Pinnacle Systems Inc.
Filed 9/27/99
TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_______________.
Commission file number: 0-24784
PINNACLE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 94-3003809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
280 North Bernardo, Mountain View, CA 94043
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (650) 526-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
September 15, 1999 as reported on the Nasdaq National Market System, was
approximately $746,911,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of September 15, 1999, registrant had outstanding 23,723,209 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held October 26, 1999.
Pinnacle Systems Inc.
(PCLE) NASDAQ
INDEXED 10-K
For the fiscal year ended June 30, 1999
Return to Corporate Window
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
Financial Index
PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the Company's ability to manage growth; the
risks associated with successfully integrating acquired businesses; the risks
associated with dependence on resellers, contract manufacturers and other
third-party relationships; the uncertainty of continued market acceptance of
professional video products; significant fluctuations in the Company's operating
results; the historical absence of backlog; the Company's highly competitive
industry and rapid technological change within the Company's industry; the risks
associated with development and introduction of new products; the need to manage
product transitions; the risks associated with product defects and reliability
problems; the risks associated with single source suppliers; the uncertainty of
patent and proprietary technology protection and reliance on technology licensed
from third parties; the risks of third party claims of infringement; the
Company's dependence on retention and attraction of key employees; the risks
associated with future acquisitions; the risks associated with international
licensing and operations; general economic and business conditions; and other
factors referenced in this Report.
ITEM 1. BUSINESS
Pinnacle Systems, Inc. (the "Company") designs, manufactures, markets
and supports computer-based video post-production products to serve the
broadcast, desktop and consumer markets. The Company's products use real time
video processing and editing technologies to apply a variety of video
post-production and on-air functions to multiple streams of live or recorded
video material. These editing applications include the addition of special
effects, graphics and titles. To address the broadcast market, the Company
offers high performance, specialized Windows NT-based solutions for high-end,
post-production and broadcast on-air applications. For the desktop market, the
Company provides real time video manipulation and editing tools to support
non-linear, computer-based, editing environments. To address the consumer
market, the Company offers low cost, easy to use video editing solutions that
allow consumers to edit their home videos using a personal computer, camcorder
and VCR. Used in conjunction with standard computer platforms, these
technologies provide high quality, cost effective, computer-based video
processing solutions for the post-production and on-air markets.
Industry Background
The development of a video program involves three distinct processes:
pre-production, which involves planning and preparation for the recording of the
video program; production, which involves the acquisition of video material
(shooting); and post-production, which involves the organization of raw video
segments acquired in the production phase into a cohesive and appealing program
(editing). During the post-production phase, elements such as titles, graphics,
and transitions between video segments are incorporated to enhance the overall
quality and impact of a video program.
Historically, the video production industry has focused on providing
program material for broadcast television and advertising. To create high
quality video programs for these channels, producers have traditionally used
expensive, dedicated video production equipment linked together in a complex
interconnected system to form a video "editing suite." Typical editing suites
incorporate video recorders, switchers, digital video effects systems, still
image management systems, character generators, electronic
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paint systems and other products, often provided by multiple manufacturers.
These editing suites require highly skilled personnel to operate and maintain.
Recently, new and expanding channels of video content distribution,
including cable television, direct satellite broadcast, video rentals, CD-ROM,
DVD, video-on-demand, and now the Internet, have led to a rapid increase in
demand for video content for a wide variety of applications. This demand has
driven the market for editing approaches that are less expensive and easier to
use. New commercial and industrial applications for this market include
multimedia entertainment, video games, music videos, special event videos,
education and training and corporate communications. In addition, the popularity
of camcorders, VCRs and personal computers has fueled the growth of an emerging
consumer market for low cost video production technology that enables consumers
to create and edit home videos. These expanding channels of video content
distribution and new applications are increasing the demand for video content
production and distribution tools.
Computer-based video solutions combining personal computers with
specialized video processing technology can now provide video quality comparable
to that of traditional editing suites at significantly lower cost. As a result,
these computer-based video solutions are replacing the traditional editing
suites. In addition, such solutions are often easier to use since they
incorporate common graphical user interfaces. The lower cost and ease of use of
computer-based video tools enables large numbers of creative individuals,
previously untrained in video production, to produce professional quality video
programming. A complete computer-based video solution generally includes four
components: a computer, specialized audio and video processing hardware, an
associated application programmers interface, or API, and specific editing
applications. A single vendor has often supplied these components. However, as
the computer-based video industry develops, it is shifting toward Windows
NT-based open architecture solutions.
As a result of these changes, the broadcast market is transitioning to
computer-based solutions, the desktop market is expanding rapidly and, more
recently, a consumer market has emerged. These changes have created
opportunities for companies that focus on computer-based editing solutions for
the video production industry.
The Pinnacle Approach
The Company designs, manufactures, markets and supports computer-based
video post-production products to serve the broadcast, desktop and consumer
markets. The Company's products are based on its proprietary video manipulation
technologies that offer the following benefits:
Sophisticated Video Processing. Pinnacle's products provide advanced
video processing and manipulation capabilities, such as special effects,
graphics and titles. Videographers constantly seek effects to give their
programs a new look and to allow them to differentiate and enhance their end
product.
Real Time Interactivity. Pinnacle's products allow users to edit in
real time. This real time interactivity gives users the flexibility to try many
different effects and fine-tune the resulting content.
Open Systems. Pinnacle's products conform to generally accepted
industry standards for video input/output and control, allowing interoperability
with a wide variety of video processing and storage equipment. Furthermore, the
Company has developed and published, and is encouraging others to adopt, open
interface specifications for computer-based video post-production products.
These specifications include video input/output, manipulation and control.
Ease of Use. Pinnacle's products include menu-driven interfaces for
selecting and controlling the various video manipulation functions. This reduces
technical obstacles to the operation of the system, permitting the user to focus
on the artistic aspects of the post-production process.
Favorable Price/Performance Ratio. Pinnacle's products have a favorable
price to performance ratio, in part because the Company uses the same
proprietary components across its product lines. The
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Company intends to continue lowering the cost of its products by further
integrating its video manipulation and video capture technologies into
application specific integrated circuits ("ASICs").
Operating Structure. The Company is organized into three separate
business groups to serve the broadcast, desktop and consumer markets. The
Company believes this organizational structure enables it to effectively address
varying product requirements, rapidly implement its core technologies,
efficiently manage different distribution channels and anticipate and respond to
changes in each of these markets.
Company Strategy
Pinnacle's goal is to become the leading supplier of computer-based
video content creation and distribution products to the broadcast, desktop and
consumer markets. To pursue its goal, the Company intends to implement the
following strategies:
Expand and Leverage Core Technologies. The Company intends to expand
its core software and hardware technological base through both internal
development and acquisitions. The Company uses a modular approach to product
development. This allows it to leverage its investment in research and
development across multiple product designs and minimize time to market.
Establish an Industry Standard Video Processing Platform. The Company
believes that as the desktop market continues to move toward an open
architecture environment, companies will either provide an open architecture
video-processing platform or develop end user editing applications. The
Company's strategy is to establish an industry standard video-processing
platform compatible with a broad range of applications. The platform technology
will combine real time video manipulation, video capture technology and a
unified API.
Develop and Expand Worldwide Sales and Distribution Organization. The
Company's sales organization focuses on a variety of distribution channels,
including OEMs, value-added resellers, distributors, retail stores and other
resellers. The Company believes that its development of a worldwide sales and
distribution organization gives it a strategic advantage in the rapidly changing
video post-production industry. The Company intends to persist in strengthening
and developing this organization and to continue to develop strong strategic
relationships with key OEMs and resellers.
Acquire Complementary Businesses, Products and Technologies. The
Company has grown and intends to continue to grow both internally as well as
through the acquisition of complementary businesses, product lines or
technologies. The Company frequently evaluates strategic acquisition
opportunities that could enhance the Company's existing product offerings or
provide an avenue for developing new complementary product lines. The Company
believes that the video production industry is in a period of consolidation and
that strategic acquisition opportunities may arise. For example, Pinnacle
acquired certain video capture technology with its August 1997 acquisition of
the miroVideo products and technology from Miro Computer Products AG ("miro").
These technologies were further enhanced with the acquisition of specialized
video processing technology with the acquisition of Truevision, Inc. in March
1999. In August 1999, the company completed the acquisition of certain assets of
the Video Communications Division of the Hewlett-Packard Company. These assets
included digital video server products, and certain intellectual property and
technology.
Products
The Company offers a suite of video products aimed at the broadcast and
on-air market: the DVExtreme family, the Lightning family, the Deko family,
AlladinPRO, and the Thunder and MediaSteam line of digital video servers. The
Company has two general classes of desktop products: digital video effects
products, which include the Alladin and Genie families, and video capture and
editing products, which include the Reeltime, the DC30, DC50, DV200/300, DC1000
and the TARGA family. The Company offers a
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line of consumer editing and viewing products, which includes the Studio 400,
Studio DC10, Studio MP10, and the Studio PCTV.
Broadcast Market
For the broadcast market the Company currently offers products that
provide real time digital effects, still image management and storage, and real
time video character generation. The Company also offers digital video servers
for on-air video content distribution. These products generally include
proprietary hardware and software and specialized control panels and/or
keyboards for rapid execution, especially for on-air applications. The primary
broadcast products sold during fiscal 1999 were the DVExtreme, Lightning, Deko
and AlladinPRO family of products. During the year the Company introduced
BroadNet, which is a network technology that enables the Company's broadcast
products to be networked together for easy interoperability, and to exchange
information through the Internet. In June 1999, the Company expanded its product
line in the broadcast market with the introduction of Thunder, a new high
performance digital video server. The DVEextreme, Lightning, Deko and AlladinPRO
products are used to edit and create video content, while Thunder is used to
store, manage, and distribute video content. In August 1999, the company
completed the acquisition of certain assets of the Video Communications Division
of the Hewlett-Packard Company. The acquisition included key technologies,
intellectual property, the MediaStream server family of products as well as most
managers and employees from that division. The MediaSteam server family
complements the Company's Thunder family, to provide a more complete line of
broadcast quality video-server solutions.
