UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-24784
PINNACLE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
California 94-3003809
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
280 N. Bernardo Ave.
Mountain View, CA 94043
- ----------------- ----------
(Address of principal executive offices) (Zip Code)
(650) 237-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock outstanding as of February 7, 2001 was
approximately 51,045,167.
1
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended
December 31, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months and Six Months Ended
December 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended - December 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3 - Quantitative and Qualitative Disclosures About
Market Risk 24
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders 25
ITEM 6 - Exhibits and Reports on Form 8-K 25
Signatures 26
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands; unaudited)
December 31, June 30,
2000 2000(1)
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 48,835 $ 58,433
Marketable securities 4,464 19,366
Accounts receivable, net 58,489 55,072
Inventories 44,769 36,824
Deferred income taxes 17,103 17,103
Prepaid expenses and other assets 4,147 4,100
--------- ---------
Total current assets 177,807 190,898
Marketable securities -- 4,346
Property and equipment, net 15,420 16,143
Goodwill and other intangibles, net 98,008 109,810
Other assets 2,338 1,602
--------- ---------
$ 293,573 $ 322,799
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 17,376 $ 22,422
Accrued expenses 24,253 30,146
--------- ---------
Total current liabilities 41,629 52,568
Deferred income taxes 10,611 10,611
--------- ---------
Total liabilities 52,240 63,179
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares;
none issued and outstanding -- --
Common stock, no par value; authorized 120,000 shares;
51,008 and 51,293 issued and outstanding as of
December 31 and June 30, 2000, respectively 272,078 257,496
Treasury shares at cost; 793 and -0- shares at
December 31 and June 30, 2000, respectively (6,508) --
Retained earnings (accumulated deficit) (15,555) 7,198
Accumulated other comprehensive loss (8,682) (5,074)
--------- ---------
Total shareholders' equity 241,333 259,620
--------- ---------
$ 293,573 $ 322,799
========= =========
<FN>
(1) Numbers are derived from the Company's audited financial statements for the
fiscal year ended June 30, 2000.
See accompanying notes to condensed consolidated financial statements.
</FN>
3
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales $ 75,033 $ 62,562 $ 137,808 $ 113,008
Cost of sales 39,668 30,415 75,910 52,714
--------- --------- --------- ---------
Gross profit 35,365 32,147 61,898 60,294
--------- --------- --------- ---------
Operating expenses:
Engineering and product development 7,971 6,244 16,327 12,213
Sales and marketing 16,683 13,819 32,272 25,545
General and administrative 4,338 2,257 8,093 4,969
Amortization of goodwill and intangibles 7,470 4,021 15,322 7,082
Acquisition settlement 363 -- 13,613 --
In-process research and development -- -- -- 2,000
--------- --------- --------- ---------
Total operating expenses 36,825 26,341 85,627 51,809
--------- --------- --------- ---------
Operating income (loss) (1,460) 5,806 (23,729) 8,485
Interest income and other, net 462 804 976 1,612
--------- --------- --------- ---------
Income (loss) before income taxes (998) 6,610 (22,753) 10,097
Income tax expense -- 1,221 -- 1,918
--------- --------- --------- ---------
Net income (loss) $ (998) $ 5,389 $ (22,753) $ 8,179
========= ========= ========= =========
Net income (loss) per share
Basic $ (0.02) $ 0.11 $ (0.45) $ 0.17
========= ========= ========= =========
Diluted $ (0.02) $ 0.10 $ (0.45) $ 0.15
========= ========= ========= =========
Shares used to compute net income (loss) per share
Basic 50,951 47,844 50,943 47,224
========= ========= ========= =========
Diluted 50,951 54,454 50,943 53,710
========= ========= ========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
4
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands; unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) $ (998) $ 5,389 $(22,753) $ 8,179
Foreign currency translation adjustment 1,531 (2,183) (3,608) (1,066)
-------- -------- -------- --------
Comprehensive income (loss) $ 533 $ 3,206 $(26,361) $ 7,113
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
5
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
Six Months Ended December 31,
2000 1999
-------- --------
Cash flows from operating activities:
Net income (loss) $(22,753) $ 8,179
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
In-process research and development -- 2,000
Acquisition settlement - equity portion 11,482 --
Depreciation and amortization 18,700 9,020
Deferred taxes 377 (1,444)
Changes in operating assets and liabilities:
Accounts receivable (3,524) (6,495)
Inventories (8,319) (2,043)
Accounts payable (5,814) 2,102
Accrued expenses (4,082) (495)
Other (2,749) (845)
-------- --------
Net cash provided by (used in) operating activities (16,682) 9,979
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,683) (5,103)
Acquisition payments net of cash acquired (6,247) (12,597)
Proceeds from maturity of marketable securities, net of purchases 19,248 11,850
-------- --------
Net cash provided by (used in) investing activities 10,318 (5,850)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (6,508) --
Payments on note payable -- (42)
Proceeds from issuance of common stock 3,100 5,748
-------- --------
Net cash provided by (used in) financing activities (3,408) 5,706
-------- --------
Effects of exchange rate changes on cash 174 1,960
-------- --------
Net increase (decrease) in cash and cash equivalents (9,598) 11,795
Cash and cash equivalents at beginning of period 58,433 48,654
-------- --------
Cash and cash equivalents at end of period $ 48,835 $ 60,449
======== ========
Supplemental disclosures of cash paid during the period for:
Income taxes $ 1,423 $ --
======== ========
Interest $ 2 $ --
======== ========
Non-cash transactions:
Common stock issued in business acquisitions $ -- $ 20,632
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
6
Notes To Condensed Consolidated Financial Statements (unaudited)
1. General
The accompanying unaudited condensed consolidated financial statements
include the accounts of Pinnacle Systems, Inc. and its wholly owned subsidiaries
("Pinnacle" or the "Company"). Intercompany transactions and related balances
have been eliminated in consolidation. These financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and in accordance with the instructions of Form 10-Q and
Rule 10 of Regulation S-X. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. The most significant estimates included in these
financial statements include accounts receivable and sales allowances, inventory
valuation and the income tax valuation allowance. Actual results could differ
from those estimates. These condensed consolidated financial statements reflect
all adjustments that, in the opinion of management, are necessary for a fair
statement of the consolidated financial position, results of operations and cash
flows as of and for the interim periods. Such adjustments consist of items of a
normal recurring nature. Certain information or footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
The condensed consolidated financial statements included herein should
be read in conjunction with the consolidated financial statements and notes
thereto, which include information as to significant accounting policies, for
the fiscal year ended June 30, 2000 included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission on September 28,
2000. Results of operations for interim periods are not necessarily indicative
of results for a full year.
Currency Translation
The Company considers the functional currency of its foreign
subsidiaries to be the local currency. These functional currencies are
translated into U.S. dollars using exchange rates in effect at period end for
assets and liabilities and average exchange rates during each reporting period
for the results of operations. Adjustments resulting from the translation of
foreign subsidiary financial statements are reported within accumulated other
comprehensive losses which is reflected as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included in results of
operations.
Comprehensive Income (Loss)
The Company's comprehensive income (loss) includes net income and
foreign currency translation adjustments.
Derivative Instruments and Hedging Activities
As of July 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. The adoption of SFAS No.
133 did not have a material effect on the Company's financial position or
results of operations.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. The Company
is in the process of assessing the impact, if any, that the adoption of SAB No.
101 will have on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25" ("FIN 44"). This interpretation clarifies the application of
Opinion 25 for certain issues including: (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or warrant, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 on July 1, 2000. The adoption of FIN 44
did not have a material effect on the Company's financial position or results of
operations.
