UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from_____ to _____
Commission File No. 0-24784
PINNACLE SYSTEMS, INC.
----------------------
(Exact name of Registrant as specified in its charter)
California 94-3003809
------------------ -------------------
(State or other jurisdiction of (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 February 2, 2000 was
24,250,210.
<PAGE>
<TABLE>
INDEX
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1999 and June 30, 1999 3
Condensed Consolidated Statements of Operations -
Three-month and Six-month Periods Ended
December 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income
Three-month and Six-month Periods Ended
December 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flow -
Six-months Ended - December 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 23
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 24
ITEM 4 - Submission of Matters to a Vote of Security Holders 25
ITEM 6 - Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 31, June 30,
1999 1999
------------------ -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 60,449 $ 48,654
Marketable securities 24,625 31,058
Accounts receivable, trade net 44,461 35,442
Other receivables, net 805 7
Inventories 23,375 22,221
Deferred income taxes 12,453 10,653
Prepaid expenses and other assets 2,823 2,500
------------------ -------------------
Total current assets 168,991 150,535
Marketable securities 3,803 9,266
Property and equipment, net 14,254 10,809
Goodwill and other intangibles 50,333 25,503
Other assets 679 356
------------------ -------------------
$ 238,060 $ 196,469
================== ===================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 16,121 12,744
Accrued expenses 15,508 14,530
Accrued income taxes 4,021 2,936
------------------ -------------------
Total current liabilities 35,650 30,210
------------------ -------------------
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares;
none issued and outstanding - -
Common stock, no par value; authorized 60,000 shares;
24,103 and 22,763 issued and outstanding as of
December 31 and June 30, 1999, respectively 198,116 169,078
Retained earnings (accumulated deficit) 7,790 (389)
Accumulated other comprehensive losses (3,496) (2,430)
------------------ -------------------
Total shareholders' equity 202,410 166,259
------------------ -------------------
$ 238,060 $ 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 Six-months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 62,562 $ 39,172 $113,008 $ 71,445
Cost of sales 30,415 18,197 52,714 33,210
-------- -------- -------- --------
Gross profit 32,147 20,975 60,294 38,235
-------- -------- -------- --------
Operating expenses:
Engineering and product development 6,244 3,352 12,213 6,653
Sales and marketing 13,819 10,287 25,545 18,460
General and administrative 2,257 1,885 4,969 3,394
Amortization of acquisition-related intangible assets 4,021 275 7,082 689
In-process research and development - - 2,000 -
-------- -------- -------- --------
Total operating expenses 26,341 15,799 51,809 29,196
-------- -------- -------- --------
Operating income 5,806 5,176 8,485 9,039
Interest income and other, net 804 1,128 1,612 2,275
-------- -------- -------- --------
Income before income taxes 6,610 6,304 10,097 11,314
Income tax expense 1,221 1,264 1,918 2,266
-------- ------- ------- -------
Net income $ 5,389 $ 5,040 $ 8,179 $ 9,048
======== ======== ======== ========
Net income per share
Basic $ 0.23 $ 0.24 $ 0.35 $ 0.44
======== ======== ======== ========
Diluted $ 0.20 $ 0.22 $ 0.30 $ 0.40
======== ======== ======== ========
Shares used to compute net income per share
Basic 23,922 21,048 23,612 20,726
======== ======== ======== ========
Diluted 27,227 23,002 26,855 22,604
======== ======== ======== ========
<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 Six-months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,389 $ 5,040 $ 8,179 $ 9,048
Foreign currency translation adjustment (2,183) (55) (1,066) 791
-------- -------- -------- --------
Comprehensive income $ 3,206 $ 4,985 $ 7,113 $ 9,839
======== ======== ======== ========
<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>
Six-months Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,179 $ 9,048
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
In-process research and development 2,000 -
Depreciation and amortization 9,020 2,059
Deferred taxes (1,444) -
Changes in operating assets and liabilities:
Accounts receivable (6,495) (4,879)
Inventories (2,043) (5,993)
Accounts payable 2,102 3,303
Accrued expenses (3,715) 1,060
Accrued income taxes 3,220 1,632
Other (845) (1,112)
-------- --------
Net cash provided by operating activities 9,979 5,118
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (5,103) (2,883)
Cash paid for acquisitions (12,597) -
Net proceeds (payments) from maturity (purchase) of marketable securities 11,850 (28,077)
-------- --------
Net cash used in investing activities (5,850) (30,960)
-------- --------
Cash flows from financing activities:
Payments on note payable (42) (150)
Proceeds from issuance of common stock 5,748 2,465
-------- --------
Net cash provided from financing activities 5,706 2,315
-------- --------
Effects of exchange rate changes on cash 1,960 500
-------- --------
Net increase (decrease) in cash and cash equivalents 11,795 (23,027)
Cash and cash equivalents at beginning of period 48,654 47,478
-------- --------
Cash and cash equivalents at end of period $ 60,449 $ 24,451
======== ========
Supplemental disclosures of cash paid during the period for:
Income taxes $ - $ 490
======== ========
Non-cash transactions:
Common stock issued in business acquisitions $ 20,632 $ 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. 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.