DVExtreme Family. DVExtreme is the Company's high performance, real
time digital video effects system for broadcast and high-end, post-production
customers which seek to incorporate unique special effects into their
programming. DVExtreme, a Windows NT-based, multi-channel system, can
simultaneously manipulate up to three channels of live video and can generate
real time effects such as four-corner page peels and turns, highlights and
shadows, water ripples, ball effects, wave patterns and other effects. The
suggested list price for a DVEtreme ranges from $44,990 to $63,990, depending on
the configuration.
AlladinPRO Family. AlladinPRO is a Windows NT based digital video
effects system designed for live and on-line applications. AlladinPRO provides
users a broadcast quality single or dual channel digital video effects system,
plus a built-in still store. It performs many of the functions of the DVEtreme
family, but it is positioned in the market as a less expensive alternative to
the DVEtreme family of products. The suggested list price for an AlladinPRO
ranges from $19,990 to $29,990, depending on the configuration.
Lightning Family. Lightning is the Company's high performance,
networkable image management system designed for broadcast and high-end,
post-production applications such as news and sports programs. Lightning is a
Windows NT-based system that can accommodate up to three channels of video, plus
additional virtual channels for previewing. It has internal storage capacity for
over 10,000 images, and an interface to external disks for expanded capacity.
Lightning can also perform digital video effects on captured video images. The
suggested list price for a Lightning ranges from $25,990 to $31,780, depending
on the configuration
Deko Family. The Deko family of products is designed to provide high
performance titling, real time effects and character generation for broadcast
and on-air applications. Deko is a Windows NT-based system that includes
powerful text and graphics tools such as real time text scrolling, text
manipulation, font enhancement, multiple layers for text composition and
supports a wide range of standard and international character fonts. During
fiscal 1999, the Company introduced DekoHD, which is a high definition version
of the Deko product family. The suggested list price for a Deko ranges from
$26,900 to $31,900, depending on the configuration.
Thunder Family. The Thunder family of digital video servers is
designed to record, store, retrieve and process digital video content for
broadcast over conventional mediums or the Internet. The Thunder server family
currently includes the four-channel Thunder MCS 4000 server, the two-channel MCS
2000 server,
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and iThunder. Thunder uses MPEG-2 and native DV video formats. Thunder's on-air
application offers sophisticated asset management capabilities for identifying
clips, transitions and stills and sequencing their play-out to air. By pairing
the Thunder system with its Internet companion, iThunder, clips and programs can
be instantly 'broadcast' over the World Wide Web. Through the iThunder HTML
browser, remote Internet users can access and view video proxies via standard
streaming technologies directly from their remote desktop location. The Company
commenced the first production shipments of Thunder in June 1999. The suggested
list prices range from $11,000 to $69,000.
Desktop Market
The Company's desktop products are designed to provide high quality
video capture, compression/decompression, editing and real time video
manipulation capabilities for computer-based video post-production systems. They
are generally offered at significantly lower price points than traditional
editing suites and are integrated into the computer by a value-added reseller,
an OEM, or the end user. The Company has two general classes of desktop
products: digital video effects products, which include the Alladin and Genie
families, and video capture and editing products, which include the Reeltime,
DC30, DC50, DV200/300, and the DC1000 family which was introduced in June 1999.
In March 1999, the Company completed the acquisition of Truevision, Inc., which
was also a provider of desktop digital video capture and editing products. As a
result of the acquisition, Pinnacle added the Truevision TARGA products to its
suite of desktop editing products.
Alladin Family. The Alladin product family is designed to provide high
quality, real time video manipulation capabilities for desktop video
post-production. The Alladin was first introduced in June 1994.
Genie Family. The Genie family of products offers a complete set of
professional quality, real time 3D digital effects, switching, character
generation, paint and still storage on a single personal computer interface
("PCI") board. While offering much of the functionality of Alladin, Genie does
so at a much lower price point and is installed inside the computer rather than
through an external port. GeniePlus integrates into linear desktop editing
environments and includes input/output and software allowing the user to process
up to two simultaneous streams of live video. In addition, a non-linear version
of Genie is sold to OEM vendors who integrate and sell it with their non-linear
editing products. The suggested list price for a Genie is $5,990.
ReelTime and ReeltimeNitro Family. ReelTime is a dual stream video and
audio capture and playback card with real time special effects. ReelTime will
support the Adobe Premiere editing software. Additionally, ReelTime's open
architecture is intended to support a wide variety of third-party video
applications. ReelTime features real time transitions, along with real time
chroma, luma and linear keying, titling, and a scalable architecture that
supports the Company's Genie RT option. The Genie RT option incorporates the
Pinnacle Genie add-in card and enables picture-in-picture motion and real time
3D effects, including page turns, ripples, spheres and hourglasses. This
combined product has been named ReeltimeNitro. The suggested list price for
Reeltime is $4,990 for an NTSC version and $5,990 for a PAL version.
ReeltimeNitro lists for between $7,990 and 8,990.
DC30 Family. The DC30 family is a non-linear video and audio editing
system offering composite video input and output connections, targeted at the
professional videographer. In April 1999, the Company introduced an upgraded
version of the product called DC30Pro. It is a single stream PCI-bus video
product that captures, compresses and decompresses video signals and stores and
retrieves such compressed video signals using a standard computer. It also
features high bandwidth audio capture and playback. DC30Pro comes bundled with a
software-editing package that allows videographers to edit and create
high-quality video productions. The suggested list price for a DC30Pro is $790.
DC-50 Family. The DC50 is a non-linear video and audio editing system
offering component, composite and S-Video input and output connections, targeted
at the professional videographer. It has similar functionality as the DC30 with
the addition of a professional breakout box for a variety of video input and
output options including component video. The suggested list price for a
miroVIDEO DC50 is $1,950.
DV200/DV300 Family. The DV200 and DV300 are all digital non-linear
video and audio editing system offering DV (digital video) input and output
connections, targeted at the professional videographer. It has
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similar functionality as the DC30 except that it uses the DV video format. The
DV200 is a lower cost and functionality version of the DV300. Suggested list
price for a DV200 is $499and $699 for a DV300.
DC1000/DVD1000 Family. The DC1000 is a two stream non-linear video and
audio editing system targeted at the professional videographer. The dual stream
nature of the product allows significantly higher productivity by reducing the
need to render video segments to finish a production. The product uses MPEG-2
compression technology, and is capable of real time processing of titles and
transitions and provides more than 300 real time effects. The DC1000 can use
analog or DV video input and can output video in a DVD format. Concurrent with
the introduction of the DC1000, the Company introduced a companion product named
the DVD1000. The DVD1000 is a complete DVD creation system for corporate, event,
and professional digital video artists to create corporate product
demonstrations, training, entertainment, or educational DVDs. The suggested list
price for the DC1000 is $2,490 and the suggested list price for the DVD1000 is
$7,990.
TARGA Family. The TARGA family was acquired as part of the Truevision
acquisition in March 1999, and consists of non-linear video and audio editing
products targeted at the professional videographer. It is a single stream
PCI-bus video product which captures, compresses and decompresses video signals,
but with higher video processing performance. The product stores and retrieves
compressed video signals from a standard computer, and features high bandwidth
audio capture and playback. It comes bundled with a software-editing package
that allows videographers to edit and create high-quality video productions. The
suggested list price for the TARGA products ranges from $3,995 to $20,500.
Consumer Market
The Company's consumer products provide video capture, editing and
playback solutions. Its consumer video editing solutions allow consumers to edit
their home videos using a personal computer, camcorder and VCR. The Company has
developed an easy to use software interface called the Studio application, which
serves as the primary interface for all of the Studio products. The Company
currently has four Studio products: Studio 400 which was introduced in June
1998, Studio DC10 which was introduced in November 1998, Studio MP10 introduced
in March 1999, and Studio PCTV introduced in July 1999.
Studio 400. Studio 400 is a video editing system which replaced the
VideoDirector Studio 200. The Studio connects to an external port of a Windows
95 or Windows 98 computer, a VCR, and camcorder. It is easy to install and
requires only limited hard disk storage space. The product incorporates the
Company's "Studio" application and is aimed at the developing consumer market.
The Studio 400 allows users to simply cut-and-paste together their best video
scenes, add music, titles, special effects and transitions. Users can create
content that has many of the same effects found in far more expensive
professional video editing systems. The suggested list price for Studio 400 is
$229.
Studio DC10. The Studio DC10 is a consumer non-linear editing system,
which uses JPEG compression technology. It allows the users to load their video
on to a computer hard drive using a single stream PCI-bus video product which
captures, compresses and decompresses video signals using a standard computer.
As with the Studio 400, the product incorporates the Company's "Studio" software
application. The suggested list price for the Studio DC10 is $229.
Studio MP10. The Studio MP10 is a consumer non-linear editing system,
which uses MPEG1 compression technology. It allows the user to load their video
on to a computer hard drive using an external device to the PC and can capture,
compress and decompress video signals using a standard computer. Since MPEG
compression technology is used, the video output can be in the form of a CD-ROM
or it can be saved
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as a computer file and transmitted over the Internet. As with the other Company
consumer products, the Studio MP10 also uses the "Studio" interface application.
The suggested list price for the Studio MP10 is $269.
Studio PCTV. The Studio PCTV is targeted at the consumer market and
allows users to view a television programming on their computer monitor.
Throughout fiscal 1999, this product was primarily sold into the European
market, but was re-introduced into the North American market in July 1999. The
suggested list price is $99.
Technology
The Company is a technological leader in digital video processing,
which includes real time video manipulation, video capture and digital video
editing, and storage. The National Academy of Television Arts and Sciences'
Outstanding Technical Achievement EMMY award has been awarded to Pinnacle
Systems, Inc. on three occasions. In 1990, the Company received an EMMY for
pioneering the concept of the video workstation. In 1994, the Company received
an EMMY for developing technology which allows real time mapping of live video
onto animated 3D surfaces and, in 1997, the Company received an EMMY for
utilization of real time video manipulation technology in non-linear editing
applications. In addition, the technology that the Company acquired from Digital
Graphix and Hewlett-Packard was awarded three Emmy's prior to their acquisition
by the Company.