7
In July 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." The EITF concluded that amounts billed to a customer related to shipping
and handling represent revenues. Issue No. 00-10 is expected to be implemented
in the same quarter as SAB No. 101. The Company does not expect the adoption of
Issue No. 00-10 to have a material impact on its financial position or results
of operations.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives." Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of a single
exchange transaction. Issue No. 00-14 is expected to be implemented in the same
quarter as SAB No. 101. The Company does not expect the adoption of Issue No.
00-14 to have a material impact on its financial position or results of
operations.
2. Acquisitions
(a) Minerva Networks, Inc.
On December 29, 2000, the Company acquired DVD authoring technology
from Minerva Networks, Inc., a leading provider of professional and consumer
video networking solutions that enable the convergence of television and the
Internet ("Minerva"). The technology acquired from Minerva includes the
Impression family of DVD application software, DVD formatting software and
associated intellectual property. Intangibles are being amortized using the
straight-line method over a three-year period. In December 2000, the Company
paid $2.3 million in cash for Minerva's technology. Pinnacle also incurred
approximately $0.1 million in transaction costs.
(b) Pro Forma Financial Information
The following unaudited pro forma results of operations for the
three-month and six-month periods ended December 31, 1999 are as if the
acquisitions, as discussed in the Company's Form 10-K for the year ended June
30, 2000, which occurred during the period ended June 30, 2000, had occurred at
the beginning of fiscal 1999, after giving effect to certain adjustments,
including amortization of goodwill and related income tax effects. The pro forma
information excludes charges for acquired in-process research and development.
The pro forma information has been prepared for comparative purposes only and is
not indicative of what operating results would have been if the acquisitions had
taken place at the beginning of fiscal 1999 or of future operating results.
Three Months Ended Six Months Ended
(In thousands, except per share data) December 31, 1999 December 31, 1999
----------------- -----------------
Net sales $ 66,217 $ 124,122
Net income $ 2,477 $ 4,083
Basic net income per share $ 0.05 $ 0.09
Diluted net income per share $ 0.05 $ 0.08
3. Per Share Information
The following tables reconcile the denominator of the basic and diluted earnings
per share computations shown on the Condensed Consolidated Statements of
Operations:
Three Months Ended Six Months Ended
December 31, December 31,
(In thousands) 2000 1999 2000 1999
------ ------ ------ ------
Basic EPS - weighted average shares of common
stock outstanding 50,951 47,844 50,943 47,224
Effect of dilutive securities - stock
options and warrants outstanding -- 6,610 -- 6,486
------ ------ ------ ------
Diluted EPS - weighted average shares and dilutive
securities outstanding 50,951 54,454 50,943 53,710
====== ====== ====== ======
The Company excludes potentially dilutive securities from its diluted
net income (loss) per share computation when either the Company reports a net
loss or the exercise price of the securities exceeds the average fair value of
the Company's common stock because the effect would be anti-dilutive. For the
three-month and six-month periods ended December 31, 2000, the Company excluded
options to purchase 6,254,674 and 6,302,004 shares of common stock,
respectively, from the diluted earnings per share computation as their exercise
prices exceeded the average fair value of the Company's common stock during the
respective periods and, accordingly, their inclusion would have been
anti-dilutive.
8
For the three-month and six-month periods ended December 31, 2000, the
Company excluded an estimated share count for the contingent shares associated
with the Avid Sports settlement and employee stock options to purchase 4,744,300
and 4,255,969 shares of common stock, respectively, from the diluted earnings
per share computation, as the Company experienced a net loss in that period, and
as such, their inclusion would have been anti-dilutive.
4. Segment Information
Prior to July 1, 2000, the Company's organizational structure was based
on three strategic business groups that sold various products into the Company's
principle markets. These business groups equated to three reportable segments:
Broadcast, Desktop, and Consumer. Beginning on July 1, 2000, the Company
reorganized and implemented a plan to divide the operations of the Company into
three distinct divisions: Broadcast Solutions, Professional .Media and Personal
Web Video. The reorganization was performed to provide a structure that would
meet the growing demands of the Company and to provide divisional managers the
ability to focus and manage their own operations and resources. Prior to this,
resources for sales, marketing, operations and logistics were managed
independently outside of the business groups. The reorganization also provided
the Company an opportunity to re-evaluate its product offerings and better align
them within its distribution channels.
The Company's chief operating decision maker evaluates the performance
of these divisions based on revenues, gross profit, and operating income before
income taxes, interest income, interest expenses, and other income, excluding
the effects of nonrecurring charges. Nonrecurring charges include in-process
research and development and amortization of goodwill and other intangibles
related to the Company's acquisitions. Operating results also include
allocations of certain corporate expenses.
The following is a summary of the Company's operations by operating
segment for the three-month and six-month periods ended December 31, 2000 and
1999. Only revenue information is being provided on a comparative basis. Due to
the reorganization of the Company and the addition and realignment of
operational departments and personnel, restatement of prior years segment
results would be impractical.
(In thousands) Three Months Ended Six Months Ended
------------------ ----------------
December 31 December 31,
----------- ------------
2000 1999 2000 1999
-------- -------- -------- --------
Broadcast Solutions:
Revenues $ 23,114 $ 19,350 $ 47,251 $ 36,359
Gross profit 12,039 23,639
Operating income (loss) $ 310 $ (861)
Professional Media:
Revenues $ 13,019 $ 11,295 $ 26,284 $ 22,903
Gross profit 6,987 13,021
Operating income $ 1,207 $ 280
Personal Web Video:
Revenues $ 38,900 $ 31,917 $ 64,273 $ 53,746
Gross profit 16,339 25,238
Operating income $ 4,856 $ 6,167
Consolidated:
Revenues $ 75,033 $ 62,562 $137,808 $113,008
Gross profit 35,365 61,898
Operating income $ 6,373 $ 5,586
9
The following table reconciles operating income (loss) to total consolidated
amounts (in thousands):
Three Months Six Months
Ended Ended
December 31, December 31,
2000 2000
-------- --------
Total operating income for reportable segments $ 6,373 $ 5,586
Unallocated expenses:
Amortization of acquisition intangibles (7,470) (15,322)
Reorganization expenses and other -- (380)
Acquisition settlement (363) (13,613)
-------- --------
Consolidated operating loss $ (1,460) $(23,729)
======== ========
5. Customers and Credit Concentrations
During the six months ended December 31, 2000 and 1999, no one customer
accounted for more than 10% of net sales or accounts receivable.
6. Related Parties
Bell Microproducts Inc. ("Bell") performs certain services and builds
certain products for the Company. A director of the Company is also a director
of Bell. During the three months ended December 31, 2000 and 1999, the Company
purchased materials from Bell totaling $994,000 and $334,000, respectively.
During the six months ended December 31, 2000 and 1999, the Company purchased
materials from Bell totaling $3,271,000 and $1,214,000, respectively.
7. Commitments and Contingencies
On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle Systems, Inc.
et al., No. 00-CV-2596 was filed in the United States District Court for the
Northern District of California against the Company and certain officer and
director defendants. The action is a putative class action and alleges that
defendants violated the federal securities laws by making false and misleading
statements concerning the Company's business prospects during an alleged class
period of April 18, 2000 through July 10, 2000. The complaint does not specify
damages. The Company is defending the case vigorously.
On August 29, 2000, a lawsuit entitled Athle-Tech Computer Systems,
Incorporated v. Montage Group, Ltd. and Digital Editing Services, Inc. No.