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.
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.
Subsequent Event - Stock Split
On February 4, 2000 the Company's announced a two-for-one stock split
(to be effective in the form of a stock dividend) to be paid on March 27, 2000
for shareholders of record on March 2, 2000. The accompanying consolidated
financial statements do not give effect to the pending stock split.
7
<PAGE>
2. Acquisitions
Hewlett-Packard
On August 2, 1999, the Company completed the purchase of the Video
Communications Division ("VID") of the Hewlett-Packard Company ("HP"). Under the
terms of an asset purchase agreement dated June 30, 1999, Pinnacle Systems
acquired substantially all of the assets of HP's Video Communications Division,
including key technologies and intellectual property, the MediaStream family of
products and selected additional assets, as well as most managers and employees.
In consideration, Pinnacle paid HP $12.6 million in cash and issued 773,172
shares of its common stock valued at $20.6 million. The Company incurred
acquisition costs of approximately $0.4 million for a total purchase price of
$33.6 million and assumed liabilities totaling $4.7 million. Pursuant to a stock
restriction and registration rights agreement entered into by the parties,
Pinnacle filed with the Securities and Exchange Commission a registration
statement on Form S-3 with respect to one-half of the Pinnacle Shares issued to
HP. HP has agreed to certain restrictions with respect to the disposition of the
remainder of such shares.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of VID and the fair market
value of the acquired assets and assumed liabilities have been included in the
financial statements of the Company as of August 2, 1999. As of August 2, 1999,
the Company recorded $4.4 million in assets, $2.0 million in in-process research
and development, $19.1 million in other identifiable intangibles including
core/developed technology, customer base, trademarks, 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.
APB 16 requires the preparation of a pro-form 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.
Truevision
On March 12, 1999, the Company acquired all the outstanding common
stock of Truevision, Inc., a supplier of digital video products ("Truevision").
In connection with the acquisition, Pinnacle issued 824,206 shares of common
stock valued at $11.5 million. In addition, Pinnacle issued to Truevision
employees and Directors 139,678 options, valued at $0.7 million, to purchase
common stock at an exercise price of $11.98. The Company also assumed 53,836
warrants valued at $0.1 million.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Truevision and the fair
market value of the acquired assets and assumed liabilities have been included
in the financial statements of the Company as of March 12, 1999. Goodwill
represents the amount by which the cost of acquired net assets exceeded the fair
values of net assets on the date of purchase. As of June 30, 1999, the Company
recorded $3.8 million in assets, $6.2 million in in-process research and
development, $2.7 million in other identifiable intangibles including patents,
trademarks and assembled workforce, assumed $13.0 million in liabilities and
allocated $13.2 million to goodwill. Goodwill and other intangibles are being
amortized using the straight-line method over periods ranging from three to
seven years.
8
<PAGE>
<TABLE>
The following table presents unaudited pro forma information as if
Pinnacle and Truevision had been combined as of the beginning of the six-month
period ended December 31, 1998. The pro forma data is presented for illustrative
purposes only and is not necessarily indicative of the combined financial
position or results of operations of future periods or the results that actually
would have resulted had Pinnacle and Truevision been a combined company during
said period. The pro forma results include the effects of the purchase price
allocation from amortization of acquisition-related intangible assets and
exclude the charge for the purchased in-process technology.
<CAPTION>
Pro Forma
(in thousands, except per share amounts)
Three-months Ended Six-months Ended
December 31, 1998 December 31, 1998
----------------- -----------------
<S> <C> <C>
Net revenue $ 45,651 $ 85,245
Net income 3,597 7,041
Net income per common share - basic $ 0.16 $ 0.33
Net income per common share - diluted $ 0.15 $ 0.30
Weighted average common share outstanding - basic 21,866 21,546
Weighted average common share outstanding - diluted 23,820 23,424
</TABLE>
Shoreline
In March, 1999, the Company acquired Shoreline Studios, Inc., a
provider of real-time 3D graphics software for use in live broadcasts. The cash
price was $754,000 including related goodwill of $375,000. The transaction was
accounted for by the purchase method of accounting. Pro forma comparative
results of operations are not presented because they are not material to the
Company's consolidated results.