Many of the Company's products share a common internal architecture.
This design approach allows the Company to leverage its research and development
expenditures by utilizing similar hardware and software modules in multiple
products. The Company's video manipulation architecture is fundamental to the
performance and capabilities of the Company's products. As a result of the
acquisition of Miro Computer Products AG in August 1997, the Company acquired
video capture technology which allows high quality live video and audio to be
captured and played back from a standard personal computer. This technology was
further developed within Pinnacle, and further augmented with the acquisition of
Truevision in March 1999.
All of the Company's products use or work with a standard personal
computer for control of video manipulation functions. In all products targeting
the broadcast market, the control microprocessor is embedded within the product.
The desktop and consumer products are inserted into or connect externally to a
personal computer. The use of industry standard microprocessors offers three
main advantages over traditional video products: lower software development
costs due to the availability of powerful off-the-shelf software development
tools; lower product manufacturing costs due to the low costs of standard
microprocessors; and the ability to integrate third party software such as
networking or 3D rendering software to provide additional functionality.
Essentially all real time video manipulation must be performed on
uncompressed video data. Since uncompressed digital video rates are too high to
be processed by a microprocessor in real time, video signals are internally
distributed over a separate high-speed digital video bus ("DVB") and processed
using the Company's proprietary real time video manipulation hardware. The video
data on the DVB is processed in the standard digital component format that fully
complies with the highest digital component video standards of the International
Radio Consultation Committee, an organization that develops and publishes
standards for international telecommunication systems.
The software in the Company's video capture and video manipulation
products is divided into two layers: the user interface application and the API.
The user interface application is different and has been optimized for each
product family. The API is, for the most part, common to most of the Company's
products and incorporates all the proprietary low level routines that allow the
Company's products to perform high quality, real time video manipulations. This
software architecture has three main advantages: real time video manipulation
algorithms that are complex and difficult to develop can be used in multiple
products; the user interface can be tailored to meet specific user requirements;
and applications can be quickly ported to the Company's products using the API.
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The Company's core technical expertise is in real time digital video
processing, video capture technology, real time software algorithms, video
input/output, advanced user interfaces and software control of commercially
available camcorders and VCRs.
Real Time Digital Video Processing. The Company has devoted significant
resources to the development of proprietary technology for real time video
processing, including high-speed digital filters, image transformation buffers,
plane and perspective addressing, and non-linear image manipulation. The Company
has patented technology related to real time mapping of live video onto
multiple, complex, animated 3D shapes and surfaces. This technology includes a
proprietary data compression algorithm that compresses the address information
and allows decompression of this data in real time.
CODEC Technology. The Company has devoted significant resources to
developing and acquiring hardware and software for real time video capture. This
technology includes audio/video effect synchronization methodologies,
compression algorithms, drivers and software for real time playback from disks.
Real Time Software Algorithms. The digital video manipulation functions
of the Company's products use common core software that performs complex
computations in real time under user control. The Company has developed certain
algorithms that enable the high-speed computation of multiple complex equations
which are required for real time video effects.
Video Input/Output. The Company has developed technology for video
input and output of composite analog, component analog and component digital
video data streams. All of the Company's products work with NTSC and PAL video
standards. In addition, the Company has developed interfaces to support
input/output of video streams stored on computer disks.
User Interface Design. The Company has extensive experience in the
design of graphical user interfaces for video control and manipulation. The
Company uses interactive, menu-driven user interfaces to control video
manipulation functions.
Camcorder and VCR Control. With the acquisition of the VideoDirector
product line from Gold Disk, Inc. in June 1996, the Company obtained software
code which enables a computer to control most commercially available camcorders
and VCRs.
The Company has historically devoted a significant portion of its
resources to engineering and product development programs and expects to
continue to allocate significant resources to these efforts. In addition, the
Company has acquired certain products and technologies which have aided the
Company's ability to more rapidly develop and market new products. The Company's
future operating results will depend to a considerable extent on its ability to
continually develop, acquire, introduce and deliver new hardware and software
products that offer its customers additional features and enhanced performance
at competitive prices. Delays in the introduction or shipment of new or enhanced
products, the inability of the Company to timely develop and introduce such new
products, the failure of such products to gain market acceptance or problems
associated with product transitions could adversely affect the Company's
business, financial condition and results of operations, particularly on a
quarterly basis.
As of June 30, 1999, the Company had 162 people engaged in engineering
and product development. The Company's engineering and product development
expenses (excluding purchased in-process research and development) in fiscal
1999, 1998 and 1997 were $16.1 million, $11.7 million and $7.6, respectively,
and represented 10.1%, 11.1% and 20.2%, respectively, of net sales.
Customers
End users of the Company's products range from individuals to major
corporate and government entities, and to video production and broadcast
facilities worldwide. Broadcast customers include domestic and international
television and cable networks, local broadcasters and program creators. Desktop
customers include corporations seeking to develop internal video post-production
capabilities, professional
9
videographers including those who cover weddings and other special events, and
small production houses serving cable and commercial video markets.
Marketing, Sales and Service
Marketing
The Company's marketing efforts are targeted at users of broadcast and
desktop post-production suites, and home video editing enthusiasts. In order to
increase awareness of its products, the Company attends a number of trade shows,
the major ones being the National Association of Broadcasters ("NAB") show and
the COMDEX exhibition, both in the United States, and the International
Broadcasters Convention ("IBC") show and the CEBIT show in Europe. Pinnacle also
uses targeted direct mail campaigns and advertisements in trade and computer
publications for most of its product lines and also participates in joint
marketing activities with its OEM partners and other desktop video companies.
Sales
The Company maintains a sales organization consisting of regional sales
managers in the United States, Europe and other international territories. The
Company currently has sales offices in 9 countries worldwide. The regional sales
managers are primarily responsible for supporting independent dealers and value
added resellers (VARs) and making direct sales in geographic regions without
dealer coverage. They also service customers who prefer to transact directly
with the Company.
The Company sells its broadcast and desktop products to end users
through an established domestic and international network of independent video
product dealers and VARs in addition to direct sales. The independent dealers
and VARs are selected for their ability to provide effective field sales and
technical support to the Company's customers. Dealers and VARs carry the
Company's broadcast and desktop products as demonstration units, advise
customers on system configuration and installation and perform ongoing
post-sales customer support. The Company believes that many end users depend on
the technical support offered by these dealers in making product purchase
decisions. The Company continues to invest resources in developing and
supporting its network of independent dealers and VARs. These groups eagerly
promote the Company's products and considerably expand its market coverage.
The Company also sells and distributes its desktop products to OEMs
that incorporate the Company's products into their video editing products and
resell these products to other resellers and end users. These OEMs generally
purchase the Company's products and are responsible for conducting their own
marketing, sales and support activities. The Company attempts to identify and
align itself with OEMs that are market share and technology leaders in the
Company's target markets. In recent years the Company has been dependent on
sales of Alladin and Genie to Avid Technologies, Inc. ("Avid,") which is a
leading supplier of digital, non-linear video and audio editing systems for the
professional video and film editing market. However, sales to Avid as a
percentage of total Company sales has declined during the last three years.
Sales to Avid accounted for approximately 6.8% of net sales in fiscal 1999,
10.7% of net sales in fiscal 1998 and 26.4% of net sales in fiscal 1997. Though
the concentration of the net sales to a single OEM customer has decreased
substantially during the last three years, it still subjects the Company to
risks, in particular the risk that its operating results can vary on a
quarter-to-quarter basis as a result of variations in the ordering patterns of
OEM customers.
The Company's consumer or Studio products and certain lower priced
desktop products are sold primarily through the consumer retail channel via
large distributors, such as Ingram Micro Inc., and large computer and electronic
retailers in addition to direct telemarketing, mail order and over the Internet.
The consumer retail channel is characterized by long payment terms and sales
returns. There can be no assurance that any particular computer retailers will
continue to stock and sell the Company's consumer products. If a significant
number of computer retailers were to discontinue selling those products or if
sales returns are higher than anticipated, the Company's results of operations
would be adversely affected. Sales into the
10
consumer retail channel entail a number of risks including the limited
experience of the Company in this market, inventory obsolescence, product
returns and potential price protection obligations.
The Company's acquisition of Miro's European sales organization in
August 1997, significantly increased the Company's desktop and consumer channel
outside North America. The Company continues to expand this organization. Sales
outside of North America represented approximately 60.8%, 57.6% and 39.7% of the
Company's net sales for fiscal 1999, 1998 and 1997, respectively. The Company
expects that sales outside of the United States will continue to account for a
significant portion of its net sales.
The Company makes foreign currency denominated sales in many
countries, especially in Europe, exposing itself to risks associated with
foreign currency fluctuations, though this risk is partially hedged since all
local selling and marketing expenses are also denominated in those same
currencies. International sales and operations may also be subject to risks such
as the imposition of governmental controls, export license requirements,
restrictions on the export of critical technology, political instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
international operations, potential insolvency of international dealers and
difficulty in collecting accounts receivable. There can be no assurance that
these factors will not have an adverse effect on the Company's future
international sales and, consequently, on the Company's business, financial
condition and results of operations.
Service and Support
The Company believes that its ability to provide customer service and
support is an important element in the marketing of its products. Its customer
service and support operation also provides the Company with a means of
understanding customer requirements for future product enhancements. The Company
maintains an in-house repair facility and also provides telephone access to its
technical support staff. The Company's technical support engineers not only
provide assistance in diagnosing problems, but also work closely with customers
to address system integration issues and to assist customers in increasing the
efficiency and productivity of their systems. The Company supports its customers
in Europe and Asia primarily through its international sales offices, European
logistic center and local dealers. The Company has recently expanded its service
network through the Hewlett-Packard acquisition in August 1999. The Company
intends to expend additional resources to meet the needs of its growing service
operation. The Company is also planning on offering extended warranty and
service plans to its customers.