00-005956-C1-021 was filed in the Sixth Judicial Circuit Court for Pinellas
County, Florida (the "AT Claim"). The AT Claim alleges that Montage breached a
purported software development agreement between Athle-Tech Computer Systems,
Incorporated ("AT") and Montage (the "AT Agreement"). The AT Claim also alleges
that DES intentionally interfered with AT's claimed rights with respect to the
purported AT Agreement and was unjustly enriched as a result. Finally, the AT
Claim requests that the court impose a constructive trust on at least 50% of the
proceeds of the purported AT Agreement and render a declaratory judgment in
favor of AT. The Company has engaged counsel to defend the AT Claim. Pinnacle
believes it has meritorious defenses and is vigorously defending AT's claim.
On June 30, 2000, the Company acquired all the outstanding common stock
of Avid Sports, Inc., a leading provider of sports editing and online sports
media management solutions ("ASports"). On September 30, 2000, the Company
entered into an agreement with the former shareholders and option holders of
ASports wherein Pinnacle agrees to compensate each of them if the closing price
of Pinnacle's common stock does not equal or exceed $23 per share for four
consecutive trading days prior to May 31, 2001. If Pinnacle's share price does
not reach this level, the value of the compensation to be paid shall be equal to
the number of shares issued and options assumed in the acquisition (944,213 and
138,158, respectively) multiplied by the difference between Pinnacle's average
closing stock price during the month of May, 2001 and $23 per share. Former
shareholders of ASports would be compensated in shares of Pinnacle's common
stock while the former option holders will be compensated in cash. On September
30, 2000, the Company recorded a charge of $13.3 million which represents the
fair value of the arrangement on September 30, 2000 including $0.1 million in
transaction fees. On December 31, 2000, the Company recorded an additional $0.4
million charge associated with this obligation. As of December 31, 2000, the
Company had recorded a liability of $2.1 million which represents the estimated
cash payout to the option holders with the remaining $11.5 million recorded as
an increase in common stock. The value assigned was determined by an independent
appraiser using the Black-Scholes method.
10
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
effect on the Company's consolidated financial position or results of operations
or liquidity, although there can be no assurance as to the outcome of such
litigation.
8. Stock Repurchase
On July 25, 2000 the Company announced that the Board of Directors had
authorized the repurchase of up to 3.0 million shares of the Company's common
stock. As of December 31, 2000, the Company repurchased a total of 0.8 million
shares of its common stock at a cost of $6.5 million. Approximately 2.2 million
shares remain authorized for repurchase.
9. Subsequent Events
In January 2001, the Company and the shareholders of DES signed an
amendment to the DES acquisition agreement that amended the earnout equation.
The earnout period is unchanged from the original agreement, but the amended
earnout formula is based on both the profitability and revenue of the DES
business during the earnout period and on the profitability and revenue of the
business acquired from Avid Sports in June, 2000 for the period from July 1,
2000 through the end of the original earnout period. Under the amended
agreement, an earnout payment will only be made if operating margins for the
total sports business (DES business plus Avid Sports business) exceeds 10% of
the total sports revenue during the earnout periods. If an earnout payment is
due, the amount will range between 55% and 96% of the combined DES and Avid
Sports revenues for those respective periods, depending on actual operating
margins of the combined businesses during the earnout period. As with the
original earnout agreement, any earnout amount will be paid in shares of the
Company's common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain Forward-Looking Information
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"), including the third and sixth sentences of the
fourth paragraph under "Acquisitions" relating to the cash payout to option
holders, the seventh paragraph under "Acquisitions" relating to the earnout
payment, the last sentence of the second paragraph under "Commitments and
Contingencies" relating to the AT Claim, the fourth sentence of the third
paragraph under Commitments and Contingencies" relating to the ASports
Settlement, the second sentence of the fourth paragraph under "Commitments and
Contingencies" relating to legal actions arising in the ordinary course of
business, the last sentence in the fourth paragraph under "Results of
Operations" relating to engineering and product development resources, the last
sentence in each of the third and fourth paragraphs under "Recent Accounting
Pronouncements" regarding the adoption of certain accounting standards, the last
sentence in the first paragraph under "Liquidity and Capital Resources" relating
to capital resources, the last sentence in the fourth paragraph under Liquidity
and Capital Resources" relating to cash proceeds from stock option securities,
the third sentence in the first paragraph under "Fixed Income Investments"
regarding the Company's investment portfolio and the fifth sentence in the
second paragraph under "Fixed Income Investments" regarding market and credit
risk. 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.
11
Overview
Pinnacle Systems, Inc. (the "Company") is a supplier of video
authoring, storage, distribution and Internet streaming solutions for
broadcasters, business and professional "desktop" users, and consumers.
Pinnacle's products are used to create, store, and distribute video content from
television programs, TV commercials, pay-per-view, sports videos, corporate
films to home movies. In addition, Pinnacle's products are increasingly being
used to stream video over the Internet. Expanding distribution channels
including cable television, direct satellite broadcast, video-on-demand, digital
video disks (DVD) and the Internet have led to a rapid increase in demand for
video content. This increasing demand for content to supply new and existing
distribution channels is driving a need for affordable, easy-to-use video
creation, storage, distribution and streaming tools.
The Company's products use real time video processing and editing
technologies to apply a variety of video post-production and on-air functions to
multiple streams of live or recorded video material. These editing applications
include the addition of special effects, graphics and titles. To address the
broadcast market, the Company offers high performance, specialized computer
based solutions for high-end, production, post-production, team sports analysis,
broadcast on-air and Internet streaming applications. For the professional
desktop market, the Company provides computer-based video editing and media
creation products, products used to create video content and solutions used to
stream live and recorded video over the Internet. To address the consumer
marketplace, the Company offers low cost, easy to use video editing and viewing
solutions that allow consumers to view TV on their computer and to edit their
home videos using a personal computer, camcorder and VCR. Many of the Company's
consumer products enable content to be created that is suitable for the
Internet. To focus resources to address the needs of these markets, Pinnacle has
structured itself into three distinct divisions: Broadcast Solutions Division,
Professional .Media Division and the Personal Web Video Division.
Broadcast Solutions Division
The Broadcast Solutions Division ("Broadcast") currently offers
products that provide systems solutions to broadcasters. This includes products
that provide real time digital effects, still image management and storage, and
real time video character generation. Pinnacle also sells digital video servers
for on-air video content distribution. These products generally include
proprietary hardware and software and specialized control surfaces for rapid
execution, especially for on-air applications. The primary broadcast products
sold during fiscal 2000 were the DVExtreme, Lightning, Deko and Thunder and the
Media Stream family of products. In addition, the Company sells BroadNet
solutions, which is a network technology that enables the Company's broadcast
products to be networked together for easy interoperability, and to exchange
information through the Internet. In August 1999, the Company completed the
acquisition of certain assets of the Video Communications Division of the
Hewlett-Packard Company. The acquisition included key technologies, intellectual
property, the MediaStream server family of products as well as most managers and
employees from that division. The MediaStream server family complements the
Company's Thunder family, to provide a more complete line of broadcast quality
video-server solutions.
In February 2000, the Company introduced MediaStream 300, the newest
member of the MediaStream family. The MediaStream 300 offers the high-quality,
reliable playback and the comprehensive networking needed by today's
broadcasters in an extremely compact, two-rack-unit package that is more
affordable and more space efficient than previous MediaStream servers. In March
2000, the Company began shipping Rocket for FXDeko, a template-based tool that
allows the generation of real-time 3D elements that can be automatically updated
by live data streams. In September 2000, Broadcast began shipping the PDS 9000
video production switcher. The PDS 9000 was designed for broadcasters producing
live video events such as news, sports and local interest programming.
During the fiscal year ended June 30, 2000, the Company acquired
Digital Editing Services, Inc. and Avid Sports, Inc. These companies supply
sports editing software used by professional and school teams around the world.