Analysis of In-Process Research and Development
The portion of the Hewlett-Packard, Truevision and Shoreline purchase
prices allocated to in-process research and development represent development
projects that have not yet reached technological feasibility and have no
alternative future use. Technological feasibility was determined based on: (i)
an evaluation of the products status in the development process with respect to
utilization and contribution of the individual products as of the date of
valuation and (ii) the expected dates in which the products would be
commercialized. It was determined that technologically feasibility was achieved
when a product is at beta stage. The value assigned to purchased in-process
research and development was determined by estimating the costs to develop the
purchased in-process research and development into commercially viable products;
estimating the resulting net cash flows from such projects; discounting the net
cash flows back to the time of acquisition and applying an attribution rate
based on the estimated percent complete considering the approximate stage of
completion of the in-process technology at the date of acquisition. Based on
these analyses and computations, $2.0 million, $6.2 million and $0.4 million
were charged to operations at the date of acquisition for the Hewlett-Packard,
Truevision and Shoreline acquisitions, respectively.
9
<PAGE>
3. Supplemental Cash Flow Information
<TABLE>
The following table reflects supplemental cash flow from investing
activities related to the March 1999 Truevision and Shoreline acquisitions
combined and the VID acquisition from Hewlett-Packard in August 1999.
<CAPTION>
Fair value of (in thousands): Truevision Shoreline Total HP
- ----------------------------- ---------- --------- ----- --
<S> <C> <C> <C> <C>
Assets acquired and goodwill $ 24,981 $ 754 $ 25,735 $ 38,294
Liabilities assumed and fees incurred (13,062) (250) (13,312) (5,065)
Common stock, stock options and
warrants issued (12,856) - (12,856) (20,632)
-------- ----- -------- --------
Cash paid 504 504 12,597
Cash acquired (937) - (937)
-------- ----- -------- --------
Net cash (received) paid on acquisitions $ (937) $ 504 $ (433) $ 12,597
======== ===== ======== ========
</TABLE>
4. Per Share Information
<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 Six-months Ended
December 31, December 31,
(In thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS - weighted average shares of common stock
outstanding 23,922 21,048 23,612 20,726
Effect of dilutive common equivalent shares - stock
options outstanding 3,305 1,954 3,243 1,878
----- ----- ----- -----
Diluted EPS - weighted average shares and common
equivalent shares outstanding 27,227 23,002 26,855 22,604
====== ====== ====== ======
</TABLE>
5. Customers and Credit Concentrations
During the three-month periods ended December 31, 1999 and 1998 and
during the six-month period ended December 31, 1999, no customer accounted for
greater than 10% of net sales. During the six-month period ended December 31,
1998, Ingram Micro, Inc. accounted for 11.0% of net sales.
Ingram Micro, Inc. accounted for approximately 15.4% and 23.2% of
accounts receivable at December 31, 1999 and June 30, 1999, respectively.
6. Development of Software for Internal Use
Beginning in fiscal 1999, the Company commenced development and
implementation of a worldwide information system based on SAP enterprise
software. In January 1999, the Company reached the application development stage
of the software implementation and began capitalizing costs associated with the
SAP implementation project. As of December 31, 1999, the Company had capitalized
approximately $2.7 million. The project is expected to be completed in the
quarter ending March 31, 2000.
10
<PAGE>
7. 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.
