
Product Group
Broadcast $22,628 $6,480 249.2%
Desktop 26,472 23,034 14.9%
Consumer 12,146 10,633 14.2%
-------- --------
$ 61,246 $ 40,147 52.6%
======== ========
Increase
Nine-months ended March 31: 2000 1999 (Decrease)
---- ---- ----------
Product Group
- -------------
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Broadcast $58,987 $18,326 221.9%
Desktop 76,364 62,626 21.9%
Consumer 38,903 30,640 27.0%
--------- --------- ------
$174,254 $ 111,592 56.2%
========= ========= ======
Sales increased in all three product groups for the three and
nine-month periods ended March 31, 2000 over the same periods last year.
Broadcast sales increased 249% over the same quarterly period last year and 222%
over the same nine-month period in the prior fiscal year and was primarily due
to the sale of MediaStream products acquired by the Company from Hewlett-Packard
in August 1999. For the desktop group, sales in the three-month period ended
March 31, 2000 increased 14.9% over the same period last year and sales in the
nine-month period ended March 31, 2000 increased 21.9% over the same period last
year. Decreased sales of DC30, Alladin and Reel-time were offset sales of newer
products such as the DV500and DC1000 in addition to the sale of TARGA products
which were acquired from Truevision, Inc. in March 1999. In the consumer group,
sales in the three-month period ended March 31, 2000 increased 14.2% over the
same period last year and sales in the nine-month period ended March 31, 2000
increased 27.0% over the same period last year . Decreased sales of Studio 400
were offset by increased sales of the DC10 and PCTV product family and sales of
new products such as Studio MP10 and Studio DV.
International Sales. International sales (sales outside of North
America) increased 52.6% in the three-month period ended March 31, 2000 compared
to the three-month period ended March 31, 1999 and accounted for approximately
59% of net sales in each of these periods. International sales increased 34.5%
in the nine-month period ended March 31, 2000 compared to the nine-month period
ended March 31, 1999 and accounted for approximately 55% and 64% of the
Company's net sales respectively. The Company expects that international sales
will continue to represent a significant portion of its net sales.
Cost of Sales. 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. 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,
provisions for obsolescence and shrinkage, and post sale customer support costs.
For the each of the three-month and nine-month periods ended March 31, 2000 and
1999, cost of sales was approximately 46%.
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, benefits, depreciation and the cost of development tools. Engineering
and product development expenses increased 73.9% to $7.4 million in the
three-months ended March 31, 2000 from $4.3 million during the comparable
three-month period in the prior year. The Company's engineering and product
development expenses increased 79.8% to $19.7 million in the nine-months ended
March 31, 2000 from $10.9 million during the nine-months ended March 31, 1999.
As a percentage of sales, engineering and product development expenses increased
to 12.2% in the quarter ended March 31, 2000 from 10.7% in the quarter ended
March 31, 1999, and to 11.3% from 9.8% in the nine-months ended March 31, 2000
and 1999, respectively. The increase was due primarily to the personnel hired in
connection with the Truevision and Hewlett-Packard acquisitions in addition to
normal growth. Management believes that investment in research and development
is crucial to its future growth and position in the industry. In addition to the
Company's recent acquisitions which added research and development facilities in
Orlando, Florida and New York City, the Company expects to continue to allocate
significant resources to all of its engineering and product development
locations including Mountain View, Grass Valley and Sausalito, California;
Paramus, New Jersey; Gainesville, Florida; Braunschweig, Germany; Indianapolis,
Indiana and Salt Lake City, Utah.
Sales and Marketing . Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show expenses, advertising and promotional expenses
including channel marketing funds and professional fees for marketing services.
Sales and marketing expenses increased by 50.1% to $14.7 million in the
three-month period ended March 31, 2000 from $9.8 million during the comparable
three-month period in the prior year. The Company's sales and marketing expenses
increased 42.4% to $40.2 million in the nine-months ended March 31, 2000 from
$28.3 million in the nine-month period ended March 31, 1999. These increases
period over period reflect the Company's investment in infrastructure focused on
increasing product awareness and market share and on new and expanding product
lines. Although sales and marketing expenditures have increased significantly
year to year, as a percentage of net sales expenditures have fallen to 24.0%
from 24.4% in the three-month
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periods ending March 31, 2000 and 1999, and to 23.1% from 25.3% in the
nine-month periods ending March 31, 2000 and 1999, respectively. These decreases
reflect a growth in sales exceeding incremental sales and marketing
expenditures. Although management continues to invest substantial amounts in the
Company's sales and marketing efforts, there can be no assurance that these
current or increased sales and marketing expenditures will enable the Company to
maintain or grow its current level of sales.
