SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto included
elsewhere herein. The consolidated statement of operations data for the fiscal
years ended June 30, 1996, 1995 and 1994 and the consolidated balance sheet data
as of June 30, 1996 and 1995 are derived from the consolidated financial
statements of the Company, which financial statements have been audited by KPMG
Peat Marwick LLP, independent auditors, and are included elsewhere in this
report. The consolidated statement of operations data for the fiscal years ended
June 30, 1993 and 1992 and the consolidated balance sheet data as of June 30,
1994, 1993 and 1992 are derived from financial statements of the Company audited
by KPMG Peat Marwick LLP that are not included herein.
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
(In thousands, except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Statement of Operations Data:
Net sales $46,151 $22,193 $10,230 $7,331 $8,997
Cost of sales 23,854 11,291 5,057 3,816 3,974
------- ------- ------- ------ ------
Gross profit 22,297 10,902 5,173 3,515 5,023
------- ------- ------- ------ ------
Operating expenses:
Engineering and product development 5,140 2,405 1,806 1,447 1,064
Sales and marketing 8,907 5,340 3,274 2,054 1,793
General and administrative 2,186 1,088 567 546 933
In process research and development 3,991 -- -- -- --
------- ------- ------- ------ ------
Total operating expenses 20,224 8,833 5,647 4,047 3,790
------- ------- ------- ------ ------
Operating income (loss) 2,073 2,069 (474) (532) 1,233
Interest income (expense), net 3,345 738 (90) (282) (258)
Income (loss) before income taxes 5,418 2,807 (564) (814) 975
Income tax expense (1,734) (567) (2) (2) (57)
------- ------- ------- ------ ------
Net income (loss) $ 3,684 $ 2,240 $ (566) $ (816) $ 918
======= ======= ======= ====== ======
Net income (loss) per share $ 0.48 $ 0.44 $ (0.21)
======= ======= =======
Shares used to compute net income
(loss) per share 7,689 5,110 2,745
======= ======= =======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30,
-----------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $72,337 $26,588 $ 2,647 $ 275 $3,096
Total assets 84,561 32,724 5,904 3,731 4,735
Long-term debt -- -- -- -- 2,000
Retained earnings (deficit) 2,330 (1,354) (3,594) (3,028) (2,269)
Shareholders equity 80,198 27,743 3,125 677 1,442
- --------------------------------------------------------------------------------
10
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, elsewhere in
this Annual Report to Shareholders and in the Company's 1996 Annual Report on
Form 10-K into which this discussion and analysis is incorporated 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 "Overview". These forward-looking
statements include paragraphs below relating to "Net Sales," the last sentence
of the paragraph below relating to "Engineering and Product Development," the
statements below under "Overview," the statements regarding the Company's
expected investment in property, machinery and equipment under "Liquidity and
Capital Resources" below, and the statements in the last paragraph under
"Liquidity and Capital Resources" below, among others.
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 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.
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
traditional video market. The Company currently has two product families
designed to serve this market; Prizm, and FlashFile. Prizm provides real time
digital video effects capabilities, compositing, 3D modeling and animation
tools, and FlashFile provides sophisticated still store library management
capabilities with optional titling, paint and video clips.
With the introduction of the Alladin in June 1994, the Company began
sales into the desktop video market. The Alladin product family provides real
time digital video manipulation capabilities for the desktop video market. Since
the introduction of Alladin, the Company's sales growth has been largely
dependent on the success of Alladin. Sales of Alladin products represented
approximately 71.3% and 55.7% of net sales for fiscal 1996 and fiscal 1995,
respectively. A decline in demand for Alladin or the failure of Alladin to
maintain market acceptance, as a result of competition, technological change or
other factors, would have a material adverse effect on the Company's business,
operating results and financial condition.
The Company distributes and sells its products to end users through the
combination of independent domestic and international dealers, original
equipment manufacturers ("OEMs") and, to a lesser extent, a direct sales force.
Sales to dealers and OEMs are generally at a discount to the published list
prices. Generally, products sold to OEMs are integrated into systems sold by the
OEMs to their customers. 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. In
the United States, the Company supports the sale of desktop products with
independent sales representatives that earn commissions based on sales into
their region.