<TABLE>
The following is a summary of the Company's operations by operating
segment (in thousands):
<CAPTION>
Three-months Ended Six-months Ended
December 31 December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Broadcast:
Revenues $ 19,350 $ 5,254 $ 36,359 $ 11,846
Gross profit 11,914 2,942 22,759 6,599
Operating income (loss) $ 1,310 $ (1,084) $ 3,595 $ (1,393)
Desktop:
Revenues $ 25,346 $ 20,336 $ 49,892 $ 39,592
Gross profit 13,411 12,431 27,067 23,834
Operating income $ 2,706 $ 4,437 $ 5,621 $ 9,201
Consumer:
Revenues $ 17,866 $ 13,582 $ 26,757 $ 20,007
Gross profit 6,822 5,602 10,468 7,802
Operating income (loss) $ 1,790 $ 1,823 $ 1,269 $ 1,231
Consolidated:
Revenues $ 62,562 $ 39,172 $113 008 $ 71,445
Gross profit 32,147 20,975 60,294 38,235
Operating income $ 5,806 $ 5,176 $ 10,485 $ 9,039
</TABLE>
<TABLE>
The following table reconciles revenues and operating income (loss) to total
consolidated amounts (in thousands):
<CAPTION>
Three-months Ended Six-months Ended
December 31 December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating income for reportable segments $ 5,806 $ 5,176 $ 10,485 $ 9,039
In-process research and development - - (2,000) -
--------- -------- --------- --------
Consolidated operating income $ 5,806 $ 5,176 $ 8,485 $ 9,039
========= ======== ========= ========
</TABLE>
11
<PAGE>
8. Commitments and Contingencies
On May 28, 1999, an action entitled Hot Key Pty Ltd. v. Pinnacle
Systems, Inc., No. 99-20487 (RW) was filed against the Company in the United
States District Court for the Northern District of California. The Complaint
alleges that the Company breached a distribution agreement with the plaintiff,
an Australian company, and alleges various legal causes of action, including
fraud, breach of warranty, and breach of the implied covenant of good faith. The
Complaint seeks compensatory and punitive damages of unspecified amounts. The
Company has asserted a counterclaim for monies owed to it by the plaintiff. A
trial date of June 12, 2000 has been set. The Company believes it has
meritorious defenses to this action, and intends to vigorously defend itself. As
of December 31, 1999, the potential liability, if any, cannot be assessed.
Further, there can be no assurance, that if damages are ultimately awarded
against the Company, that the financial position and results of operations of
the Company will be unaffected.
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 PC 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.
Broadcast Market
The broadcast market generally requires very high technical performance
such as real time 10-bit processing, control of multiple channels of live video
and specialized filtering and interpolation. From the Company's inception in
1986 until 1994, substantially all of the Company's revenues were derived from
the sale of products into the broadcast market. Currently, DVExtreme, Lightning,
Deko, AlladinPRO and Thunder and Media stream servers comprise the Company's
suite of high performance real time products designed for on-air, broadcast and
high-end, post-production applications.
In 1997, the Company commenced shipment of DVExtreme and Lightning. In
the same year, the Company also completed the acquisition of the Deko titling
and character generation product line from Digital Graphix, Inc. Currently the
Company sells three products in the Deko line--FXDeko, TypeDeko and WriteDeko--
and has recently announced the release of six additional products including
FXDekoHD, a high definition character and graphics generator. In June 1998, the
Company commenced shipment of AlladinPRO; a high-performance Windows NT based
digital video effects system designed for live and on-line applications. In
September 1999, the Company commenced shipment of FXDeko; a high performance
Windows NT-based product that combines the feature set of Deko with real time
digital effect technology. In June 1999, the Company introduced Thunder, the
Company's first multi-channel video and audio clip server and iThunder, a real
time video server for Internet broadcasting. In August 1999, the Company
12
<PAGE>
completed the acquisition of certain of the assets of the Hewlett-Packard
Company including the Media Stream server family. Media Stream compliments the
Thunder family in providing a complete line of broadcast quality video server
solutions. The broadcast market accounted for approximately 30.9% and 13.4% of
net sales in the three-month periods ended December 31, 1999 and 1998,
respectively and 32.2% and 16.6% of net sales in the six-month periods ended
December 31, 1999 and 1998, respectively.
Desktop Market
The Company's desktop products are designed to provide high quality
video capture, compression/decompression, editing, and real time video
manipulation capabilities for computer based video post-production systems. They
are generally offered at significantly lower price points than traditional
editing suites and are integrated into the computer by a value-added reseller,
an OEM, or the end user.
The Company has two general classes of desktop products. First, the
digital video effects products which include the Alladin and Genie product
families were released in 1994 and 1996 respectively. Second, the Company has
released video capture and editing products, including the ReelTime, ReelTime
Nitro, miroVIDEO DC30, miroVIDEO DC50 and miroVIDEO DV300/200 families. In March
1999, the Company completed its acquisition of Truevision, Inc. and added
Truevision's TARGA branded products to its catalog. In April 1999, the Company
began shipping DV200, its new low-cost DV-based video capture and editing
solution. In June 1999, the Company began shipping DC1000, a new dual stream
MPEG2 editing product and a companion DVD authoring option and in July 1999
began shipping the companion product DVD1000, which adds the capability to
author fully featured DVD titles, one of the fastest growing delivery mediums
for video. In 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. Also 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. The desktop market accounted for approximately 40.5% and
51.9% of net sales in the three-month periods ended December 31, 1999 and 1998,
respectively and 44.1% and 55.4% of net sales in the six-month periods ended
December 31, 1999 and 1998, respectively.