General and Administrative. General and administrative expenses 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 to $4.2 million for the
three-months ended March 31, 2000 from $1.7 million for the three-months ended
March 31, 1999. General and administrative expenses increased to $9.2 million
for the nine-months ended March 31, 2000 from $5.1 million for the nine-months
ended March 31, 1999. Included in general and administrative expenses in the
three and nine-month periods ended March 31, 2000 is a legal settlement and
related expenses totaling $2.1 million. Excluding this charge, general and
administrative expenses increased 26.3% to $2.1 million for the three-months
ended March 31, 2000 and 39.8% increased to $7.1 million for the nine-months
ended March 31, 2000. As a percentage of total revenue, excluding the legal
settlement, general and administrative expenses decrease to 3.4% from 4.2% in
the three-month period ended March 31, 2000 and 1999 respectively, and to 4.1%
from 4.5% in nine-months ended March 31, 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. These included staffing and associated
benefits, investment in the Company's new SAP information system and legal and
professional fees. The Company anticipates that for the near future, its general
and administrative expenses, excluding the legal settlement, as a percentage of
total revenues should remain at approximately the same percentage as in the
first nine months of fiscal 2000.
Amortization of Acquisition - Related Intangible Assets. Amortization
of acquisition related intangibles consists of goodwill from acquisitions and
other identifiable intangibles including core/developed technology, customer
base, trademarks, favorable contracts and assembled workforce amongst others.
These assets are being amortized using the straight-line method over periods
ranging from one month to nine years. The amortization increased from $0.5
million in the three-month period ended March 31, 1999 to $4.8 million in the
three-month period ended March 31, 2000 and from $1.2 million to $11.8 million
in the nine-month periods ended March 31, 1999 and 2000, respectively. These
increases are due primarily to the amortization of goodwill and other
intangibles acquired in the Truevision and Shoreline acquisitions in March 1999
and the acquisition of the Video Communication Division from the Hewlett-Packard
Company in August 1999.
In-Process Research and Development. During the nine-month period ended
March 31, 2000, the Company recorded an in-process research and development
charge of $3.1 million. This amount relates to the Company's acquisition of
certain assets of the Video Communications Division of the Hewlett-Packard
Company ("HP") in August 1999 and Digital Editing Services, Inc. and Puffin
Designs, Inc. in March 2000. During the nine-month period ended March 31, 1999,
the Company recorded an in-process research and development charge of $6.6
million. This amount relates to the Company's acquisition of Truevision and
Shoreline Studios in March 1999. 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 majority of the in-process research and development costs for the
nine-month periods ended March 31, 2000 and 1999 relate to the HP and Truevision
acquisitions respectively. The acquired in-process research and development from
HP relates to the development of the next generation of Media Stream products.
The acquired in-process research and development from Truevision relates to the
development of the next generation of TARGA 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. Although
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 projects are 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. Current fiscal year
estimates and valuations discussed above are subject to change.
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<PAGE>
Interest Income and Other, Net. Interest income and other, 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 March 31, 2000 and 1999, net interest income was $1.0
million and $1.1 million respectively. In the nine-months ended March 31, 2000
and 1999, net interest income was $2.6 million and $3.4 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 of federal, state and
foreign income taxes. The Company recorded a provision for income taxes of $0.4
million and zero for the three-month periods ended March 31, 2000 and 1999,
respectively. The Company recorded a provision for income taxes of $2.3 million
for the nine-month periods ended March 31, 2000 and 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. Total valuation allowance was $2.0 million and $6.2
million as of March 31, 2000 and June 30, 1999 respectively.