Combined, these businesses give Pinnacle a leading position in this important
video market. In addition, Pinnacle acquired Montage, a provider of networked
non-linear editing solutions including VorteXNews(TM) which gives users the
ability to process, edit, store, broadcast and stream to the Internet live news
and sports content entirely in the digital domain. These products are expected
to form the basis of Broadcast's Totally Networked News(TM) solutions family to
create powerful and comprehensive media management, editing and streaming
solutions for broadcasters and sports organizations.
Broadcast accounted for approximately 30.8% and 30.9% of net sales in
the three-month periods ended December 31, 2000 and 1999, respectively and 34.3%
and 32.2% of net sales in the six-month periods ended December 31, 2000 and
1999, respectively.
12
Professional .Media Division
The Professional .Media Division ("Media") designs, manufactures, and
sells media creation and delivery solutions combining powerful media production,
editing, and authoring tools with leading edge visual effects solutions. Media
enables its customers to distribute rich integrated media content through
traditional and new, Internet-based, delivery methods. By combining the power of
the Internet with Pinnacle Systems' rich media production and editing solutions
heritage, Media offers customers new ways to create value for their clients.
Media includes Pinnacle's webcasting solutions which emphasize the Company's
goal to be a leading provider of solutions for the Internet media-streaming
marketplace. Media's product offerings include Genie, Reeltime, DVD 2000,
Commotion, StreamGenie, StreamFactory, and the TARGA family of products.
In March 2000, the Company acquired Puffin, a provider of content
creation solutions. Puffin sells an advanced set of software tools that includes
Commotion(TM), an all-in-one solution that combines the power of the paintbrush
with intuitive compositing and effects tools to deliver superior performance on
the desktop. Commotion 3.0 began shipping in June 2000. Also in June 2000, the
Company began shipping TARGA 3000, the Company's newest content creation and
streaming platform. TARGA 3000 allows users to choose processing in DV, MPEG-2
or true uncompressed digital 601 format, and enables them to mix these formats
on a single timeline. In October 2000, the Company announced the availability of
CineWave, an uncompressed standard-definition (SD) video solution available for
Apple's Power Mac G4. Based on the award winning TARGA architecture, CineWave is
a powerful solution for the Power Mac G4. In January 2001, the Company announced
the availability of the Cinewave HD (high-definition) option, an HD system for
non-linear editing and post-production on the Power Mac G4.
For its class of webcasting solutions, Media offers StreamGenie, a
portable Webcasting solution for streaming live video programming over the
Internet. The Company began shipping StreamGenie in June 2000. In March 2000,
the Company announced the StreamFactory(TM) Web Media Encoder that targets
Internet broadcasters who require real-time web encoding of live or previously
produced content. The Company began shipping StreamFactory in December 2000.
Media accounted for approximately 17.4% and 18.1% of net sales in the
three-month periods ended December 31, 2000 and 1999, respectively and 19.1% and
20.3% of net sales in the six-month periods ended December 31, 2000 and 1999,
respectively.
Personal Web Video Division
The Personal Web Video Division ("Web") combines the Company's high-end
professional video product line with its consumer retail products. Professional
products, targeted to the sophisticated end-user, are designed to provide high
quality video capture, compression and decompression, editing and real time
video manipulation capabilities for computer based video post-production
systems. Professional products are integrated into the computer by a value-added
reseller ("VAR"), an OEM, or the end user. The Company also maintains alliances
with computer manufacturers such as Dell and Compaq to provide professional
workstations using Pinnacle solutions. Web's class of professional video capture
and editing products includes miroVIDEO DC30, DC1000 and the DV500. Web's lower
end consumer products provide complete video editing solutions that allow
consumers to edit their home videos using their personal computer (PC),
camcorder and VCR. Web recently announced a solution for capturing, editing and
sharing video over the Internet. Web also sells products that allow consumers to
watch TV, listen to FM radio and create their own videos on a PC. Web's consumer
product line includes Studio DC10, Studio MP10, Studio PCTV and PCTV USB and
Studio DV. Price points of consumer products are the lowest of all the Company's
product lines and are marketed as computer peripherals.
In September 2000, the Company announced Studio OnLine, one of the
first consumer products to offer a complete integrated solution for capturing,
editing and sharing video over the Internet. Studio OnLine comes with Pinnacle's
powerful and easy-to-use video editing Studio software. The Company initiated
shipment of Studio OnLine in January 2001. In October 2000, Web announced
immediate availability of Studio Basic for RealVideo(R), an easy-to-use video
editing software for creating RealNetworks(R) RealVideo content. This product is
the result of an alliance between Pinnacle and RealNetworks, Inc.
Web's products are mostly distributed directly to retail outlets,
through retail distributors such as Ingram Micro, and to VARs, and other
resellers. Web also sells directly to end-users by accepting orders via the
telephone and Internet.
13
The Personal Web Video Division accounted for approximately 51.8% and
51.0% of net sales in the three-month periods ended December 31, 2000 and 1999,
respectively, and 46.6% and 47.5% of net sales in the six-month periods ended
December 31, 2000 and 1999, respectively.
Results of Operations
Net Sales. Net sales increased 19.9% to $75.0 million in the
three-month period ended December 31, 2000, from $62.6 million in the same
period last year. Net sales increased 21.9% to $137.8 million in the six-month
period ended December 31, 2000, from $113.0 million in the same period last
year. Net sales increased in all three divisions. Broadcast Solutions sales
increased 19.5% and 30.0% during the three-month and six-month periods ended
December 31, 2000, respectively, as compared to the same period in the prior
year. The increase in Broadcast sales was primarily due to the sale of products
obtained through the acquisition of ASports, DES, and Montage. Broadcast sales
also benefited from increased sales of its Deko line and revenues generated from
sales of its new production switcher, the PDS 9000. Media sales increased 15.3%
and 14.8% during the three-month and six-month periods ended December 31, 2000,
respectively, as compared to the same period in the prior year. This increase
was due mostly to sales of Media's recent product releases which include the
TARGA line, Stream Genie, and Stream Factory. In the Personal Web Video
division, sales increased 21.9% and 19.6% during the three-month and six-month
periods ended December 31, 2000, respectively, as compared to the same period in
the prior year. This increase was due primarily to new product releases in the
Studio line. In addition, sales of Studio DV outgrew a decline in sales of other
Studio products including the Studio 400, MP10, and DC10. Following is a summary
of revenues from each division:
Three-months ended December 31: 2000 % 1999 % Increase
-------- ------- -------- ------- ------
Division
Broadcast Solutions $23,114 30.8% $19,350 30.9% 19.5%
Professional .Media 13,019 17.4% 11,295 18.1% 15.3%
Personal Web Video 38,900 51.8% 31,917 51.0% 21.9%
-------- ------- -------- ------- ------
$75,033 100.0% $62,562 100.0% 19.9%
-------- ------- -------- ------- ------
Six-months ended December 31: 2000 % 1999 % Increase
-------- ------- -------- ------- ------
Division
Broadcast Solutions $ 47,251 34.3% $ 36,359 32.2% 30.0%
Professional .Media 26,284 19.1% 22,903 20.3% 14.8%
Personal Web Video 64,273 46.6% 53,746 47.5% 19.6%
-------- ------- -------- ------- ------
$137,808 100.0% $113,008 100.0% 21.9%
-------- ------- -------- ------- ------
International sales (sales outside of North America) increased 21.3% in
the three-month period ended December 31, 2000 compared to the three-month
period ended December 31, 1999 and accounted for approximately 57.5% and 56.9%
of the Company's net sales, respectively. International sales increased 28.3% in
the six-month period ended December 31, 2000 compared to the six-month period
ended December 31, 1999 and accounted for approximately 56.0% and 53.2% of the
Company's net sales, respectively. The Company expects that international sales
will continue to represent a significant portion of its total net sales.