Consumer Market
The Company's consumer products provide complete video editing
solutions that allow consumers to edit their home videos using their personal
computer, camcorder and VCR. As of December 31, 1999, the Company's consumer
product line included Studio 400, 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.
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 28.6% and 34.7% of net sales in the
three-month periods ended December 31, 1999 and 1998, respectively and 23.7% and
28.0% of net sales in the six-month periods ended December 31, 1999 and 1998,
respectively.
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Results of Operations
Net Sales The Company's net sales increased 59.7% to $62.6 million in
the three-month period ended December 31, 1999 compared to $39.2 million in the
same period last year. Net sales increased 58.2% to $113.0 million in the
six-month period ended December 31, 1999 compared to $71.4 million in the same
period last year.
Increase
Quarter ended December 31: 1999 1998 (Decrease)
---- ---- ----------
Product Group
Broadcast $19,350 $ 5,254 268.3%
Desktop 25,346 20,336 24.6%
Consumer 17,866 13,582 31.5%
------- ------
$62,562 $39,172 59.7%
======= ======
Increase
Six-months ended December 31: 1999 1998 (Decrease)
---- ---- ----------
Product Group
Broadcast $ 36,359 $11,846 206.9%
Desktop 49,892 39,592 26.0%
Consumer 26,757 20,007 33.7%
-------- ------
$113,008 $71,445 58.2%
======== ======
Sales increased in all three product groups for the three and six-month
periods ended December 31, 1999 over the same periods last year. The increase in
Broadcast sales was primarily due to the sale of Media Stream products acquired
by the Company from Hewlett-Packard in August 1999 in addition to sales of
Thunder, released in June 1999 and increased sale of Deko products. For the
desktop group, sales in the three-month period ended December 31, 1999 increased
24.6% over the same period last year and sales in the six-month period ended
December 31, 1999 increased 26.0% over the same period last year. Decreased
sales of Reel-time and DC30 were offset by higher OEM sales, sales of new
products such as the DV500, DC1000 and the DVD1000 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 December 31, 1999
increased 31.5% over the same period last year and sales in the six-month period
ended December 31, 1999 increased 33.7% over the same period last year.
Decreased sales of Studio 400 were offset by increased sales of PCTV and DC10
and sales of new products such as Studio MP10 and Studio DV.
International Sales. International sales (sales outside of North
America) increased 19.1% in the three-month period ended December 31, 1999
compared to the three-month period ended December 31, 1998 and accounted for
approximately 57% and 72% of these periods net sales respectively. International
sales increased 25.6% in the six-month period ended December 31, 1999 compared
to the six-month period ended December 31, 1998 and accounted for approximately
53% and 67% of the Company's net sales respectively. The Company expects that
international sales will continue to represent a significant portion of its net
sales.
Cost of Sales and Gross Profit. 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, warehousing, shipping, warranty costs, royalties and post sale
customer support costs. For the three-month periods ended December 31, 1999 and
1998, cost of sales were 48.6% and 46.5%, respectively while for the six-month
period ended December 31, 1999 and 1998 cost of sales were 46.6% and 46.5%,
respectively. The increase in cost of sales in the December 1999 quarter was
primarily due to a large mixture of consumer products sold in the December
holiday quarter.