The Company is highly dependent on sales of Alladin through OEM's, in
particular Avid Technology, Inc. ("Avid"). Sales to Avid accounted for
approximately 43.3% of net sales in fiscal 1996. No other customer accounted for
more than 10% of the Company's net sales during such period or during the fiscal
year ended June 30, 1995. This concentration of the Company's net sales to a
single OEM customer, subjects the Company to a number of risks, in particular
the risk that its operating results will vary on a quarter to quarter basis as a
result of variations in the ordering patterns of
11
the OEM customer. Variations in the timing of revenues can cause significant
fluctuations in quarterly results of operations. The Company's results of
operations could be materially adversely affected by the failure of anticipated
orders to materialize and by deferrals or cancellations of orders as a result of
changes in Avid's requirements. For example, sales to Avid in the fourth quarter
of 1996 were lower than sales in the third quarter of 1996 leading to a decline
in overall net sales. As a result, if the Company were to lose Avid as a
customer, or if orders from Avid were to otherwise decrease, the Company's
business, operating results and financial condition would be materially
adversely affected. (See "Results of Operations - Net Sales").
In April 1996, the Company announced Genie, a new desktop video product
family and commenced shipment of the first Genie products in June 1996. The
Company will be dependent upon the successful introduction, market acceptance,
manufacture, distribution and sale of Genie to increase revenue and
profitability in the future. In order to successfully introduce Genie, the
Company will be required to rapidly bring it into volume production, a process
that will require the attainment of acceptable manufacturing yields and costs.
New products typically have lower initial manufacturing yields and higher
initial manufacturing costs than more mature products. In addition, despite
testing by the Company, as is typical with any new product introduction, quality
and reliability problems may arise and 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. The successful introduction of Genie will also require the Company to
manage the introduction in order to minimize disruption in customer's ordering
patterns for Alladin. Sales of Genie will also be dependent on the successful
integration of Genie by various OEM's into their non-linear editing products.
Any delay in the Company's ability to manufacture and ship Genie, the failure of
Genie to gain market acceptance, a disruption in customer ordering pattern for
Alladin, and the timing and success in which Genie is integrated into non-linear
OEM systems could adversely affect the Company's business, operating results and
financial condition, particularly on a quarterly basis.
In June 1996, the Company acquired the Video Director product line from
Gold Disk, Inc. Video Director is a low-cost video software package sold
primarily to home video enthusiasts. Pinnacle anticipates developing a new
family of products that combine a subset of its video manipulation technology
with Video Director technology to create a new category of products enabling
home video enthusiasts to create professional-looking video content. The
introduction of these products is directed at a new market and depends on
expected technology and market acceptance. There can be no assurance that the
market for home video systems will expand, or that these new products will be
accepted by that market. The sources of competition on the home video market are
not yet well defined. The Company expects that existing computer software
manufacturers and new market entrants will develop products that may compete
directly with the Video Director derivative products to be developed by the
Company. Suppliers or other computer software products have established
distribution channels and experience in marketing low price products and may
acquire or develop high quality home video editing and manipulation products for
this market. Increased competition could result in lower prices, margins and
market share than are currently anticipated in designing and developing these
products. There can be no assurance that the Company will be able to compete
successfully against current and future competitors in the video markets. To the
extent the Company is not successful with the development and sales of products
in this market segment, the Company's business, operating results and financial
condition could be adversely affected.
The Company currently intends to develop and market follow-on products
for the traditional video market. The introduction of such products would have
the same market acceptance, manufacture, distribution and sales risks as
described above for the Genie family. The introduction of new traditional
products could significantly slow or replace sales of Prizm and/or FlashFile. If
this were to occur prior to shipment of any new products, sales of the Company
video traditional products and total sales could be adversely affected. In
addition, if sales of the Prizm and/or FlashFile products were to decrease more
rapidly than expected, the Company could be left with excess Prizm and FlashFile
inventory which could materially affect the Company's financial condition.
12
The Company is nearing capacity at its Sunnyvale, California
headquarters facility. In June 1996, the Company entered into an operating lease
agreement for another facility in Mountain View, California, which commences on
August 15, 1996. The Company expects to move into the new facility, located
approximately one mile from the current facility, in October 1996. During the
transition to the new facility, the Company will be required to maintain an
uninterrupted supply of products in order to avoid any disruption in customer
shipments. Any failure to maintain acceptable production levels during the
transition to the new facility could adversely affect the Company's operating
results, particularly in the quarter of the transition. The Company is obligated
to continue lease payments on the Sunnyvale facility through November 15, 1996.