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 March 31, 2000,
the Company's principal sources of liquidity included cash, cash equivalents and
marketable securities totaling approximately $95 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 generated $14.2 million in cash
during the nine-month period ended March 31, 2000. This was primarily
attributable to the Company's net income of $28.0 after adjusting for
depreciation, amortization and in-process research and development. This was
partially offset by an increase in accounts receivable and inventories. Accounts
receivable increased 26.5% from June 30, 1999 to March 31, 2000 although days
sales outstanding in receivables decreased to 66 days at March 31, 2000 from 68
days at June 30, 1999. Inventory increased primarily due to the obligated
purchase of inventory from the Hewlett Packard Company pursuant to the
acquisition of their Video Communications Division in August 1999. Inventory
management remains an area of focus as Pinnacle balances the need to maintain
strategic inventory levels to ensure competitive lead times versus the risk of
inventory obsolescence because of rapidly changing technology and customer
requirements.
During the nine-month period ended March 31, 2000, cash flow from
investing activities included $7.2 million invested in property and equipment,
compared to $4.2 million in the nine months ended March 31, 1999. The higher
level of expenditures for the nine months ended March 31, 2000 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 and $3.5 million in capitalized
expenditures related to the implementation of an SAP enterprise software system.
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 decreased due to 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 1,546,334 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.
17
<PAGE>
On March 24, 2000, the Company acquired all the outstanding common
stock of Puffin Designs, Inc. , a provider of content creation solutions
("Puffin"). In connection with the acquisition, Pinnacle issued 360,352 shares
of its common stock valued at $11.2 million. In addition, Pinnacle assumed
outstanding stock options and warrants covering 51,884 and 4,155 shares of stock
respectively and valued at $336,000. 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 the shares issued. There are however certain restrictions with
respect to the disposition of a certain number of shares.
On March 30, 2000, the Company acquired all the outstanding common
stock of Digital Editing Services, Inc. , a provider of real-time video analysis
and database solutions ("DES"). In connection with the acquisition, Pinnacle
paid $300,000. in cash and issued 287,752 shares of its common stock valued at
$9.1 million ("initial payment"). The terms of the acquisition also included an
earnout provision wherein the former shareholders of DES could receive
additional consideration, net of the initial payment, upon achieving certain
profitability levels for the one year period ending March 30, 2001 ("earnout
period"). Operating profits ranging between 10% to 20% of revenues would result
in an additional payout of between 100% to 175% of those revenues. No earnout
payment will be made if operating profit does not exceed 10% of revenues during
the earnout period. The earnout will be paid in shares of the Companys' common
stock.
On April 6, 2000, the Company acquired all the outstanding common stock
of Montage Group, Ltd., a provider of networked non-linear editing solutions
("Montage"). In connection with the acquisition, Pinnacle issued 125,224 shares
of its common stock valued at $3.7 million ("initial payment"). The terms of the
acquisition also included an earnout provision wherein the former shareholders
of Montage could receive additional consideration, net of the initial payment,
upon achieving certain gross margin levels for each year of a two year period
beginning April 6, 2000. Gross margins ranging between 40% to 50% of revenues
would result in an additional payout of between 100% to 150% of related revenues
respectively. However, in the second year of the earnout, assuming the 40% gross
margin threshold has been met, consideration will be paid only to the extent
that the second year earnout calculation exceeds that of the first year. No
earnout payment will be made in either year if gross margins do not exceed 40%
of revenues exclusively. Earnout payments, if any, will be paid in shares of the
Companys' common stock.
Factors Affecting Operating Results
|_| We have grown rapidly and expect to continue to grow rapidly. If we
fail to effectively manage this growth, our financial results could
suffer.
We have experienced rapid growth and anticipate that we will continue
to grow at a rapid pace in the future. For example, net sales in fiscal 1999
were $159.1 million compared to $105.3 million in fiscal 1998, a 51% increase,
and net sales in the first nine months of fiscal 2000 were $174.3 million
compared with $111.6 million in the first nine months of fiscal 2000. 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.
|_| Any failure to successfully integrate the businesses we have acquired could
negatively impact us.
Since March 1999, we have completed six acquisitions. 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
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<PAGE>
|_| There are various factors which may cause our net revenues and operating
results to fluctuate.