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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, benefits, depreciation and the cost of development tools. Engineering
and product development expenses increased 86.3% to $6.2 million in the
three-months ended December 31, 1999 from $3.4 million during the comparable
three-month period in the prior year. The Company's engineering and product
development expenses increased 83.6% to $12.2 million in the six-months ended
December 31, 1999 from $6.7 million during the six-months ended December 31,
1998. As a percentage of sales, engineering and product development expenses
increased to 10.0% in the quarter ended December 31, 1999 from 8.6% in the
quarter ended December 31, 1998, and to 10.8% from 9.3% in the six-months ended
December 31, 1999 and 1998, 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. The Company expects to continue to allocate significant resources to
engineering and product development efforts located in Mountain View and Grass
Valley, California; Paramus, New Jersey; 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 34.3% to $13.8 million in the
three-month period ended December 31, 1999 from $10.3 million during the
comparable three-month period in the prior year. The Company's sales and
marketing expenses increased 38.4% to $25.5 million in the six-months ended
December 31, 1999 from $18.5 million in the six-month period ended December 31,
1998. These increases period over period reflect the Company's investment in
infrastructure focused on increasing product awareness and market share and on
expanding product lines. Although sales and marketing expenditures have
increased significantly year to year, as a percentage of net sales expenditures
have fallen to 22.1% from 26.3% in the three-month periods ending December 31,
1999 and 1998, and to 22.6% from 25.8% in the six-month periods ending December
31, 1999 and 1998, 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 $2.3 million for the
three-months ended December 31, 1999 from $1.9 million for the three-months
ended December 31, 1998 and decreased as a percentage of total revenues to 3.6%
in the fiscal 1999 period from 4.8% in the fiscal 1999 period. General and
administrative expenses increased to $5.0 million for the six-months ended
December 31, 1999 from $3.4 million for the six-months ended December 31, 1998
and decreased as a percentage of total revenues to 4.4% in the fiscal 1999
period from 4.8% in the fiscal 1998 period. The increase in the absolute dollar
amount of general and administrative expenses was primarily due to increased
staffing and associated expenses necessary to manage and support the Company's
increased scale of operations. The Company anticipates that for the near future,
its general and administrative expenses as a percentage of total revenues should
remain at approximately the same percentage as in the first six-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 six-months to nine years. The amortization increased over 1000% from $0.3
million in the three-month period ended December 31, 1998 to $4.0 million in the
three-month period ended December 31, 1999 and 928% from $0.7 million to $7.1
million in the six-month periods ended December 31, 1999 and 1998, 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 Communications Division from the
Hewlett-Packard Company in August 1999.
In-Process Research and Development. During the six-month period ended
December 31, 1999, the Company recorded an in process research and development
charge of $2.0 million relating to the acquisition of certain assets of the
Video Communications Division of the Hewlett-Packard Company ("HP"). The value
assigned to purchased in-process research and development was determined by
estimating the costs to develop the purchased in-process research and
development into commercially viable products; estimating the resulting net cash
flows from such projects; discounting the net cash flows back to the time of
acquisition and applying an attribution rate based on the estimated percent
complete considering the approximate stage of completion of the in-process
technology at the date of acquisition.
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The acquired in-process research and development from HP relates to the
development of the next generation of Media Stream products. At the date of
acquisition, revenues attributable to these future products were projected for
purposes of valuing the acquired in-process research and development. 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 project is not successfully
developed, the Company may not realize the value assigned to the in-process
research and development project. In addition, the value of goodwill and other
acquired intangible assets may also become impaired. Ongoing operations and
financial results are subject to a variety of factors which may or may not have
been known or estimable at the time of the acquisition, and the estimates
discussed above are subject to change.
Interest Income 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 December 31, 1999 and 1998, net interest income was $0.8
million and $1.1 million respectively. In the six-months ended December 31, 1999
and 1998, net interest income was $1.6 million and $2.3 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 $1.2
million and $1.3 million for the three-month periods ended December 31, 1999 and
1998, respectively. The Company recorded a provision for income taxes of $1.9
million and $2.3 million for the six-month periods ended December 31, 1999 and
1998 respectively. The Company has provided a valuation allowance for a portion
of its deferred tax assets as it is presently unable to conclude that all of the
deferred tax assets are more likely than not to be realized. Total valuation
allowance was $6.2 million as of June 30, 1999.
As of June 30, 1999, the Company has federal research and
experimentation carryforwards of $0.7 million which expire between 2012 and
2014, and state research and experimentation credit carryforwards of $60,000
which have no expiration provision. As of June 30, 1999, the cumulative amount
of unremitted earnings of non-U.S subsidiaries on which the Company had not
provided U.S taxes approximated $4.5 million. The additional taxes that could
arise if those earnings were to be remitted to the U.S. would not be material.
It is management's intent that these earnings remain indefinitely invested.
Liquidity and Capital Resources
The Company has funded its operations to date through sales of equity
securities as well as through cash flows from operations. As of December 31,
1999, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $89 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 $10.0 million in cash
during the six-month period ended December 31, 1999. This was primarily
attributable to the Company's net income of $19.2 after adjusting for
depreciation and in-process research and development. This was partially offset
by an increase in accounts receivable and, to a lesser extent, inventories.
Increases in these areas are related to the Company's overall growth.