The Company typically warrants its products against defects in
materials and workmanship for varying periods depending on the product and the
nature of the purchaser. The Company believes its warranties are similar to
those offered by other video production equipment suppliers. To date, the
Company has not encountered any significant product maintenance problems.
Competition
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over the
life of a product. Competition is fragmented with several hundred manufacturers
supplying a variety of products to this market. The Company anticipates
increased competition in the video post-production equipment market from both
existing manufacturers and new market entrants. Increased competition could
result in price reductions, reduced margins and loss of market share, any of
which could materially and adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully against current and future competitors.
Competition for the Company's broadcast products is generally based on
product performance, breadth of product line, service and support, market
presence and price. The Company's principal competitors in this market include
Accom, Inc., Chyron Corporation, Leitch Technology Corporation, Matsushita
Electric Industrial Co. Ltd. ("Matsushita"), Quantel Ltd. (a division of Carlton
Communications
11
Plc) SeaChange Corporation, Sony Corporation ("Sony"), and Tektronix Inc., some
of whom have greater financial, technical, marketing, sales and customer support
resources, greater name recognition and larger installed customer bases than the
Company. In addition, some of these companies have established relationships
with current and potential customers of the Company. Some of the Company's
competitors also offer a wide variety of video equipment, including professional
video tape recorders, video cameras and other related equipment. In some cases,
these competitors may have a competitive advantage based upon their ability to
bundle their equipment in certain large system sales.
The Company's competition in the desktop and consumer markets comes
from a number of groups of video companies such as traditional video equipment
suppliers, providers of desktop editing solutions, video software application
companies and others. Suppliers of traditional video equipment such as
Matsushita and Sony have the financial resources and technical know-how to
develop high quality, real time video manipulation products for the desktop
video market. Suppliers of desktop video editing systems or components such as
Avid, Matrox Electronics Systems, Ltd., Media100, Inc., have established desktop
video distribution channels, experience in marketing video products and
significant financial resources.
The Company believes that the consumer video editing market is still
emerging and as well the sources of competition. There are several established
video companies that are currently offering products or solutions that compete
directly or indirectly with the Company's consumer products by providing some or
all of the same features and video editing capabilities. In addition, the
Company expects that existing manufacturers and new market entrants will develop
new, higher performance, lower cost consumer video products that may compete
directly with the Company's consumer products. The Company may also face
competition from other computer companies that lack experience in the video
production industry but that have substantial resources to acquire or develop
technology and products for the video production market. There can be no
assurance that any of these companies will not enter into the video production
market or that the Company could successfully compete against them if they did.
Manufacturing and Suppliers
The Company's manufacturing and logistics operations, located in
Mountain View, California and Braunschweig, Germany, consist primarily of
testing printed circuit assemblies, final product assembly, configuration and
testing, quality assurance and shipping for the Company's broadcast and desktop
products. Manufacturing of the Company's consumer and desktop products is
performed by independent subcontractors from where products are often shipped
directly to the distributor or retailer. Each of the Company's products
undergoes quality inspection and testing at the board level and final assembly
stage. The Company manages its materials with a software system that integrates
purchasing, inventory control and cost accounting.
The Company relies on independent subcontractors who manufacture to the
Company's specifications its consumer and desktop products and major
subassemblies used in the Company's broadcast and other desktop products. This
approach allows the Company to concentrate its manufacturing resources on areas
where it believes it can add the most value, such as product testing and final
assembly, and reduces the fixed costs of owning and operating a full scale
manufacturing facility. The Company has manufacturing agreements with a number
of U.S.-based subcontractors which include Pemstar, Flash Electronics and Sales
Link (formerly PacLink), for the manufacture of Company's consumer and desktop
products, and with Streiff & Helmold GmbH, which is located in Braunschweig,
Germany. The Company's reliance on subcontractors to manufacture products and
major subassemblies involves a number of significant risks including the loss of
control over the manufacturing process, the potential absence of adequate
capacity, the unavailability of or interruptions in access to certain process
technologies and reduced control over delivery schedules, manufacturing yields,
quality and costs. In the event that any significant subcontractor were to
become unable or unwilling to continue to manufacture these products or
subassemblies in required volumes, the Company's business, financial condition
and results of operations would be materially adversely affected.
12
To the extent possible, the Company and its manufacturing
subcontractors use standard parts and components available from multiple
vendors. However, the Company and its subcontractors are dependent upon single
or limited source suppliers for a number of key components and parts used in its
products, including integrated circuits manufactured by Altera Corporation,
AuraVision Corporation, C-Cube Microsystems, LSI Logic Corp., Maxim Integrated
Products, Inc., National Semiconductor Corporation, Philips Electronics, Inc.,
Raytheon Corporation and Zoran Corporation, boards and modules manufactured by
Adaptec, Inc., and Sony, field programmable gate arrays manufactured by Altera
Corporation, serial RAM memory modules manufactured by Hitachi, Ltd. and
software applications from Adobe. The Company's manufacturing subcontractors
generally purchase these single or limited source components pursuant to
purchase orders placed from time to time in the ordinary course of business, do
not carry significant inventories of these components and have no guaranteed
supply arrangements with such suppliers. In addition, the availability of many
of these components to the Company's manufacturing subcontractors is dependent
in part on the Company's ability to provide its manufacturers, and their ability
to provide suppliers, with accurate forecasts of its future requirements. The
Company and its manufacturing subcontractors endeavor to maintain ongoing
communication with their suppliers to guard against interruptions in supply. The
Company and its subcontractors have in the past experienced delays in receiving
adequate supplies of single source components. Also, because of the reliance on
these single or limited source components, the Company may be subject to
increases in component costs which could have an adverse effect on the Company's
results of operations. Any extended interruption or reduction in the future
supply of any key components currently obtained from a single or limited source
could have a significant adverse effect on the Company's business, financial
condition and results of operations in any given period.
The Company's broadcast and desktop customers generally order on an
as-needed basis. The Company typically ships its products within 30 days of
receipt of an order, depending on customer requirements, although certain
customers, including OEMs, may place substantial orders with the expectation
that shipments will be staged over several months. A substantial majority of
product shipments in a period relate to orders received in that period, and
accordingly, the Company generally operates with a limited backlog of orders.
The absence of a significant historical backlog means that quarterly results are
difficult to predict and delays in product delivery and in the closing of sales
near the end of a quarter can cause quarterly revenues to fall below anticipated
levels. In addition, customers may cancel or reschedule orders without
significant penalty and the prices of products may be adjusted between the time
the purchase order is booked into backlog and the time the product is shipped to
the customer. As a result of these factors, the Company believes that the
backlog of orders as of any particular date is not necessarily indicative of the
Company's actual sales for any future period.
Proprietary Rights and Licenses
The Company's ability to compete successfully and achieve future
revenue growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company
relies on a combination of patent, copyright, trademark and trade secret laws
and other intellectual property protection methods to protect its proprietary
technology. In addition, the Company generally enters into confidentiality and
nondisclosure agreements with its employees and OEM customers and limits access
to and distribution of its proprietary technology. The Company currently holds a
number of United States patents covering certain aspects of its technologies.
Although the Company intends to pursue a policy of obtaining patents for
appropriate inventions, the Company believes that the success of its business
will depend primarily on the innovative skills, technical expertise and
marketing abilities of its personnel, rather than upon the ownership of patents.
Certain technology used in the Company's products is licensed from third parties
on a royalty-bearing basis. Such royalties to date have not been, and are not
expected to be, material. Generally, such agreements grant to the Company
nonexclusive, worldwide rights with respect to the subject technology and
terminate only upon a material breach by the Company.
In the course of its business, the Company may receive and in the past
has received communications asserting that the Company's products infringe
patents or other intellectual property rights of third parties.
13
The Company's policy is to investigate the factual basis of such communications
and to negotiate licenses where appropriate. While it may be necessary or
desirable in the future to obtain licenses relating to one or more of its
products, or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms or at all. There can be no assurance that such communications can be
settled on commercially reasonable terms or that they will not result in
protracted and costly litigation.
There has been substantial industry litigation regarding patent,
trademark and other intellectual property rights involving technology companies.
In the future, litigation may be necessary to enforce any patents issued to the
Company, to protect its trade secrets, trademarks and other intellectual
property rights owned by the Company, or to defend the Company against claimed
infringement. Any such litigation could be costly and a diversion of
management's attention, either of which could have material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Employees
As of June 30, 1999, the Company had 460 full-time employees, including
162 engaged in engineering and product development activities, 75 in
manufacturing and operations, 186 in marketing and sales and 37 in
administration and finance. The Company believes that its future success will
depend, in part, on its continuing ability to attract, retain and motivate
qualified technical, marketing and managerial personnel. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. In Germany, certain of the Company's
employees are represented by statutory worker councils, which are representative
bodies to which employees appoint representatives. In general, the employer is
required to seek the approval and/or advice of the worker council before making
certain significant decisions affecting the employees and the business. The
Company believes that its relations with its employees are good.
Executive Officers
The executive officers of the Company and their ages as of September
17, 1999 are as follows:
------------------------------------------------------------------------------------------------------------------------------------
Name Age Position
---- --- --------
------------------------------------------------------------------------------------------------------------------------------------
Mark L. Sanders .............................. 56 President, Chief Executive Officer and Director
Ajay Chopra .................................. 42 Chairman of the Board, Vice President, General Manager, Desktop Products
Arthur D. Chadwick ........................... 42 Vice President, Finance and Administration and Chief Financial Officer
Georg Blinn .................................. 51 Vice President, General Manager, Pinnacle Systems GmbH
Patrick Burns ................................ 52 Vice President, Broadcast and Professional Sales, Americas and Japan
Tavy A. Hughes ............................... 44 Vice President, Operations
William Loesch ............................... 45 Vice President, General Manager, Consumer Products
Robert Wilson ................................ 45 Vice President, General Manager, Broadcast Products
James E. Dunn ................................ 54 Vice President, Business and Consumer Marketing and Sales, Americas
------------------------------------------------------------------------------------------------------------------------------------
There is no family relationship between any director or executive
officer of the Company.