The Company's financial results may be affected as a result of this move, since
rent expenses will be incurred on two facilities from August 15 through November
15, 1996. Additionally, the Company will incur relocation and other moving costs
of up to $200,000 during the transition period.
Results of Operations
The following table sets forth, for the periods indicated, certain consolidated
statement of operations data as a percentage of net sales:
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
---------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 51.7 50.9 49.4
Gross profit 48.3 49.1 50.6
Operating expenses:
Engineering and product development 11.1 10.8 17.7
Sales and marketing 19.3 24.1 32.0
General and administrative 4.7 4.9 5.5
In process research and development 8.7 -- --
---- ---- ----
Total operating expenses 43.8 39.8 55.2
---- ---- ----
Operating income (loss) 4.5 9.3 (4.6)
Interest income (expense), net 7.2 3.3 (0.9)
---- ---- ----
Income (loss) before income taxes 11.7 12.6 5.5
Income tax expense (3.8) (2.6) (0.0)
---- ---- ----
Net income (loss) 7.9% 10.0% (5.5)%
- --------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Net Sales. The Company's net sales increased by 108.0% to $46.2 million in
fiscal 1996 from $22.2 million in fiscal 1995 and by 116.9% in fiscal 1995 from
$10.2 million in fiscal 1994. The increases in net sales in each period were
primarily attributable to shipment of the Alladin product, particularly to Avid
in fiscal 1996. See "Overview." Sales outside of North America were
approximately 32.7%, 46.5% and 47.6% of the Company's net sales in fiscal 1996,
1995 and 1994, respectively. The decrease in sales outside of North America in
fiscal 1996 was primarily attributable to the significant increase in sales of
Alladin to Avid's North American facility.
As previously mentioned, sales to the Company's largest customer, Avid,
declined from the third quarter to the fourth quarter of fiscal 1996. Also,
sales of Alladin products to customers other than Avid declined during the same
period. The Company believes these trends will likely continue into the first
quarter of fiscal 1997, and as a result, net sales in the first quarter of
fiscal 1997 will decline sequentially from the fourth quarter of fiscal 1996. As
a result of this decline in net sales and an increase in operating expenses, the
Company expects operating income to decline significantly in the first quarter
of fiscal 1997.
13
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 48.3%, 49.1%
and 50.6 % in fiscal 1996, 1995 and 1994, respectively. The decrease in gross
profits as a percentage of net sales between fiscal 1996 and 1995 was due
primarily to an increase in sales to OEM customers, which typically carry a
lower gross profit percentage. The decrease in gross profits as a percentage net
sales between fiscal 1995 and 1994 was primarily due to higher material costs as
a percentage of sales for Alladin as compared to the Company's traditional video
products. Both comparable period changes were partially offset by increased
efficiency due to higher production volume.
Engineering and Product Development. Engineering and product development
expenses increased by 113.7% to $5.1 million in fiscal 1996 from $2.4 million in
fiscal 1995 and by 33.2% in fiscal 1995 from $1.8 million in fiscal 1994. The
increase in each period was primarily attributable to increased expenditures in
connection with the continued expansion of the Company's design engineering
team. Engineering and product development expenses as a percentage of net sales
were 11.1%, 10.8% and 17.7% in fiscal 1996, 1995 and 1994, respectively. The
Company expects to continue to allocate significant resources to engineering and
product development effort.
Software development costs are expensed as incurred until technological
feasibility is established, after which any additional costs are capitalized, in
accordance with Statement of Financial Accounting Standards No. 86. During
fiscal 1996, the Company capitalized less than $100,000 and no such costs were
capitalized during fiscal 1995. The Company currently believes that future
capitalization of such costs will not be significant.
Sales and Marketing. Sales and marketing expenses include compensation and
benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show and advertising expenses and professional fees
for marketing services. Sales and marketing expenses increased by 66.8% to $8.9
million in fiscal 1996 from $5.3 million in fiscal 1995 and by 63.1% in fiscal
1995 from $3.3 million in fiscal 1994. The increase in sales and marketing
expenses in each period was primarily attributable to increased expenditures
related to continued promotion of the Alladins including expenditures for trade
shows, advertising creation and placement, professional fees for marketing
services and increases in the number of sales and marketing personnel. Sales and
marketing expenses as a percentage of net sales were 19.3%, 24.1% and 32.0% in
fiscal 1996, 1995 and 1994, respectively. The decrease of sales and marketing as
a percentage of net sales in each period was due primarily to the increase in
sales through the OEM distribution channel, in particular through Avid, which
require less direct sales and marketing expenditures by the Company.