Gross Profit. Pinnacle distributes and sells its products to end users
through the combination of independent domestic and international dealers and
VARs, retail distributors, OEMs and, to a lesser extent, a direct sales force.
Sales to dealers, VARs, distributors and OEMs are generally at a discount to the
published list prices. The amount of discount, and consequently, the Company's
gross profit, varies depending on the product, the channel of distribution, the
volume of product purchased, and other factors. In addition to direct material
costs, cost of sales consists primarily of costs related to the procurement of
components and subassemblies, labor and overhead associated with procurement,
assembly and testing of finished products, inventory management, warehousing,
shipping, warranty costs, royalties and provisions for excess and shrinkage. In
the three-month period ended December 31, 2000, total blended gross profit
decreased to 47.1% from 51.4% in the three-month period ended December 31, 1999.
In the six-month period ended December 31, 2000, total blended gross profit
14
decreased to 44.9% from 53.4% in the six-month period ended December 31, 1999.
Included in the cost of sales for the six months ended December 31, 2000 is a
$2.5 million inventory charge related to discontinued products and accessories
primarily in the Broadcast and Media divisions. Excluding the charge, blended
gross profit would have been 46.7% in the six month-period ended December 31,
2000. The decrease in margins was primarily reflected in the Broadcast division.
Broadcast margins dropped to 52.1% from 60.7% in the three-month periods ended
December 31, 2000 and 1999, respectively. Excluding a $1.3 million portion of
the inventory charge, Broadcast margins dropped to 50.0% from 62.3% in the
six-month periods ended December 31, 2000 and 1999, respectively. The decrease
in Broadcast margins was due to a decrease in service revenues, which generally
provide more favorable margins. Pinnacle's margin also decreased due to changes
in its overall mix of product sales.
Engineering and Product Development. Engineering and product
development expenses include costs associated with the development of new
products and enhancements of existing products and consist primarily of employee
salaries and benefits, prototype and development expenses, depreciation and
facility costs. Engineering and product development expenses increased 27.7% to
$8.0 million in the three-month period ended December 31, 2000 from $6.2 million
in the same period last year. Engineering and product development expenses
increased 33.7% to $16.3 million in the six-month period ended December 31, 2000
from $12.2 million in the same period last year. As a percentage of sales,
engineering and product development expenses were 10.6% and 10.0% in the
three-month periods ended December 31, 2000 and 1999, respectively, and were
11.8% and 10.8% in the six-month periods ended December 31, 2000 and 1999,
respectively. The increase was due primarily to the acquisitions of Puffin,
Montage, DES, and ASports. Pinnacle believes that investment in research and
development is crucial to its future growth and position in the industry and
expects to continue to allocate significant resources to all of its engineering
and product development locations throughout the world.
Sales and Marketing. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions, travel, advertising
and promotional expenses including channel marketing funds and trade shows, and
professional fees for marketing services. Sales and marketing expenses increased
20.7% to $16.7 million in the three-month period ended December 31, 2000, from
$13.8 million in the same period last year. Sales and marketing expenses
increased 26.3% to $32.3 million in the six-month period ended December 31,
2000, from $25.5 million in the same period last year. The increase was due to
acquisitions of Puffin and ASports, expanded operations in Japan, and increased
expenditures in North America and Europe. These increases reflect expenditures
to achieve the Company's goal of increased sales and market share and expanded
product awareness in new and existing markets throughout the world. As a
percentage of sales, sales and marketing expenditures were 22.2% and 22.1% in
the three-month periods ended December 31, 2000 and 1999, respectively, and were
23.4% and 22.6% in the six-month periods ended December 31, 2000 and 1999,
respectively. This increase reflects a growth in sales and marketing
expenditures exceeding incremental sales.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits for administrative, executive, finance and
MIS personnel, occupancy costs and other corporate administrative expenses.
General and administrative expenses increased 92.2% to $4.3 million in the
three-month period ended December 31, 2000, from $2.3 million in the same period
last year. General and administrative expenses increased 62.9% to $8.1 million
in the six-month period ended December 31, 2000, from $5.0 million in the same
period last year. As a percentage of total revenue, general and administrative
expenses were 5.8% and 3.6% in the three-month periods ended December 31, 2000
and 1999, respectively, and were 5.9% and 4.4% in the six-month periods ended
December 31, 2000 and 1999, respectively. The increase in general and
administrative expenses was primarily due to the increased investment necessary
to manage and support the Company's increased scale of operations and the
infrastructure related to the Company's new business units. Other contributing
factors were an increase in the bad debt reserve, due to higher overall sales
activity and an increase in the reserve for a select number of customers, and
higher legal fees associated with the class action lawsuit filed in July 2000.
The increase also includes a reorganization charge of approximately $342,000
primarily related to severance and associated costs that were paid during the
six-month period ended December 31, 2000.
Amortization of Acquisition-Related Intangible Assets. Amortization of
acquisition-related intangible assets consists of amortization of goodwill and
identifiable intangible assets mostly including core/developed technology,
customer base, trademarks, favorable contracts and assembled workforce. These
assets are being amortized using the straight-line method over periods ranging
from three to nine years. The amortization increased 85.8% from $4.0 million in
the three-month period ended December 31, 1999 to $7.5 million in the
three-month period ended December 31, 2000. The amortization increased 116.4%
from $7.1 million in the six-month period ended December 31, 1999 to $15.3
million in the six-month period ended December 31, 2000. The increase is
primarily related to amortization of additional goodwill and other intangibles
resulting from the six acquisitions Pinnacle made during fiscal 2000.
15
Acquisition Settlement. On September 30, 2000, the Company entered into
an agreement with the former shareholders and option holders of ASports wherein
Pinnacle agreed to compensate each of them if the closing price of Pinnacle's
common stock does not equal or exceed $23 per share for four consecutive trading
days prior to May 31, 2001. If Pinnacle's share price does not reach this level,
the value of the compensation to be paid shall be equal to the number of shares
issued and options assumed in the acquisition (944,213 and 138,158,
respectively) multiplied by the difference between Pinnacle's average closing
stock price during the month of May, 2001 and $23 per share. Former shareholders
of ASports would be compensated in shares of Pinnacle's common stock while the
former option holders would be compensated in cash. On September 30, 2000, the
Company recorded a charge of $13.3 million which represents the fair value of
the arrangement on September 30, 2000 including $0.1 million in transaction
fees. On December 31, 2000, the Company recorded an additional $0.4 million
charge associated with this obligation. As of December 31, 2000, the Company has
recorded a liability of $2.1 million which represents the estimated cash payout
to the option holders with the remaining $11.5 million recorded as an increase
in common stock. The value assigned was determined by an independent appraiser
using the Black-Scholes method.
In-Process Research and Development. During the six-month period ended
December 31, 1999, the Company recorded an in-process research and development
charge of $2.0 million relating to the acquisition of certain assets of the
Video Communications Division of the Hewlett-Packard Company ("VID"). The
acquired in-process research and development from VID relates to the development
of the next generation of Media Stream products. The value assigned to purchased
in-process research and development was determined by estimating the costs to
develop the purchased in-process research and development into commercially
viable product's; estimating the resulting net cash flows from such projects;
discounting the net cash flows back to the time of acquisition and applying an
attribution rate based on the estimated percent complete considering the
approximate stage of completion of the in-process technology at the date of
acquisition.
Interest Income and Other, net. Net interest income and other consists
primarily of interest income generated from the Company's investments in money
market funds, government securities and commercial paper. In the three-month
period ended December 31, 2000, interest income and other decreased
approximately 42.5% to $462,000 from $804,000 in the same period last year. In
the six-month period ended December 31, 2000, interest income and other
decreased approximately 39.5% to $976,000 from $1,612,000 in the same period
last year. The decrease reflects a reduction in the Company's cash and
marketable securities due to cash used in operations, cash paid for
acquisitions, and cash paid to repurchase common stock. In addition, cash
invested by Pinnacle's foreign operations obtains lower interest yields than
investments made domestically.