14
Mr. Sanders has served as President, Chief Executive Officer and a
director of the Company since January 1990. From 1988 to 1990, Mr. Sanders was
an independent business consultant. Prior to that time, Mr. Sanders served in a
variety of management positions, most recently as Vice President and General
Manager of the Recording Systems Division of Ampex Incorporated, a manufacturer
of video broadcast equipment.
Mr. Chopra, a founder of the Company, has served as Chairman of the
Board of Directors since January 1990, and has served as a director of the
Company since its inception in May 1986. Mr. Chopra has served as Vice
President, General Manager, Desktop Products since April 1997. He previously
served as Chief Technology Officer from June 1996 to April 1997, Vice President
of Engineering from January 1990 to June 1996, and President and Chief Executive
Officer of the Company from its inception to January 1990.
Mr. Chadwick has served as Vice President, Finance and Administration
and Chief Financial Officer of the Company since January 1989. From February
1987 to January 1989 he served as Plant Manager for the Philippines facility of
Gould Semiconductor, a semiconductor company and as Corporate Controller from
February 1984 to February 1987.
Mr. Blinn has served as Vice President, General Manager, Pinnacle
Systems GmbH since August 1997. Prior to joining the Company, Mr. Blinn was the
Chief Financial Officer of Miro AG, a provider of video capture cards, from
December 1996 to August 1997. From January 1993 to December 1996, Mr. Blinn was
an independent business consultant. From January 1987 to December 1992, Mr.
Blinn served as a General Manager of Hitachi Data Systems GmbH, a mainframe
computer distributor.
Mr. Burns has served as Vice President, Broadcast and Professional
Sales, the Americas and Japan since April 1999. He served as Vice President of
Corporate Marketing from February 1998 until March 1999. He served as Vice
President of North American Sales and Corporate Marketing of the Company since
December 1996. From March 1996 to November 1996, Mr. Burns served as a marketing
and strategy consultant to software developers in the film and video markets.
From April 1995 to February 1996, he served as Vice President and General
Manager of Video and Graphics products at Radius, Inc., a graphics company. From
May 1994 to April 1995, Mr. Burns served as Vice President and General Manager
of Chyron's West Coast operations. From April 1993 to May 1994, Mr. Burns served
as Director of International Marketing for VeriFone, Inc., a financial
transaction company. From November 1991 through January 1993, Mr. Burns was Vice
President of Macrovision, Inc., a video encryption company.
Ms. Hughes has served as Vice President, Operations since July, 1998,
as Vice President, Manufacturing of the Company since January 1995, Director of
Manufacturing from April 1994 to January 1995 and a Manager from September 1993
until April 1994. From July 1991 to September 1993, Ms. Hughes served as an
independent business consultant. From 1985 to June 1991, Ms. Hughes served as
Manufacturing Manager of Alta Group, Inc., a manufacturer of digital video
post-production equipment.
Mr. Loesch has served as Vice President, General Manager, Consumer
Products since April 1997. Prior to that Mr. Loesch served as Vice President,
New Business Development of the Company from May 1994 to April 1997. From July
1993 to May 1994, Mr. Loesch served as an independent business consultant. From
June 1990 to November 1992, Mr. Loesch co-founded and served as President of
SHOgraphics Inc., a 3D graphics systems company, and from November 1992 until
July 1993 served as its Executive Vice President and Chief Technical Officer.
Mr. Wilson has served as Vice President, Broadcast Products since April
1997. From May 1994 to April 1997, Mr. Wilson served as Executive Vice
President, Chief Operating Officer and Chief Financial officer of Accom, Inc., a
video company. From March 1991 to April 1994, Mr. Wilson served as President and
Chief Executive Officer of The Grass Valley Group (a subsidiary of Tektronix,
Inc.), which provides video systems to the high-end production, post-production
and broadcast market.
Mr. Dunn has served as Vice President, Business and Consumer Marketing
and Sales, Americas, since August 1999. From August 1996 to May 1999, Mr. Dunn
served as Chief Operating Officer of the Automotive Performance Group, an
automotive aftermarket marketing and distribution company. From April 1988 to
February 1996, Mr. Dunn served as the Director of Business and Government
Marketing for Apple Computer, Inc., a computer manufacturer.
15
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, manufacturing and
product development facility is located in Mountain View, California. This
facility occupies approximately 106,000 square feet pursuant to a lease which
commenced August 15, 1996 and which will terminate December 31, 2003. The
Company also leases approximately 26,000 square feet of engineering,
administrative, logistics and marketing space in Braunschweig, Germany. The
Braunschweig lease expires in April 2004.
In addition, the Company occupies sales and customer support facilities
in Uxbridge, United Kingdom; Munich, Germany; Singapore; Tokyo, Japan; Beijing,
China; Taipei, Taiwan; Nijmegen, Netherlands; Paris, France; and Upplands Vasby,
Sweden. The Company has six engineering and development sites, one at the
corporate headquarters in Mountain View, California plus facilities in
Indianapolis, Indiana; Gainesville, Florida; Paramus, New Jersey; Grass Valley,
California and Braunschweig, Germany.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pinnacle Systems made its initial public offering on November 8, 1994.
Its Common Stock is traded on the Nasdaq National Market under the symbol PCLE.
The following table sets forth for the fiscal periods indicated the range of
high and low sales prices per share of the common stock as reported on the
Nasdaq National Market.
--------------------------------------------------------------------------------
High Low
--------------------------------------------------------------------------------
Fiscal Year Ended June 30, 1999
--------------------------------------------------------------------------------
First Quarter ............................... 19.125 9.282
--------------------------------------------------------------------------------
Second Quarter .............................. 19.125 9.500
--------------------------------------------------------------------------------
Third Quarter ............................... 23.625 16.094
--------------------------------------------------------------------------------
Fourth Quarter .............................. 33.875 20.250
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fiscal Year Ended June 30, 1998
--------------------------------------------------------------------------------
First Quarter ............................... 15.875 8.563
--------------------------------------------------------------------------------
Second Quarter .............................. 16.750 10.000
--------------------------------------------------------------------------------
Third Quarter ............................... 18.938 10.000
--------------------------------------------------------------------------------
Fourth Quarter .............................. 21.750 13.000
--------------------------------------------------------------------------------
As of September 15, 1999, there were approximately 297 stockholders of
record of the common stock.
On April 15, 1999, the Company announced a two-for-one stock split of
the Company's common shares. This was paid in the form of a 100% stock
distribution on June 4, 1999 to stockholders of record on
16
May 14, 1999. Accordingly, all share and per share data for prior periods
presented have been restated to reflect the stock split.
The Company has never paid cash dividends on its capital stock. The
Company currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data for
each of the years in the five-year period ended June 30, 1999. The consolidated
statements of operations data and balance sheet data are derived from the
consolidated financial statements of Pinnacle Systems Inc. and its subsidiaries,
which have been audited by KPMG LLP, independent auditors. The results for the
fiscal year ended June 30, 1999 are not necessarily indicative of the results
for any future period. The selected consolidated financial data set forth below
should be read in conjunction with the consolidated financial statements as of
June 30, 1999 and June 30, 1998 and for each of the years in the three year
period ended June 30, 1999 and notes thereto set forth on Pages F-1 to F-24 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
17
(In thousands, except per share data) FISCAL YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales $ 159,098 $ 105,296 $ 37,482 $ 46,151 $ 22,193
Cost of sales 74,022 48,715 23,997 23,854 11,291
--------- --------- --------- --------- ---------
Gross profit 85,076 56,581 13,485 22,297 10,902
--------- --------- --------- --------- ---------
Operating expenses:
Engineering and product development 16,137 11,652 7,579 5,140 2,405
Sales and marketing 41,160 29,301 12,667 8,907 5,340
General and administrative 6,840 5,342 3,702 2,186 1,088
In process research and development 6,579 16,960 4,894 3,991 --
--------- --------- --------- --------- ---------
Total operating expenses 70,716 63,255 28,842 20,224 8,833
--------- --------- --------- --------- ---------
Operating income (loss) 14,360 (6,674) (15,357) 2,073 2,069
Interest income, net 4,742 3,139 2,867 3,345 738
--------- --------- --------- --------- ---------
Income (loss) before income taxes 19,102 (3,535) (12,490) 5,418 2,807
Income tax expense (666) (2,685) (2,445) (1,734) (567)
--------- --------- --------- --------- ---------
Net income (loss) $ 18,436 $ (6,220) $ (14,935) $ 3,684 $ 2,240
========= ========= ========= ========= =========
Net income (loss) per share
Basic $ 0.86 $ (0.35) $ (1.01) $ 0.26 $ 0.26
========= ========= ========= ========= =========
Diluted $ 0.79 $ (0.35) $ (1.01) $ 0.24 $ 0.21
========= ========= ========= ========= =========
Shares used to compute net income (loss) per share
Basic 21,390 17,814 14,804 14,316 8,532
========= ========= ========= ========= =========
Diluted 23,483 17,814 14,804 15,606 10,440
========= ========= ========= ========= =========
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands) JUNE 30,
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 120,325 $ 100,496 $ 57,662 $ 72,337 $ 26,588
Total assets 196,469 132,937 70,007 84,561 32,724
Long-term debt -- 163 475 -- --
Retained earnings (deficit) (389) (18,825) (12,605) 2,330 (1,354)
Shareholders' equity 166,259 114,392 62,711 80,198 27,743
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain Forward-Looking Information
Certain statements in this Management's Discussion and Analysis and
elsewhere in this Annual Report on Form 10-K are forward-looking statements
based on current expectations, and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. Such risks and uncertainties are set forth below
under "Factors Affecting Operating Results"
Overview
The Company designs, manufactures, markets and supports video
post-production tools for high quality real time video processing. The Company's
products are used to capture, compress and store and edit video and to perform a
variety of video manipulation functions, including the addition of special
effects, graphics and titles to multiple streams of live or previously recorded
video material. Pinnacle's strategy is to leverage its existing market and
technological position to continue to provide innovative, real time, computer
based solutions for three video post production markets which the Company
characterizes as the broadcast, desktop and the consumer video markets. Pinnacle
distributes and sells its products to end users through the combination of
independent domestic and international dealers and value added resellers
("VARs"), retail distributors, OEMs and, to a lesser extent, a direct sales
force. Sales to dealers, VARs, distributors and OEMs are generally at a discount
to the published list prices. The amount of discount, and consequently the
Company's gross profit, varies depending on the product and the channel of
distribution through which it is sold, the volume of product purchased and other
factors. Generally, products sold to OEMs are integrated by them into editing
systems sold to their customers.