During the six-month period ended December 31, 1999, cash flow from
investing activities included $5.1 million invested in property and equipment,
compared to $2.9 million in the six-months ended December 31, 1998. The higher
level of expenditures for the six-months ended December 31, 1999 were primarily
for leasehold improvements, furniture and equipment purchased for the Company's
Mountain View facility expansion in August 1999 to accommodate increased
headcount related to the HP acquisition and $1.7 million in capitalized
expenditures related to the its implementation of an SAP enterprise software
system. The Company will continue to incur expenditures for the software
implementation through March 2000. As the Company continues to grow, it expects
to 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
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<PAGE>
Video Communications Division, including key technologies and intellectual
property, the MediaStream family of products and selected additional assets, as
well as most managers and employees. In consideration, Pinnacle paid HP $12.6
million in cash and issued 773,172 shares of Pinnacle's common stock valued at
$20.6 million. The Company incurred acquisition costs of approximately $0.4
million for a total purchase price of $33.6 million and assumed liabilities
totaling $4.7 million.
Factors Affecting Operating Results
[ ] 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 six months of fiscal 2000 were $113.0 million
compared with $71.4 million in the first quarter of fiscal 1999. As a result of
internal growth and recent acquisitions, we have increased the number of
employees significantly over the last two fiscal years and many are
geographically dispersed, primarily throughout North America and Europe. This
growth places increasing demands on our management, financial and other
resources. We have built resources and systems to account for such growth, but
continued or accelerated growth may require us to increase our investment in
such systems, or to reorganize our management team. Such changes, should they
occur, could cause an interruption or diversion of focus from our core business
activities and have an adverse effect on financial results.
[ ] Any failure to successfully integrate the businesses we have acquired
could negatively impact us.
In August 1999, we acquired the Video Communications Division of the
Hewlett-Packard Company and in March 1999, we completed the acquisitions of
Truevision, Inc and Shoreline Studios, Inc. We may in the near- or long-term
pursue acquisitions of complementary businesses, products or technologies.
Integrating acquired operations is a complex, time-consuming and potentially
expensive process. All acquisitions involve risks that could materially and
adversely affect our business and operating results. These risks include:
- Distracting management from the day-to-day operations of our
business
- Costs, delays and inefficiencies associated with integrating
acquired operations, products and personnel
- The potential to result in dilutive issuance of our equity
securities
- Incurring debt and amortization expenses related to goodwill
and other intangible assets
[ ] 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
17
<PAGE>
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 management's attention
and resources. Any adverse determination in such litigation could also subject
us to significant liabilities.
[ ] We are dependent on contract manufacturers and single or limited source
suppliers for our components. If these manufacturers and suppliers do
not meet our demand either in volume or quality, then we could be
materially harmed.
We rely on subcontractors to manufacture our desktop and consumer
products and the major subassemblies of our broadcast products. We and our
manufacturing subcontractors are dependent upon single or limited source
suppliers for a number of components and parts used in our products, including
certain key integrated circuits. Our strategy to rely on subcontractors and
single or limited source suppliers involves a number of significant risks,
including:
- Loss of control over the manufacturing process
- Potential absence of adequate capacity
- Potential delays in lead times
- Unavailability of certain process technologies
- Reduced control over delivery schedules, manufacturing yields,
quality and costs
- Unexpected increases in component costs
If any significant subcontractor or single or limited source suppliers
becomes unable or unwilling to continue to manufacture these subassemblies or
provide critical components in required volumes, we will have to identify and
qualify acceptable replacements or redesign our products with different
components. Additional sources may not be
18
<PAGE>
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 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
19
<PAGE>
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
Tektronix, Inc.
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 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
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Also, with these distribution channels standing between them and the
actual market, we may not be able to accurately gauge current demand for
products and anticipate demand for newly introduced products. For example,
dealers may place large initial orders for a new product just to keep their
stores stocked with the newest products and not because there is a significant
demand for them.
As to consumer products offerings, we have expanded our distribution
network to include several consumer channels, including large distributors of
products to computer software and hardware retailers, which in turn sell
products to end users. We also sell our consumer products directly to certain
retailers. Rapid change and financial difficulties of distributors have
characterized distribution channels for consumer retail products. These
arrangements have exposed us to the following risks, some of which are out of
our control:
- We are obligated to provide price protection to such retailers
and distributors and, while the agreements limit the
conditions under which product can be returned to us, we may
be faced with product returns or price protection obligations.
- The distributors or retailers may not continue to stock and
sell our consumer products.
- Retailers and retail distributors often carry competing
products.
Any of the foregoing events could materially harm our business.
[ ] If certain of our key employees leave or are no longer able to perform
services for us, it could have a material adverse effect on our
business. We may not be able to attract and retain a sufficient number
of managerial personnel and technical employees to compete
successfully.