Income Tax Expense. Income taxes are comprised of federal, state and
foreign income taxes. The Company did not record a provision for income taxes
for the three-month and six-month periods ended December 31, 2000. The Company
recorded a provision for income taxes of $1.2 million and $1.9 million for the
three-month and six-month periods ended December 31, 1999. The Company has
provided a valuation allowance for a portion of its deferred tax assets as it is
presently unable to conclude that all of the deferred tax assets are more likely
than not to be realized. On June 30, 2000, the total valuation allowance was
$9.3 million.
As of June 30, 2000, the Company had federal and state net operating
loss carryforwards of approximately $13.9 million and $5.7 million,
respectively. The Company's federal net operating loss carryforwards expire in
the years 2012 through 2020, if not utilized. The Company's state net operating
loss expires in the years 2002 through 2005, if not utilized. In addition, the
Company had federal research and experimentation credit carryforwards of $3.1
million which expire in the years 2001 through 2020, and state research and
experimentation credit carryforwards of $2.3 million which have no expiration
provision.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. The Company
is in the process of assessing the impact, if any, that the adoption of SAB No.
101 will have on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25" ("FIN 44"). This interpretation clarifies the application of
16
Opinion 25 for certain issues including: (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or warrant, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 on July 1, 2000. The adoption of FIN 44
did not have a material effect on the Company's financial position or results of
operations.
In July 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." The EITF concluded that amounts billed to a customer related to shipping
and handling represent revenues. Issue No. 00-10 is expected to be implemented
in the same quarter as SAB No. 101. The Company does not expect the adoption of
Issue No. 00-10 to have a material impact on its financial position or results
of operations.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives." Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of a single
exchange transaction. Issue No. 00-14 is expected to be implemented in the same
quarter as SAB No. 101. The Company does not expect the adoption of Issue No.
00-14 to have a material impact on its financial position or results of
operations.
17
Liquidity and Capital Resources
The Company has funded its operations to date through sales of equity
securities as well as through cash flows from operations. As of December 31,
2000, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $53.3 million. The
Company believes that the existing cash and cash equivalent balances as well as
marketable securities and anticipated cash flow from operations will be
sufficient to support the Company's current operations and growth for the
foreseeable future.
The Company's operating activities consumed $16.7 million in cash
during the six months ended December 31, 2000. This was primarily attributable
to the increase in inventories and accounts receivable, and the paydown of
accounts payable and accrued expenses from operations and assumed through
acquisitions. Inventory management is an area of focus as Pinnacle balances the
need to maintain strategic inventory levels to ensure competitive lead times and
provide timely customer service versus the risk of inventory obsolescence
because of rapidly changing technology and customer requirements.
During the six-month period ended December 31, 2000, cash flow from
investing activities increased primarily due to the maturation of the Company's
investments in marketable securities, whose proceeds were used to fund
operations. Cash flow used in investing activities included $2.7 million
invested in property and equipment, compared to $5.1 million in the six months
ended December 31, 1999. The high level of expenditures in the six-month period
ended December 31, 1999 primarily reflects payments for leasehold improvements,
furniture and equipment purchased for the Company's Mountain View facility
expansion in August 1999 to accommodate increased headcount related to the VID
acquisition and to fund the Company's SAP implementation. Such capital
expenditures were financed from working capital. Cash flow from investing
activities also includes payments related to acquisitions. During the six-month
period ended December 31, 2000, the Company paid $3.4 million in July 2000 for
the acquisition of Propel Ahead, Inc. which closed in June 2000, and $2.3
million in December 2000 for the acquisition of Minerva. During the six-month
period ended December 31, 1999, the Company paid $12.6 million in August 2000
related to the VID acquisition.
Cash flows used in financing activities consisted mostly of cash paid
to repurchase stock on the open market. On July 25, 2000 the Company announced
that the Board of Directors had authorized the repurchase of up to 3.0 million
shares of the Company's common stock. As of December 31, 2000, the Company
repurchased a total of 0.8 million shares of its common stock at a cost of $6.5
million. Approximately 2.2 million shares remain authorized for repurchase. Cash
flows from the exercise of employee stock options decreased from $5.7 million in
the six-month period ended December 31, 1999 to $3.1 million in the six-month
period ended December 31, 2000. This is due mainly to the drop in the market
price of the Company's common stock. The Company may continue to experience a
decrease in the cash proceeds from stock option exercises, and employee stock
purchases pursuant to the plan, if the stock maintains a moderately low price
level.
18
Factors Affecting Operating Results
|X| There are various factors which may cause our net revenues and
operating results to fluctuate.
Our quarterly and annual operating results have varied significantly in
the past and may continue to fluctuate because of a number of factors, many of
which are outside our control. These factors include:
- Increased competition and pricing pressure
- Timing of significant orders from and shipments to major
customers, including OEM's and our large broadcast accounts.
- Timing and market acceptance of new products
- Success in developing, introducing and shipping new products
- Dependence on distribution channels through which our products
are sold
- Accuracy of our and our resellers' forecasts of end-user demand
- Accuracy of inventory forecasts
- Ability to obtain sufficient supplies from our subcontractors
- Timing and level of consumer product returns
- Foreign currency fluctuations
- Costs of integrating acquired operations
- General domestic and international economic conditions
We also experience significant fluctuations in orders and sales due to
seasonal fluctuations, the timing of major trade shows and the sale of consumer
products in anticipation of the holiday season. Sales usually slow down during
the summer months of July and August, especially in Europe. Also, we attend a
number of annual trade shows which can influence the order pattern of products,
including CEBIT in March, the NAB convention held in April and the IBC
convention held in September. Our operating expense levels are based, in part,
on our expectations of future revenue and, as a result, net income would be
disproportionately affected by a shortfall in net sales. Due to these factors,
we believe that quarter-to-quarter comparisons of our results of operations are
not necessarily meaningful and should not be relied upon as indicators of future
performance.
|X| We are dependent on contract manufacturers and single or limited
source suppliers for our components. If these manufacturers and suppliers do not
meet our demand either in volume or quality, then we could be materially harmed.
We rely on subcontractors to manufacture our desktop and consumer
products and the major subassemblies of our broadcast products. We and our
manufacturing subcontractors are dependent upon single or limited source
suppliers for a number of components and parts used in our products, including
certain key integrated circuits. Our strategy to rely on subcontractors and
single or limited source suppliers involves a number of significant risks,
including:
- Loss of control over the manufacturing process
- Potential absence of adequate capacity
- Potential delays in lead times
- Unavailability of certain process technologies
- Reduced control over delivery schedules, manufacturing yields,
quality and costs
- Unexpected increases in component costs
If any significant subcontractor or single or limited source supplier
becomes unable or unwilling to continue to manufacture these subassemblies or
provide critical components in required volumes, we will have to identify and
qualify acceptable replacements or redesign our products with different
components. Additional sources may not be available and product redesign may not
be feasible on a timely basis. This could materially harm our business. Any
extended interruption in the supply of or increase in the cost of the products,
subassemblies or components manufactured by third party subcontractors or
suppliers could materially harm our business.
|X| We must retain key employees to remain competitive.