Broadcast Market
The broadcast market generally requires very high technical performance
such as real time 10-bit processing, control of multiple channels of live video
and specialized filtering and interpolation. From the Company's inception in
1986 until 1994, substantially all of the Company's revenues were derived from
the sale of products into the broadcast market. Currently, DVExtreme, Lightning,
Deko, AlladinPRO and Thunder and Media stream servers comprise the Company's
suite of high performance real time products designed for on-air, broadcast and
high-end, post-production applications.
In June 1997, the Company commenced shipment of DVExtreme and
Lightning, two Windows NT-based products designed to address the markets
previously addressed by Prizm and Flashfile respectively, the primary broadcast
products sold throughout fiscal 1997. In April 1997, the Company completed the
acquisition of the Deko titling and character generation product line from
Digital Graphix, Inc. ("Deko Acquisition"). Currently the Company sells three
products in the Deko line, FXDeko, TypeDeko and WriteDeko, and has recently
announced the release of six additional products including FXDekoHD, a high
definition character and graphics generator. In fiscal 1998, substantially all
of the broadcast revenue came from the sale of DVEtreme, Lightning and Deko
products. In June 1998, the Company commenced shipment of AlladinPRO; a
high-performance Windows NT based digital video effects system designed for live
and on-line applications. In September 1998, the Company commenced shipment of
FXDeko; a new high performance Windows NT-based product that combines the
feature set of Deko with real time digital effect technology. In June 1999, the
Company introduced Thunder, the Company's first multi-channel video and audio
clip server and iThunder, a real time video server for Internet broadcasting. In
August 1999, the Company completed the acquisition of certain of the assets of
the Hewlett-Packard Company including the Media Stream server family. Media
Stream compliments the Thunder family in providing a complete line of broadcast
quality video
19
server solutions. The broadcast market accounted for approximately 16.9%, 24.2%,
and 25.4% of net sales in the years ended June 30, 1999, 1998 and 1997,
respectively.
Desktop Market
The Company's desktop products are designed to provide high quality
video capture, compression/decompression, editing, and real time video
manipulation capabilities for computer based video post-production systems. They
are generally offered at significantly lower price points than traditional
editing suites and are integrated into the computer by a value-added reseller,
an OEM, or the end user. The Company's first desktop product was the Alladin,
which commenced shipment in June 1994. The Company expanded its desktop product
line with the introduction of Genie in June 1996. In August 1997, the Company
acquired the miroVIDEO desktop product lines and during fiscal 1998 the Company
introduced additional new desktop products. The Company has two general classes
of desktop products: digital video effects products, which include the Alladin
and Genie families, and video capture and editing products, which include the
ReelTime, ReelTime Nitro, miroVIDEO DC30, miroVIDEO DC50 and miroVIDEO DV300/200
families. In September 1998, the Company commenced shipment of ReelTime Nitro
which combines the video capture and editing capabilities of ReelTime with the
digital video effects capabilities of Genie. In March 1999, the Company
completed its acquisition of Truevision, Inc. and added Truevision's TARGA
branded products to its catalog. In April 1999, the Company began shipping
DV200, its new low-cost DV-based video capture and editing solution. In June
1999, the Company began shipping DC1000, a new dual stream MPEG2 editing product
and a companion DVD authoring option. The desktop market accounted for
approximately 56.5%, 57.5% and 59.8% of net sales in the fiscal years ended June
30, 1999, 1998 and 1997, respectively.
Consumer Market
The Company's consumer products provide complete video editing
solutions that allow consumers to edit their home videos using their personal
computer, camcorder and VCR. The Company entered the consumer video editing
market by acquiring the VideoDirector product line from Gold Disk, Inc. in June
1996, and commenced shipment of its first internally developed consumer-editing
product, the VideoDirector Studio 200, in March 1997. In June 1998 the Company
commenced shipment of Studio 400, which expands the capabilities of and replaces
VideoDirector Studio 200. In November 1998, the Company commenced shipment of
Studio DC10 Plus. In March 1999, the Company commenced shipment of Studio MP10,
the company's third product in the Studio line. As of June 30, 1999, the
Company's consumer product line included Studio 400, Studio DC10, Studio MP10
and Studio PCTV. Consumer products are distributed direct to retail outlets and
through retail distributors such as Ingram Micro. The Company also sells
directly to end-users by accepting orders via the telephone and Internet. Price
points of consumer products are lower than the Company's broadcast and desktop
products and consumer products are marketed as computer peripheral products. The
consumer market accounted for approximately 26.6%, 18.3% and 14.8% of net sales
in the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
Acquisitions
To further Pinnacle's strategy of providing an expanded line of easy to
use computer based video production products, in August 1997 the Company
acquired the miro Digital Video Products Group (the "Miro Acquisition") from
miro Computer Products AG ("Miro"). In the Miro Acquisition, the Company
acquired the miroVIDEO product line, certain technology and other assets. The
Company paid $15.2 million in cash in October 1997, issued 407,130 shares of
common stock, valued at $4.4 million, assumed liabilities of $2.7 and incurred
transaction costs of $1.1 million. The fair value of assets acquired included
tangible assets, primarily inventories, of $2.4 million, goodwill and other
intangibles of $3.9 million, and the Company expensed $17.0 million of
in-process research and development. In addition, the Company incurred $465,000
of other nonrecurring costs related to the acquisition in the year ended June
30, 1998. The
20
terms of the Miro Acquisition also included an earnout provision pursuant to
which Miro received additional consideration based on sales and operating profit
targets. On September 1, 1998, the Company issued 615,068 shares of Common Stock
in consideration of such earnout payment which was recorded as goodwill and
amortized over nine years beginning September 1, 1998.
On March 12, 1999, the Company acquired all the outstanding common
stock of Truevision, Inc. , a supplier of digital video products ("Truevision").
In connection with the acquisition, Pinnacle issued 824,206 shares of common
stock valued at $11.5 million. In addition, Pinnacle issued to Truevision
employees and directors 139,678 options, valued at $0.7 million, to purchase
common stock at an exercise price of $11.98. The Company also assumed 53,836
warrants valued at $0.1 million. The Company incurred acquisition costs of
approximately $0.5 million for a total purchase price of $12.8 million. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Truevision, Inc. and the fair market
value of the acquired assets and assumed liabilities have been included in the
financial statements of the Company since March 12, 1999.
In March, 1999, the Company acquired Shoreline Studios, Inc., a leading
provider of innovative real-time 3D graphics software for use in live
broadcasts, in a transaction intended to strengthen Pinnacle's position in the
broadcast graphics market. The total purchase price of the acquisition totaled
$0.8 million of which approximately $0.5 million was paid in the quarter ended
March 31, 1999. The balance is expected to be paid during the fiscal year ending
June 30, 2000.
On June 30, 1999, the Company announced that it had signed a definitive
agreement to purchase certain assets of the Video Communications Division of the
Hewlett-Packard Company ("HP"). Under the terms of the agreement, Pinnacle
Systems would acquire substantially all of the assets of HP's Video
Communications Division, including key technologies and intellectual property,
the Media Stream family of products and selected assets, as well as most
managers and employees. On August 2, 1999, the Company completed the purchase.
Pursuant to the terms of the Agreement, the Company paid HP approximately $12.6
million in cash and issued 773,172 shares of Pinnacle's common stock valued at
approximately $19.5 million. Pursuant to a stock restriction and registration
rights agreement included in the definitive agreement, Pinnacle filed with the
Securities and Exchange Commission a registration statement on Form S-3 with
respect to one-half of the Pinnacle Shares issued to HP. HP has agreed to
certain restrictions with respect to the disposition of the remainder of such
shares.
The Company will account for the HP acquisition as a purchase.
Accordingly, the results of operations and the fair market value of the acquired
assets and assumed liabilities will be included in the financial statements of
the Company as of August 2, 1999. The Company estimates that it will assume
liabilities of approximately $3.0 million and expects to incur approximately
$0.5 million in expenses associated with executing the transaction. The Company
is currently in the process of valuing amounts to be allocated to indentifiable
intangible assets and acquired in-process research and development. These
valuations are being performed by an independent appraiser using established
valuation techniques. Charges for in-process research and development and
amortization of intangibles and goodwill will be included in the Company's
statement of operations for the quarter ending September 30, 1999. Goodwill
represents the amount by which the cost of acquired net assets exceeds the fair
value of the net assets acquired on the date of purchase.
Foreign Exchange
The Company transacts business in various foreign currencies but
primarily in those of Germany, France and the United Kingdom. During the fiscal
year ended June 30, 1999, the Company experienced significant fluctuations in
the exchange rate of the German mark. These fluctuations resulted in a
translation adjustment loss of approximately $2.0 million at June 30, 1999. This
amount is included in Shareholder's equity as accumulated other comprehensive
loss.
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data as a percentage of net sales:
21
--------------------------------------------------------------------------------
Fiscal Year Ended June 30,
---------------------------
1999 1998 1997
----- ----- -----
--------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 46.5 46.3 64.0
----- ----- -----
Gross profit 53.5 53.7 36.0
Operating expenses:
Engineering and product development 10.1 11.1 20.2
Sales and marketing 25.9 27.8 33.8
General and administrative 4.3 5.1 9.9
In process research and development 4.1 16.1 13.1
----- ----- -----
Total operating expenses 44.4 60.1 77.0
----- ----- -----
Operating income (loss) 9.1 (6.4) (41.0)
Interest income, net 3.0 3.0 7.7
----- ----- -----
Income (loss) before income taxes 12.1 (3.4) (33.3)
Income tax expense (0.4) (2.5) (6.5)
----- ----- -----
Net income (loss) 11.7% (5.9)% (39.8)%
===== ===== =====
--------------------------------------------------------------------------------
Comparison of sales by business group for the years ended June 30,
'99 - '98 '98 - '97
Group 1999 1998 1997 % Change % Change
----- ---- ---- ---- -------- --------
Broadcast $ 26,917 $ 25,521 $ 9,520 5.5% 168.1%
Desktop 89,798 60,335 22,414 48.8% 169.2%
Consumer 42,383 19,440 5,548 118.0% 250.4%
-------- -------- --------
$159,098 $105,296 $ 37,482 51.1% 180.9%
======== ======== ========
Net Sales. The Company's net sales increase 51.1% to $159.1 million in
fiscal 1999 from $105.3 million in fiscal 1998. The increase is primarily
attributable to increases in desktop and consumer product sales. Broadcast sales
increased slightly and were augmented by the release of Thunder and FXDeko.