General and Administrative. General and administrative expenses increased by
100.9% to $2.2 million in fiscal 1996 from $1.1 million in fiscal 1995 and by
91.9% in fiscal 1995 from $0.6 million in fiscal 1994. General and
administrative expenses as a percentage of net sales were 4.7%, 4.9% and 5.5% in
fiscal 1996, 1995 and 1994, respectively. The increase in general and
administrative expenses in each period resulted from an increase in expenditures
related to the overall growth of the Company's operations, the Company's
expanded facility and in fiscal 1995 increased administrative costs associated
with being a public company.
In Process Research and Development. In June 1996, the Company purchased certain
assets for $4.5 million from Gold Disk, Inc., a developer and marketer of
software products for video editing and assembly. The assets acquired primarily
included tangible assets of $240,000, intangible assets including the Video
Director Brand name, user list, and source code technology totaling $342,000,
and in process research and development of $3,991,000. The in process research
and development were recorded as an expense during the fourth quarter of 1996.
The intangible assets will be amortized over a 3 year period.
14
Interest Income (Expense), Net. Net Interest income increased to $3.3 million in
fiscal 1996 from $0.7 million in fiscal 1995 compared to a nominal net interest
expense in fiscal 1994. The increases in each period were due to interest earned
on the investment of cash proceeds received from the Company's public offerings
in November 1994 and July 1995. In general, the Company's cash and marketable
securities have maturities of less than one year. Changes in the market interest
rates may have an effect on interest income in future periods.
Income Tax Benefit (Expense). The Company recorded provisions for income taxes
of $1.7 million, $0.6 million and $2,000 for the fiscal years ended 1996, 1995
and 1994, respectively, at effective rates of 32.0% and 20.2% and zero,
respectively. During the second quarter in fiscal 1996, the Company discontinued
its Domestic International Sales Corp. ("DISC"), and established a Foreign Sales
Corporation ("FSC"). As of June 30, 1996, the Company's reported net operating
loss carryforward was approximately $0.1 million for federal income tax
purposes. The Company's general business credit carryforwards were estimated to
be approximately $0.3 million for federal tax purposes. If not utilized, these
carryforwards will expire in various amounts from 2006 through 2011. The
Company's ability to utilize these carryforwards is subject to certain
limitations due to an ownership change as defined by the provisions of Section
382 of the Internal Revenue Code of 1986.
INFLATIONARY IMPACT
Since the inception of operations, inflation has not significantly affected the
operating results of the Company. However, inflation and changing interest rates
have had a significant effect on the economy in general and therefore could
affect the operating results of the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private placements of equity
securities with aggregate net proceeds of approximately $6.9 million, long-term
debt, short-term bank borrowings and cash generated from operations. In addition
the Company completed offerings in November 1994 and July 1995 raising
approximately $65.5 million, net of offering expenses.
The Company's operating activities provided $0.9 million in fiscal 1996
and used $0.7 million and $0.1 million in fiscal 1995 and 1994, respectively.
The cash provided by operating activities during fiscal 1996 was the result of
net income as adjusted for the effects of acquired research and development,
depreciation and amortization, tax benefits from the exercise of common stock
options, partially offset by net increases in the components of working capital.
In fiscal 1995, significant increases in the accounts receivable and inventory
balances were partially offset by increases in accounts payable and accrued
expenses.
In fiscal 1996, the Company raised approximately $43.8 million in net
proceeds from the follow-on public offering, purchased $1.8 million in property
and equipment, and paid $4.4 million for Video Director Product Line. In fiscal
1995, the Company purchased $0.9 million of property and equipment.
The Company expects to continue to purchase property and equipment at an
increasing rate during fiscal 1997. In addition to increased machinery and
equipment expenditures, the Company expects to invest between $2.5 million and
$3.0 million during the first two quarters of fiscal 1997 in capital and
leasehold improvements for the new Mountain View facility. See "Overview." Such
investing will be financed from working capital.