19
If certain of our key employees leave or are no longer able to perform
services for us, it could have a material adverse effect on our business. We may
not be able to attract and retain a sufficient number of managerial personnel
and technical employees to compete successfully. We believe that the efforts and
abilities of our senior management and key technical personnel are very
important to our continued success. Our success is dependent upon our ability to
attract and retain qualified technical and managerial personnel. There are not
enough engineers, technical support, software services and managers available to
meet the current demands of the computer industry. We may not be able to retain
our key technical and managerial employees or attract, assimilate and retain
such other highly qualified technical and managerial personnel as are required
in the future. Also, employees may leave our employ and subsequently compete
against us, or contractors may perform services for competitors of ours. If we
are unable to retain key personnel, our business could be materially harmed.
|X| We have grown rapidly and expect to continue to grow rapidly. If we
fail to effectively manage this growth, our financial results could suffer.
We have experienced rapid growth and anticipate that we will continue
to grow at a rapid pace in the future. For example, in the six-month period
ended December 31, 2000, net sales increased 21.9% over the same period last
year. Net sales in fiscal 2000 were $238.0 million compared to $159.1 million in
fiscal 1999, a 49.6% increase. As a result of internal growth and recent
acquisitions, we have increased the number of employees significantly over the
last two fiscal years and many are geographically dispersed, primarily
throughout North America and Europe. This growth places increasing demands on
our management, financial and other resources. We have built resources and
systems to account for such growth, but continued or accelerated growth may
require us to increase our investment in such systems, or to reorganize our
management team. Such changes, should they occur, could cause an interruption or
diversion of focus from our core business activities and have an adverse effect
on financial results.
|X| Any failure to successfully integrate the businesses we have
acquired could negatively impact us.
In December 2000, we acquired Minerva Networks, Inc. In June 2000, we
acquired Avid Sports, Inc. and Propel Ahead, Inc. In April 2000, we acquired
Montage Group, Ltd. In March 2000, we acquired Digital Editing Services, Inc.
and Puffin Designs, Inc. In January 2000, we acquired Synergy, Inc. Also, in
1999, we acquired the Video Communications Division of the Hewlett-Packard
Company, Truevision, Inc. and Shoreline Studios, Inc. We may in the near or
long-term pursue additional acquisitions of complementary businesses, products
or technologies. Integrating acquired operations is a complex, time-consuming
and potentially expensive process. All acquisitions involve risks that could
materially and adversely affect our business and operating results. These risks
include:
- Distracting management from the day-to-day operations of our
business
- Costs, delays and inefficiencies associated with integrating
acquired operations, products and personnel
- The potential to result in dilutive issuance of our equity
securities
- Incurring debt and amortization expenses related to goodwill
and other intangible assets
|X| Our stock price may be volatile.
The trading price of our common stock has in the past and could in the
future fluctuate significantly. The fluctuations have been or could be in
response to numerous factors including:
- Quarterly variations in results of operations
- Announcements of technological innovations or new products by us,
our customers or competitors
- Changes in securities analysts' recommendations
- Announcements of acquisitions
- Changes in earnings estimates made by independent analysts
- General fluctuations in the stock market
Our revenues and results of operations may be below the expectations of
public market securities analysts or investors. This could result in a sharp
decline in the market price of our common stock. In July 2000, we announced that
financial results for the fourth quarter of fiscal 2000, which ended June 30,
2000, would be lower than the then current analyst consensus estimates regarding
Pinnacle's quarterly results. In the day following this announcement, our share
price lost more than 59% of its value and our shares continue to trade in a
price range significantly lower than the range held by our shares before this
announcement.
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With the advent of the Internet, new avenues have been created for the
dissemination of information. Pinnacle has no control over the information that
is distributed and discussed on electronic bulletin boards and investment chat
rooms. The motives of the people or organizations that distribute such
information may not be in the best interest of Pinnacle and its shareholders.
This, in addition to other forms of investment information including newsletters
and research publications, could result in a sharp decline in the market price
of our common stock.
In addition, stock markets have from time to time experienced extreme
price and volume fluctuations. The market prices for high technology companies
have been particularly affected by these market fluctuations and such effects
have often been unrelated to the operating performance of such companies. These
broad market fluctuations may cause a decline in the market price of our common
stock.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against the
issuing company. On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle
Systems, Inc., et al., No. 00-CV-2596 was filed in the United States District
Court for the Northern District of California against Pinnacle and certain
officer and director defendants.
We have publicly announced that we intend to defend the case vigorously
and are in the process of doing so. It is possible that additional similar
litigation could be brought against us in the future. The securities class
action lawsuit described above and any similar litigation which may be brought
against Pinnacle could result in substantial costs and will likely divert
management's attention and resources. Any adverse determination in such
litigation could also subject us to significant liabilities.
|X| If our products do not keep pace with the technological
developments in the rapidly changing video post-production equipment industry,
then we may be adversely affected.
The video post-production equipment industry is characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The introduction of products embodying new technologies
or the emergence of new industry standards can render existing products obsolete
or unmarketable. Delays in the introduction or shipment of new or enhanced
products, our inability to timely develop and introduce such new products, the
failure of such products to gain significant market acceptance or problems
associated with new product transitions could materially harm our business,
particularly on a quarterly basis.
We are critically dependent on the successful introduction, market
acceptance, manufacture and sale of new products that offer our customers
additional features and enhanced performance at competitive prices. Once a new
product is developed, we must rapidly commence volume production. This process
requires accurate forecasting of customer requirements and attainment of
acceptable manufacturing costs. The introduction of new or enhanced products
also requires us to manage the transition from older, displaced products in
order to minimize disruption in customer ordering patterns, avoid excessive
levels of older product inventories and ensure that adequate supplies of new
products can be delivered to meet customer demand. In addition, as is typical
with any new product introduction, quality and reliability problems may arise.
Any such problems could result in reduced bookings, manufacturing rework costs,
delays in collecting accounts receivable, additional service warranty costs and
a limitation on market acceptance of the product.
|X| If we do not effectively compete, our business will be harmed.
The market for our products is highly competitive. We compete in the
broadcast, desktop and consumer video production markets. We anticipate
increased competition in each of the broadcast, desktop and consumer video
production markets, particularly since the industry is undergoing a period of
technological change and consolidation. Competition for our broadcast, consumer
and video products is generally based on:
- Product performance
- Breadth of product line
- Quality of service and support
- Market presence
- Price
- Ability of competitors to develop new, higher performance,
lower cost consumer video products
Certain competitors in the broadcast, desktop and consumer video
markets have larger financial, technical, marketing, sales and customer support
resources, greater name recognition and larger installed customer bases than we
do. In addition,
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some competitors have established relationships with current and potential
customers of ours and offer a wide variety of video equipment that can be
bundled in certain large system sales.
Principal competitors in the broadcast market include:
Accom, Inc.
Chyron Corporation
Grass Valley Group
Leitch Technology Corporation
Matsushita Electric Industrial Co. Ltd.
Quantel Ltd. (a division of Carlton Communications Plc)
SeaChange Corporation
Sony Corporation
Tektronix, Inc.
Principal competitors in the desktop and consumer markets are:
Accom, Inc.
Adobe Systems, Inc.
Apple Computer
Avid Technology, Inc.
Dazzle Multimedia
Digitel Processing Systems, Inc.
Fast Multimedia
Hauppauge Digital, Inc.
Matrox Electronics Systems, Ltd.
Media 100, Inc.
Sony Corporation
These lists are not all-inclusive.
The consumer market in which certain of our products compete is an
emerging market and the sources of competition are not yet well defined. There
are several established video companies that are currently offering products or
solutions that compete directly or indirectly with our consumer products by
providing some or all of the same features and video editing capabilities. In
addition, we expect that existing manufacturers and new market entrants will
develop new, higher performance, lower cost consumer video products that may
compete directly with our consumer products. We expect that potential
competition in this market is likely to come from existing video editing
companies, software application companies, or new entrants into the market, many
of which have the financial resources, marketing and technical ability to
develop products for the consumer video market. Increased competition in any of
these markets could result in price reductions, reduced margins and loss of
market share. Any of these effects could materially harm our business.