Desktop sales in fiscal 1999 increased 48.8% over fiscal 1998. This was driven
primarily by increased sales from existing products including the DC30, DC50,
Reeltime and DV300 in addition to sales generated from new product releases
notably the DC1000. Desktop sales also increased due to the acquisition of
Truevision in March 1999 which added the TARGA and Ready-to-Edit products.
Consumer sales increased 118.0% due to a full year of sales of the Studio 400
which was released at the end of fiscal 1998. Consumer sales also grew due to
increased sales of PCTV and the introduction of Studio DC10 and Studio MP10.
International Sales (sales outside of North America) were approximately
60.8% and 57.6% of the Company's net sales in fiscal 1999 and 1998,
respectively. The increase in fiscal 1999 was primarily attributable to an
increase in European sales of consumer products. The Company expects that
international sales will continue to represent a significant portion of its net
sales.
Gross Profit. Cost of revenues consists primarily of costs associated
with the procurement of components; tooling, assembly, testing, and distribution
of finished products; warehousing; warranty and service costs; product reworks,
provisions for inventory obsolescence and shrinkage, and royalties. The
resulting gross profit fluctuates based on factors such as product mix,
licensing fees or royalties paid to third
22
parties, the offering of product upgrades, price discounts and other sales
promotion programs, and the distribution channels through which products are
sold. Gross profit as a percentage of net sales was 53.5% and 53.7% in fiscal
1999 and 1998, respectively. Gross margins were aided in fiscal 1999 by a
favorable product mix. However, the Company has experienced and expects to
continue to experience pricing pressures on its products as the industry matures
and competition increases.
Engineering and Product Development. Engineering and product
development expenses increased 38.5% to $16.1 million for the fiscal year ended
June 30, 1999 from $11.7 million during fiscal 1998. As a percentage of sales,
engineering and product development expenses decreased to 10.1% in the fiscal
year ended June 30, 1999 from 11.1% in fiscal 1999. Management believes that
investment in research and development is crucial to its future growth and
position in the industry. The Company expects to continue to allocate
significant resources to engineering and product development efforts in Mountain
View and Grass Valley, California; Paramus, New Jersey; Gainsville, Florida;
Braunschweig, Germany; and Indianapolis, Indiana.
Sales and Marketing. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade shows, cooperative marketing and advertising
expenses and professional fees for marketing services. Sales and marketing
expenses increased by 40.5% to $41.2 million in fiscal 1999 from $29.3 million
in fiscal 1998. The increase in sales and marketing expenses was attributable to
promotional costs for the introduction of several new desktop and consumer
products in addition to the release of Thunder in June 1999. Sales and marketing
expenses as a percentage of net sales were 25.9% and 27.8% in fiscal 1999 and
1998, respectively. The decrease reflects a growth in sales exceeding
incremental sales and marketing expenditures.
General and Administrative. General and administrative expenses
increased by 28.0% to $6.8 million in fiscal 1999 compared to $5.3 million in
fiscal 1998. This increase in the June 99 fiscal year, is partly due to the
inclusion of a full twelve months of expenses from the German operations which
were acquired from Miro in August 1997. Additional increases were related to the
Company's overall growth. General and administrative expenses as a percentage of
net sales were 4.3% and 5.1%, respectively.
In-Process Research and Development. During the year ended June 30,
1999, the Company recorded an in-process research and development charge of
approximately $6.6 million mostly related to the acquistion of Truevision.
During the year ended June 30, 1998, the Company recorded an in-process research
and development charge of approximately $17.0 million related to the Miro
Acquisition.
The amounts to acquired in-process research and development, were based
on results of an independent appraisal using established valuation techniques in
the high-technology industry. The portion of the purchase price allocated to
in-process research and development represents development projects that have
not yet reached technological feasibility and have no alternative future use.
Technological feasibility was determined based on: (i) an evaluation of the
product's status in the development process with respect to utilization and
contribution of the individual products as of the date of valuation and (ii) the
expected dates in which the products would be commercialized. It was determined
that technologically feasibility was achieved when a product is at beta stage.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products; estimating the resulting net
cash flows from such projects; and discounting the net cash flows back to the
time of acquisition using a risk-adjusted discount rate. Discount rates of 35%
and 43% were used for the Truevision and Miro valuations respectively.
Interest Income Net. Net interest income increased 51.1% to $4.7
million in fiscal 1999 from $3.1 million in fiscal 1998. The increase was due to
an increase in cash and marketable securities due primarily to the completion of
a public offering in November 1997. Thus, fiscal 1999 includes one full year of
interest income from these proceeds.
23
Income Tax Expense. The Company recorded provisions for income taxes of
$0.7 million and $2.7 million for the fiscal years ended 1999 and 1998,
respectively. The provision for income taxes as a percentage of pretax income
was 3.5% and 75.6% respectively. The tax rate in fiscal 1999 was significantly
lower than the rate in fiscal 1998 mainly due to the reduction of the Company's
valuation allowance as management determined that it was likely that the Company
would realize a portion of its deferred tax asset. The tax rate in fiscal 1998
reflects the exclusion of non-deductible expenses related to acquisitions.
As of June 30, 1998, the Company has federal research and
experimentation and alternative minimum tax credit carryforwards of $0.7 million
which expire between 2012 and 2014, and state research and experimentation
credit carryforwards of $0.6 million which have no expiration provision.
Comparison of Years Ended June 30, 1998 and 1997
Net Sales. The Company's net sales were $105.3 million in fiscal 1998
compared to $37.5 million in fiscal 1997. The increase was attributable to an
increase in sales of all three product groups: broadcast, desktop and consumer.
The increase in consumer sales resulted from sales of products acquired in the
Miro Acquisition and sales of the VideoDirector Studio 200 and Studio 400, which
commenced shipment in March 1997 and June 1998, respectively. Broadcast sales
increased as a result of increasing sales of DVExtreme and Lightning, which were
first shipped in June 1997, Deko, which was acquired in April 1997, and
AlladinPRO which commenced shipment in June 1998, partially offset by a decline
in sales of Prizm and FlashFile. Desktop sales increased as a result of
miroVideo DC30 sales, which was acquired from Miro in August 1997, sales of
DV300 which commenced shipment in February 1998, sales of ReelTime which
commenced shipment in March 1998, and sales of miroVIDEO DC50 which commenced
shipment in June 1998. Sales outside of North America were approximately 57.6%
and 39.7% of the Company's net sales in fiscal 1998 and 1997, respectively. The
increase in sales outside of North America in fiscal 1998 was primarily
attributable to sales of miroVideo products in Europe following the Miro
Acquisition.
Cost of sales. Cost of sales consists primarily of costs related to
the acquisition of components and subassemblies, labor and overhead associated
with procurement, assembly and testing of finished products, warehousing,
shipping and warranty costs. Gross profit as a percentage of net sales was 53.7%
and 36.0% in fiscal 1998 and 1997, respectively. The increase in gross profit
percentage is due primarily to a significant charge to cost of sales in fiscal
1997 totaling $4.0 million relating to inventory write downs.
Engineering and Product Development. Engineering and product
development expenses increased by 53.9% to $11.7 million in fiscal 1998 from
$7.6 million in fiscal 1997. The increase was primarily attributable to
increased expenditures in connection with the continued expansion of the
Company's engineering design teams, in particular the engineering design group
based in Braunschweig, Germany established in connection with the Miro
Acquisition. Engineering and product development expenses as a percentage of net
sales were 11.1% and 20.2% in fiscal 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show, cooperative marketing and advertising
expenses and professional fees for marketing services. Sales and marketing
expenses increased by 130.7% to $29.3 million in fiscal 1998 from $12.7 million
in fiscal 1997. The increase in sales and marketing expenses was primarily
attributable to promotional costs for the introduction of several new broadcast
and consumer products, as well as the hiring of sales and marketing personnel in
connection with the Miro Acquisition. Sales and marketing expenses as a
percentage of net sales were 27.8% and 33.8% in fiscal 1998 and 1997,
respectively.
24
General and Administrative. General and administrative expenses
increased by 43.2% to $5.3 million in fiscal 1998 compared to $3.7 million in
fiscal 1997. General and administrative expenses as a percentage of net sales
were 5.1% and 9.9%, respectively. Included in general and administrative
expenses in fiscal 1998 were $465,000 of non-recurring spending related to the
acquisition of the Miro group. Included in general and administrative expenses
in fiscal 1997 were $315,000 of non-recurring spending related to the Deko
Acquisition and approximately $500,000 relating to the disposal of leasehold
improvements and other capital equipment, moving costs and rent overlap incurred
as a result of the move to the Company's facility in Mountain View, California.
In Process Research and Development. During the year ended June 30,
1998, the Company recorded an in process research and development charge of
approximately $17.0 million relating to the Miro Acquisition. During the year
ended June 30, 1997, the Company recorded an in process research and development
charge of approximately $4.9 million relating to the Deko Acquistion.
Interest Income Net. Net interest income increased 6.9% to $3.1 million
in fiscal 1998 from $2.9 million in fiscal 1997. The increase was due to an
increase in cash and marketable securities due primarily to the completion of a
public offering in November 1997.