Our quarterly and annual operating results have varied significantly in
the past and may continue to fluctuate because of a number of factors, many of
which are outside our control. These factors include:
- Timing of significant orders from and shipments to major OEM
customers
- Timing and market acceptance of new products
- Success in developing, introducing and shipping new products
- Dependence on distribution channels through which our products
are sold
- Increased competition and pricing pressure
- Accuracy of our and our resellers' forecasts of end -user demand
- Accuracy of inventory forecasts
- Ability to obtain sufficient supplies from our subcontractors
- Timing and level of consumer product returns
- Foreign currency fluctuations
- Costs of integrating acquired operations
- General domestic and international economic conditions, such as
the recent economic 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.
|_| 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, new avenues have 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 investment
chat rooms. The motives of the people or organizations that distribute such
information 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.
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
19
<PAGE>
management's attention and resources. Any adverse determination in such
litigation could also subject us to significant liabilities.
|_| We are dependent on contract manufacturers and single or limited source
suppliers for our components. If these manufacturers and suppliers do
not meet our demand either in volume or quality, then we could be
materially harmed.
We rely on subcontractors to manufacture our desktop and consumer
products and the major subassemblies of our broadcast products. We and our
manufacturing subcontractors are dependent upon single or limited source
suppliers for a number of components and parts used in our products, including
certain key integrated circuits. Our strategy to rely on subcontractors and
single or limited source suppliers involves a number of significant risks,
including:
- Loss of control over the manufacturing process
- Potential absence of adequate capacity
- Potential increases in component lead times
- Unavailability of certain process technologies
- Reduced control over delivery schedules, manufacturing yields,
quality and costs
- Unexpected increases in component costs
- Discontinued components for which substitute components may be
difficult to procure
If any significant subcontractor or single or limited source suppliers
becomes unable or unwilling to continue to manufacture these subassemblies or
provide critical components in required volumes, we will have to identify and
qualify acceptable replacements or redesign our products with different
components. Additional sources may not be available and product redesign may not
be feasible on a timely basis. This could materially harm our business. Any
extended interruption in the supply of or increase in the cost of the products,
subassemblies or components manufactured by third party subcontractors or
suppliers could materially harm our business.
|_| We may fail to sell products in the consumer market.
We entered the consumer market with the acquisition of the
VideoDirector product line from Gold Disk in June 1996. We 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
|_| 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
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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.
|_| 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:
Accom, Inc.
Chyron Corporation
Leitch Technology Corporation
Matsushita Electric Industrial Co. Ltd.
Quantel Ltd. (a division of Carlton Communications Plc)
SeaChange Corporation
Sony Corporation
Grass Valley Group
Principal competitors in the desktop and consumer markets are:
Accom, Inc.
Adobe Systems, Inc.
Avid Technology, Inc.
Digitel Processing Systems, Inc.
Fast Multimedia
Hauppauge Digital, Inc.
Matrox Electronics Systems, Ltd.
Media 100, Inc.
Quantel Ltd. (a division of Carlton Communications Plc)
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
21
<PAGE>
new, higher performance, lower cost consumer video products that may compete
directly with our consumer products. We expect that potential competition in
this market is likely to come from existing video editing companies, software
application companies, or new entrants into the market, many of which have the
financial resources, marketing and technical ability to develop products for the
consumer video market. Increased competition in any of these markets could
result in price reductions, reduced margins and loss of market share. Any of
these effects could materially harm our business.
|_| We rely heavily on dealers and OEMs to market, sell, and distribute our
products. In turn, we depend heavily on the success of these resellers.
If these resellers do not succeed in effectively distributing our
products, then our financial performance will be negatively affected.
These resellers may:
- Not effectively promote or market our products
- Experience financial difficulties and even close operations
Our dealers and retailers are not contractually obligated to sell our
products. Therefore, they may, at any time:
- Refuse to promote or pay for our products
- Discontinue our products in favor of a competitor's product
Also, with these distribution channels standing between them and the
actual market, we may not be able to accurately gauge current demand for
products and anticipate demand for newly introduced products. For example,
dealers may place large initial orders for a new product just to keep their
stores stocked with the newest products and not because there is a significant
demand for them.
As to consumer products offerings, we have expanded our distribution
network to include several consumer channels, including large distributors of
products to computer software and hardware retailers, which in turn sell
products to end users. We also sell our consumer products directly to certain
retailers. Rapid change and financial difficulties of distributors have
characterized distribution channels for consumer retail products. These
arrangements have exposed us to the following risks, some of which are out of
our control:
- We are obligated to provide price protection to such retailers
and distributors and, while the agreements limit the conditions
under which product can be returned to us, we may be faced with
product returns or price protection obligations.