We believe that the efforts and abilities of our senior management and
key technical personnel are very important to our continued success. Only one
has an employment agreement and none are the subject of key man life insurance.
Our success is dependent upon our ability to attract and retain qualified
technical and managerial personnel. There are not enough engineers, technical
support, software services and managers available to meet the current demands of
the computer industry. We may not be able to retain our key technical and
managerial employees or attract, assimilate and retain such other highly
qualified technical and managerial personnel as required in the future. Also,
employees may leave our employ and subsequently compete against us, or
contractors may perform services for competitors of ours. If we are unable to
retain key personnel, our business could be materially harmed.
[ ] We may be unable to protect our proprietary information and procedures
effectively.
We must protect our proprietary technology and operate without
infringing the intellectual property rights of others. We rely on a combination
of patent, copyright, trademark and trade secret laws and other intellectual
property protection methods to protect our proprietary technology. In addition,
we generally enter into confidentiality and nondisclosure agreements with our
employees and OEM customers and limit access to and distribution of our
proprietary technology. These steps may not protect our proprietary information
nor give us any competitive advantage. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property, or disclose such intellectual property
or trade secrets. If we are unable to protect our intellectual property, our
business could be materially harmed.
[ ] 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.
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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 53% of net sales in the six-month period ended December 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.
22
<PAGE>
Future Y2K problems could hurt our business
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 customers 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.
23
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 28, 1999, an action entitled Hot Key Pty Ltd. v. Pinnacle
Systems, Inc., No. 99-20487 (RW) was filed against the Company in the United
States District Court for the Northern District of California. The Complaint
alleges that the Company breached a distribution agreement with the plaintiff,
an Australian company, and alleges various legal causes of action, including
fraud, breach of warranty, and breach of the implied covenant of good faith. The
Complaint seeks compensatory and punitive damages of unspecified amounts. The
Company has asserted a counterclaim for monies owed to it by the plaintiff. A
trial date of June 12, 2000 has been set. The Company believes it has
meritorious defenses to this action, and intends to vigorously defend itself. As
of December 31, 1999, the potential liability, if any, cannot be assessed.
Further, there can be no assurance, that if damages are ultimately awarded
against the Company, that the financial position and results of operations of
the Company will be unaffected.
24
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On October 26, 1999, the Company held its Annual Meeting of
Shareholders for which it solicited votes by proxy. The following is a brief
description of the matters voted upon at the meeting and a statement of the
number of votes cast for and against, and the number of abstentions. There were
no broker non-votes with respect to item 1 below.
1. To elect seven directors to serve until the next Annual Meeting of
Shareholders and until their successors are duly elected and qualified.
VOTES
NOMINEE VOTES WITHHELD
------- ----- --------
Mark L. Sanders 19,941,069 523,794
Ajay Chopra 19,938,669 526,194
L. Gregory Ballard 19,940,805 524,058
John Lewis 19,941,055 523,808
L. William Krause 19,939,031 525,832
Glenn E. Penisten 19,941,069 523,794
Charles J. Vaughan 19,941,069 523,794
2. To approve an amendment to the 1996 Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
800,000 shares. The meeting was adjourned without approval of this
proposal. On Friday, November 12, 1999, the meeting was reconvened with
respect to this proposal only. The vote was as follows:
FOR: 9,004,279 AGAINST: 12,374,496 ABSTAIN: 15,800 BROKER NON-VOTES: 0
3. To ratify the appointment of KPMG LLP as independent auditors of the
Company for the fiscal period ending June 30, 2000.
FOR: 20,461,075 AGAINST: 1,948 ABSTAIN: 7,082 BROKER NON-VOTES: 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On August 13, 1999 the Company filed a report on Form 8-K announcing the
Company's acquisition of the Video Communications Division of the
Hewlett-Packard Company. On October 15, 1999 the Company filed a report on Form
8-K/A relating to the Company's acquisition of the Video Communications Division
of the Hewlett-Packard Company. The October filing amended the Form 8-K filing
made on August 13, 1999 in order to file required financial statement disclosure
of the acquired business and pro-forma financial statement disclosure.
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: February 11, 2000 By: /s/Mark L. Sanders
-----------------------
Mark L. Sanders
President and Chief Executive Officer
Date: February 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: February 11, 2000 By:
------------------------------------------------
Mark L. Sanders
President and Chief Executive Officer
Date: February 11, 2000 By:
-----------------------------------------------
Arthur D. Chadwick
Vice President, Finance and Administration and
Chief Financial Officer
(principal financial and accounting officer)
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