Income Tax Expense. The Company recorded provisions for income taxes of
$2.7 million and $2.4 million for the fiscal years ended 1998 and 1997,
respectively. Income tax expense for the year ended June 30, 1997 included a
charge of $3,245,000 resulting from the establishment of a valuation allowance
against the Company's deferred tax asset due to significant operating losses and
the introduction of new products for which market acceptance was uncertain. As
of June 30, 1998, the Company has federal research and experimentation and
alternative minimum tax credit carryforwards of $1.3 million which expire
between 2009 and 2013, and state research and experimentation credit
carryforwards of $0.5 million which have no expiration provision.
Liquidity and Capital Resources
The Company has funded its operations to date through sales of equity
securities as well as through cash flows from operations. As of June 30, 1999
Company's principal sources of liquidity included cash, cash equivalents and
marketable securities totaling approximately $89.0 million. The Company believes
that the existing cash and cash equivalent balances as well as marketable
securities and anticipated cash flow from operations will be sufficient to
support the Company's current operations and growth for the foreseeable future.
The Company's operating activities used $215,000 in cash for the year
ended June 30, 1999. Cash was generated primarily from net income of $18.4
million after adjustment for in-process research and development charges,
depreciation and amortization, and deferred taxes net of stock option benefits.
This was offset by increases in accounts receivable and inventories. These
increases relate primarily to a 51% increase in product revenues from fiscal
1998 to 1999. In addition, the Company used cash to pay down notes and
liabilities of over $5.0 million assumed in its acquisition of Truevision in
March 1999.
During the year ended June 30, 1999, cash flow from investing
activities included $7.7 million invested in property and equipment, compared to
$2.5 million in the year ended June 30, 1998. The high level of expenditures for
the year ended June 30, 1999, was primarily for leasehold improvements,
furniture and equipment purchased for the Company's Mountain View facility
expansions in September 1998 and January and June 1999. The Company also
incurred expenditures of approximately $1.0 million in capitalized internal
software related to its SAP enterprise software implementation which began in
January 1999. The Company will continue to incur expenditures for the
implementation through March 2000. Cash
25
flow from investing activities also increased due to the maturity of certain of
the Company's marketable securities. As the Company continues to grow, it
expects ongoing purchases of property and equipment. Such capital expenditures
will be financed from working capital.
On March 12, 1999, the Company acquired all the outstanding common
stock of Truevision, a supplier of digital video products. In connection with
the acquisition, Pinnacle issued 824,206 shares of common stock valued at $11.5
million. In addition, Pinnacle issued to Truevision employees and directors
139,678 options, valued at $0.7 million, to purchase common stock at an exercise
price of $11.98. The Company also assumed 53,836 warrants valued at $0.1
million. The Company incurred acquisition costs of approximately $0.5 million
for a total purchase price of $12.8 million and assumed liabilities totaling
$13.0 million.
On June 30, 1999, the Company announced that it had signed a definitive
agreement to purchase certain assets of the Video Communications Division of the
Hewlett-Packard Company ("HP"). Under the terms of the agreement, Pinnacle
Systems would acquire substantially all of the assets of HP's Video
Communications Division, including key technologies and intellectual property,
the Media Stream family of products and selected assets, as well as most
managers and employees. On August 2, 1999, the Company completed the purchase.
Pursuant to the terms of the Agreement, the Company paid HP approximately $12.6
million in cash and issued 773,172 shares of Pinnacle's common stock valued at
approximately $19.5 million. Pursuant to a stock restriction and registration
rights agreement set forth in the definitive agreement, Pinnacle filed with the
Securities and Exchange Commission a registration statement on Form S-3 with
respect to one-half of the Pinnacle Shares issued to HP. HP has agreed to
certain restrictions with respect to the disposition of the remainder of such
shares.
FACTORS AFFECTING OPERATING RESULTS
We have grown rapidly and expect to continue to grow rapidly. If we
fail to effectively manage this growth, our financial results could suffer.
We have experienced rapid growth and anticipate that we will continue
to grow at a rapid pace in the future. For example, net sales in fiscal 1999
were $159.1 million compared to $105.3 million in fiscal 1998. As a result of
internal growth and recent acquisitions, we have increased the number of
employees significantly over the last two fiscal years and many are
geographically dispersed, primarily throughout North America and Europe. This
growth places increasing demands on our management, financial and other
resources. We have built these resources and systems to account for such growth,
but continued or accelerated growth may require us to increase our investment in
such systems, or to reorganize our management team. Such changes, should they
occur, could cause an interruption or diversion of focus from our core business
activities and have an adverse effect on financial results.
Any failure to successfully integrate the businesses we have acquired
could negatively impact us.
In August 1999, we closed the transaction with the Hewlett-Packard
Company and in March 1999, we completed the acquisitions of Truevision, Inc and
Shoreline Studios, Inc. We may in the near- or long-term pursue acquisitions of
complementary businesses, products or technologies. Integrating acquired
operations is a complex, time-consuming and potentially expensive process. All
acquisitions involve risks that could materially and adversely affect our
business and operating results. These risks include:
- Distracting management from the day-to-day operations of our
business
26
- Costs, delays and inefficiencies associated with integrating
acquired operations, products and personnel
- The potential to result in dilutive issuance of our equity
securities
- Incurring debt and amortization expenses related to goodwill
and other intangible assets
There are various factors which may cause our net revenues and
operating results to fluctuate.
Our quarterly and annual operating results have varied significantly in
the past and may continue to fluctuate because of a number of factors, many of
which are outside our control. These factors include:
- Timing of significant orders from and shipments to major OEM
customers
- Timing and market acceptance of new products
- Success in developing, introducing and shipping new products
- Dependence on distribution channels through which our products
are sold
- Increased competition and pricing pressure
- Accuracy of our and our resellers' forecasts of end user
demand
- Accuracy of inventory forecasts
- Ability to obtain sufficient supplies from our subcontractors
- Timing and level of consumer product returns
- Foreign currency fluctuations
- Costs of integrating acquired operations
- General domestic and international economic conditions, such
as the recent economic downturn in Asia and Latin America.
We also experience significant fluctuations in orders and sales due to
seasonal fluctuations, the timing of major trade shows and the sale of consumer
products in anticipation of the holiday season. Sales usually slow down during
the summer months of July and August, especially in Europe. Also, we attend a
number of annual trade shows which can influence the order pattern of products,
including CEBIT in March, the NAB convention held in April, the IBC convention
held in September and the COMDEX exhibition held in November. Our operating
expense levels are based, in part, on our expectations of future revenue and, as
a result, net income would be disproportionately affected by a shortfall in net
sales. Due to these factors, we believe that quarter-to-quarter comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance.
Our stock price may be volatile.
The trading price of our common stock has in the past and could in the
future fluctuate significantly. The fluctuations have been or could be in
response to numerous factors including:
- Quarterly variations in results of operations
- Announcements of technological innovations or new products by
us, our customers or competitors
- Changes in securities analysts' recommendations
- Announcements of acquisitions
- Earnings estimates for us
- General fluctuations in the stock market
Our revenues and results of operations may be below the expectations of
public market securities analysts or investors. This could result in a sharp
decline in the market price of our common stock.
27
In addition, stock markets have from time to time experienced extreme
price and volume fluctuations. The market prices for high technology companies
have been particularly affected by these market fluctuations and such effects
have often been unrelated to the operating performance of such companies. These
broad market fluctuations may cause a decline in the market price of our common
stock.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against the
issuing company. Although no such litigation has been brought against us, it is
possible that similar litigation could be brought against us. Such litigation
could result in substantial costs and would likely divert management's attention
and resources. Any adverse determination in such litigation could also subject
us to significant liabilities.
We are dependent on contract manufacturers and single or limited source
suppliers for our components. If these manufacturers and suppliers do not meet
our demand either in volume or quality, then we could be materially harmed.
We rely on subcontractors to manufacture our desktop and consumer
products and the major subassemblies of our broadcast products. We and our
manufacturing subcontractors are dependent upon single or limited source
suppliers for a number of components and parts used in our products, including
certain key integrated circuits. Our strategy to rely on subcontractors and
single or limited source suppliers involves a number of significant risks,
including:
- Loss of control over the manufacturing process
- Potential absence of adequate capacity
- Potential delays in lead times
- Unavailability of certain process technologies
- Reduced control over delivery schedules, manufacturing yields,
quality and costs
- Unexpected increases in component costs
If any significant subcontractor or single or limited source suppliers
becomes unable or unwilling to continue to manufacture these subassemblies or
provide critical components in required volumes, we will have to identify and
qualify acceptable replacements or redesign our products with different
components. Additional sources may not be available and product redesign may not
be feasible on a timely basis. This could materially harm our business. Any
extended interruption in the supply of or increase in the cost of the products,
subassemblies or components manufactured by third party subcontractors or
suppliers could materially harm our business.
We may fail to sell products in the consumer market.
We entered the consumer market with the acquisition of the
VideoDirector product line from Gold Disk in June 1996. We began shipping our
first internally developed consumer product, the VideoDirector Studio 200, in
March 1997 and began shipping a successor product, the Studio 400 in June 1998.
In addition, with the Miro Acquisition in August 1997, we acquired Miro's
consumer products and European sales organization. We aim to continue to invest
resources to develop, market and sell products into the consumer market. In this
endeavor, we need to continue to develop and maintain the following
capabilities:
- Marketing and selling products through the consumer
distribution channels.
- Establish relationships with distributors and retailers
- A fully developed infrastructure to support electronic retail
stores and telephone and Internet orders.
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Additionally, factors beyond our control could hurt consumer product
sales and consequently our financial condition. These factors include:
- Potential compatibility problems with other manufacturers'
electronic components
- The risk of obsolete inventory and inventory returns
- The growth of the consumer video market is difficult to
predict
If our products do not keep pace with the technological developments in
the rapidly changing video post-production equipment industry, then we may be
adversely affected.
The video post-production equipment industry is characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The introduction of products embodying new technologies
or the emergence of new industry standards can render existing products obsolete
or unmarketable. Delays in the introduction or shipment of new or enhanced
products, our inability to timely develop and introduce such new products, the
failure of such products to gain significant market accept