We rely heavily on dealers and OEMs to market, sell and distribute our
products. In turn, we depend heavily on the success of these resellers. If these
resellers do not succeed in effectively distributing our products, then our
financial performance will be negatively affected.
These resellers may not effectively promote or market our products or
they may experience financial difficulties and even close operations. Our
dealers and retailers are not contractually obligated to sell our products.
Therefore, they may, at any time:
- Refuse to promote or pay for our products
- Discontinue our products in favor of a competitor's product
Also, with these distribution channels standing between us and the
actual market, we may not be able to accurately gauge current demand for
products and anticipate demand for newly introduced products. For example,
dealers may place large initial orders for a new product just to keep their
stores stocked with the newest products and not because there is a significant
demand for them.
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As to consumer products offerings, we have expanded our distribution
network to include several consumer channels, including large distributors of
products to computer software and hardware retailers, which in turn sell
products to end users. We also sell our consumer products directly to certain
retailers. Rapid change and financial difficulties of distributors have
characterized distribution channels for consumer retail products. These
arrangements have exposed us to the following risks, some of which are out of
our control:
- We are obligated to provide price protection to such retailers
and distributors and, while the agreements limit the conditions
under which product can be returned to us, we may be faced with
product returns or price protection obligations
- The distributors or retailers may not continue to stock and sell
our consumer products
- Retailers and retail distributors often carry competing products
|X| We may be unable to protect our proprietary information and
procedures effectively.
We must protect our proprietary technology and operate without
infringing the intellectual property rights of others. We rely on a combination
of patent, copyright, trademark and trade secret laws and other intellectual
property protection methods to protect our proprietary technology. In addition,
we generally enter into confidentiality and nondisclosure agreements with our
employees and OEM customers and limit access to and distribution of our
proprietary technology. These steps may not protect our proprietary information
nor give us any competitive advantage. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property, or disclose such intellectual property
or trade secrets. If we are unable to protect our intellectual property, our
business could be materially harmed.
|X| We may be adversely affected if we are sued by a third party or if
we decide to sue a third party.
There has been substantial litigation regarding patent, trademark and
other intellectual property rights involving technology companies. In the
future, litigation may be necessary to enforce any patents issued to us, to
protect our trade secrets, trademarks and other intellectual property rights
owned by us, or to defend us against claimed infringement. We are also exposed
to litigation arising from disputes in the ordinary course of business. This
litigation may:
- Divert management's attention away from the operation of our
business
- Result in the loss of our proprietary rights
- Subject us to significant liabilities - Force us to seek licenses
from third parties
- Prevent us from manufacturing or selling products
Any of these results could materially harm our business.
In the course of business, we have in the past received communications
asserting that our products infringe patents or other intellectual property
rights of third parties. We investigated the factual basis of such
communications and negotiated licenses where appropriate. It is likely that in
the course of our business, we will receive similar communications in the
future. While it may be necessary or desirable in the future to obtain licenses
relating to one or more of our products, or relating to current or future
technologies, we may not be able to do so on commercially reasonable terms, or
at all. These disputes may not be settled on commercially reasonable terms and
may result in long and costly litigation.
|X| Because we sell products internationally, we are subject to
additional risks.
Sales of our products outside of North America represented
approximately 55% of net sales in the period ended June 30, 2000 and 61% of net
sales in the year ended June 30, 1999. We expect that international sales will
continue to represent a significant portion of our net sales. We make foreign
currency denominated sales in many, primarily European, countries. This exposes
us to risks associated with currency exchange fluctuations. In fiscal 2001 and
beyond, we expect that a majority of our European sales will continue to be
denominated in local foreign currency, including the Euro. Pinnacle has
developed natural hedges for some of this risk in that most of the European
operating expenses are also denominated in local currency.
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In addition to foreign currency risks, international sales and
operations may also be subject to the following risks:
- Unexpected changes in regulatory requirements
- Export license requirements
- Restrictions on the export of critical technology
- Political instability
- Trade restrictions
- Changes in tariffs
- Difficulties in staffing and managing international operations
- Potential insolvency of international dealers and difficulty in
collecting accounts
We are also subject to the risks of generally poor economic conditions
in certain areas of the world, most notably Asia. These risks may harm our
future international sales and, consequently, our business.
[X] We rely on a continuous power supply to conduct our operations, and
California's current energy crisis could disrupt our operations and increase our
expenses.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently do not have
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for and any damages we or our
customers may suffer as a result of any interruption in our power supply. If
blackouts interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company transacts business in various foreign currencies but
primarily the Euro and those of the U.K., and Japan. Accordingly, the Company is
subject to exposure from adverse movements in foreign currency exchange rates.
The Company currently does not use financial instruments to hedge local currency
activity at any of its foreign locations. Instead, the Company believes that a
natural hedge exists, in that local currency revenues substantially offset the
local currency denominated operating expenses. The Company assesses the need to
utilize financial instruments to hedge foreign currency exposure on an ongoing
basis.
Fixed Income Investments
The Company's exposure to market risk for changes in interest rates
relates primarily to its investment portfolio of marketable securities. The
Company does not use derivative financial instruments for speculative or trading
purposes. The Company invests primarily in US Treasury Notes and high-grade
commercial paper and generally holds them to maturity. Consequently, the Company
does not expect to incur any material loss with respect to its investment
portfolio.
The Company does not use derivative financial instruments in its
investment portfolio to manage interest rate risk. The Company does, however,
limit its exposure to interest rate and credit risk by establishing and strictly
monitoring clear policies and guidelines for its fixed income portfolios. At the
present time, the maximum duration of all portfolios is one year. The guidelines
also establish credit quality standards, limits on exposure to any one issue, as
well as the type of instruments. Due to the limited duration and credit risk
criteria established in the Company's guidelines, the exposure to market and
credit risk is not expected to be material.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On October 30, 2000, the Company held its Annual Meeting of
Shareholders for which it solicited votes by proxy. The following is a brief
description of the matters voted upon at the meeting and a statement of the
number of votes cast for and against, and the number of abstentions. There were
no broker non-votes with respect to item 1 below.
1. To elect seven directors to serve until the next Annual Meeting of
Shareholders and until their successors are duly elected and qualified.
VOTES
NOMINEE VOTES WITHHELD
------- ----- --------
Mark L. Sanders 40,563,177 90,397
Ajay Chopra 40,562,763 90,811
L. Gregory Ballard 40,567,843 85,731
John Lewis 40,568,295 85,279
L. William Krause 40,559,721 93,853
Glenn E. Penisten 40,561,777 91,797
Charles J. Vaughan 40,569,181 84,393
2. To approve an amendment to the 1996 Stock Option Plan to increase the number
of shares of Common Stock reserved for issuance thereunder by 800,000 shares.
The vote was as follows:
FOR: 28,708,540 AGAINST: 11,726,503 ABSTAIN: 218,531 BROKER NON-VOTES: 0
3. To ratify the appointment of KPMG LLP as independent auditors of the Company
for the fiscal period ending June 30, 2001.
FOR: 40,423,105 AGAINST: 45,998 ABSTAIN: 184,471 BROKER NON-VOTES: 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
Date: February 12, 2001 By: /s/ Mark L. Sanders
Mark L. Sanders
President, Chief Executive
Officer and Director
Date: February 12, 2001 By: /s/ Arthur D. Chadwick
Arthur D. Chadwick
Vice President, Finance and
Administration and
Chief Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
Date: February 12, 2001 By: /s/ Mark L. Sanders
Mark L. Sanders
President, Chief Executive
Officer and Director
Date: February 12, 2001 By: /s/ Arthur D. Chadwick
Arthur D. Chadwick
Vice President, Finance and
Administration and
Chief Financial Officer
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