- The distributors or retailers may not continue to stock and sell
our consumer products.
- Retailers and retail distributors often carry competing products.
Any of the foregoing events could materially harm our business.
|_| If certain of our key employees leave or are no longer able to perform
services for us, it could have a material adverse effect on our
business. We may not be able to attract and retain a sufficient number
of managerial personnel and technical employees to compete
successfully.
We believe that the efforts and abilities of our senior management and
key technical personnel are very important to our continued success. Only one
has an employment agreement and none are the subject of key man life insurance.
Our success is dependent upon our ability to attract and retain qualified
technical and managerial personnel. There are not enough engineers, technical
support, software services and managers available to meet the current demands of
the computer industry. We may not be able to retain our key technical and
managerial employees or attract, assimilate and retain such other highly
qualified technical and managerial personnel as required in the future. Also,
employees may leave our employ and subsequently compete against us, or
contractors may perform services for competitors of ours. If we are unable to
retain key personnel, our business could be materially harmed.
|_| We may be unable to protect our proprietary information and procedures
effectively.
We must protect our proprietary technology and operate without
infringing the intellectual property rights of others. We rely on a combination
of patent, copyright, trademark and trade secret laws and other intellectual
property
22
<PAGE>
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.
|_| 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. The Company is 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.
|_| 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 nine-month period ended March 31, 1999 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. 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 2000 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.
|_| Future Y2K problems could harm our business
23
<PAGE>
As of the date of this filing, we have not incurred any business
disruptions nor any significant product issues as a result of Year 2000 issues.
However, while no such occurrence has developed as of the date of this filing to
our knowledge, Year 2000 issues may not become apparent as of this date and
therefore, there is no assurance that the Company will not be affected by future
disruptions. The Company will continue to monitor the issue vigilantly and work
to remedy any issues that arise. It is uncertain to what extent we will be
affected by the year 2000 problem, however, if the Company or its customer or if
third parties or suppliers experience year 2000 problems, our business may be
materially 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, Japan 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. 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 28, 1999, a complaint, Hot Key Pty Ltd. v. Pinnacle Systems,
Inc., No. C-99-20487 (RMW) was filed against the Company in the United States
District Court for the Northern District of California. The Complaint was filed
by a former distributor of Pinnacle and alleges causes of action for breach of
contract, fraud and deceit, breach of the implied covenant of good faith and
fair dealing, and breach of express warranty. The parties to this matter reached
an out-of-court settlement in March 2000. The matter accordingly has been
dismissed with prejudice.
Item 2. Changes in Securities and Use of Proceeds
(a) The Board of Directors approved a two-for-one stock split of the Company's
common stock to holders of record on March 2, 2000 to be distributed on March
27, 2000. The Company's Restated Articles of Incorporation were amended to
reflect the stock split.
(b) During the quarter, the Company issued an aggregate of approximately 648,000
shares of its common stock in exchange for the outstanding capital stock of
Digital Editing Services, Inc. and Puffin Designs, Inc. The shares were issued
pursuant to an exemption by reason of Section 4(2) of the Securities Act of
1933. These sales were made without general solicitation or advertising. Each
purchaser was an accredited investor or a sophisticated investor (either alone
or through its representative) with access to all relevant information
necessary. The Company has filed a Registration Statements on Form S-3 covering
the resale of 360,352 of such securities.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
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: May 11, 2000 By: /s/Mark L. Sanders
-----------------------------
Mark L. Sanders
President and
Chief Executive Officer
Date: May 11, 2000 By: /s/Arthur D. Chadwick
-----------------------------
Arthur D. Chadwick
Vice President, Finance
and Administration and
Chief Financial Officer
(principal financial and
accounting officer)
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
Date: May 11, 2000 By: ___________________________________
Mark L. Sanders
President and
Chief Executive Officer
Date: May 11, 2000 By: ___________________________________
Arthur D. Chadwick
Vice President, Finance and
Administration and Chief
Financial Officer (principal
financial and accounting officer)
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