As of June 30, 1996, the Company had working capital of approximately
$72.3 million, including $27.8 million in cash and cash equivalents and $29.3
million in marketable securities. 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 working
capital requirements for the foreseeable future.
15
- --------------------------------------------------------------------------------
JUNE 30,
----------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 27,846 $ 12,626
Marketable securities 29,315 8,840
Accounts receivable, less allowance for doubtful
accounts and returns of $840 and $361 as of
June 30, 1996 and 1995, respectively 7,526 4,546
Inventories 9,611 5,398
Deferred taxes 2,091 --
Prepaid expenses 311 159
-------- --------
Total current assets 76,700 31,569
Property and equipment, net 2,204 1,067
Marketable securities 3,973 --
Deferred taxes 1,154 --
Other assets 530 88
-------- --------
$ 84,561 $ 32,724
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,495 $ 3,411
Accrued expenses 2,621 1,153
Deferred revenue 247 417
-------- --------
Total current liabilities 4,363 4,981
-------- --------
Commitments
Shareholders' equity:
Common stock; authorized 15,000 shares; 7,468
and 5,256 issued and outstanding as of
June 30, 1996 and 1995, respectively 77,902 29,170
Deferred compensation, net (34) (73)
Retained earnings (deficit) 2,330 (1,354)
-------- --------
Total shareholders' equity 80,198 27,743
-------- --------
$ 84,561 $ 32,724
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
----------------------------
(In thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales $46,151 $22,193 $10,230
Cost of sales 23,854 11,291 5,057
------- ------- -------
Gross profit 22,297 10,902 5,173
------- ------- -------
Operating expenses:
Engineering and product development 5,140 2,405 1,806
Sales and marketing 8,907 5,340 3,274
General and administrative 2,186 1,088 567
In process research and development 3,991 -- --
------- ------- -------
Total operating expenses 20,224 8,833 5,647
------- ------- -------
Operating income (loss) 2,073 2,069 (474)
Interest income (expense):
Interest income 3,354 761 11
Interest expense (9) (23) (101)
------- ------- -------
Income (loss) before income taxes 5,418 2,807 (564)
Income tax expense (1,734) (567) (2)
------- ------- -------
Net income (loss) $ 3,684 $ 2,240 $ (566)
------- ------- -------
Net income (loss) per share $ 0.48 $ 0.44 $ (0.21)
======= ======= =======
Shares used to compute net income (loss) per share 7,689 5,110 2,745
======= ======= =======
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK RETAINED TOTAL
----------------- ----------------- DEFERRED EARNINGS SHAREHOLDERS'
(In Thousands) SHARES AMOUNT SHARES AMOUNT COMPENSATION (DEFICIT) EQUITY
- ----------------------------------------------------------------------------------------------------------------
Balances as of June 30, 1993 1,051 $3,526 1,038 $ 226 $ (47) $(3,028) $ 677
Issuance of Series G preferred
stock, net 500 2,978 -- -- -- -- 2,978
Exercise of common stock
options and deferred
compensation related
to the issuance of certain
stock options -- -- 19 102 (87) -- 15
Amortization of deferred
compensation -- -- -- -- 21 -- 21
Net loss -- -- -- -- -- (566) (566)
----- ------ ----- ------- ----- ------- -------
Balances as of June 30, 1994 1,551 $6,504 1,057 $ 328 $(113) $(3,594) $ 3,125
Conversion of preferred stock
to common stock (1,551) (6,504) 1,600 6,504 -- -- --
Issuance of common stock in
initial public offering, net
of issuance costs of $2,268 -- -- 2,395 21,682 -- -- 21,682
Issuance of common stock
related to stock plans
and warrants -- -- 204 269 -- -- 269
Tax benefit from common
stock option exercises -- -- -- 387 -- -- 387
Amortization of deferred
compensation -- -- -- -- 40 -- 40
Net income -- -- -- -- -- 2,240 2,240
----- ------ ----- ------- ----- ------- -------
Balances as of June 30, 1995 -- $ -- 5,256 $29,170 $ (73) $(1,354) $27,743
Issuance of common stock, net
of issuance costs of $2,831 -- -- 1,810 43,787 -- -- 43,787
Issuance of common stock
related to stock plans -- -- 402 1,248 -- -- 1,248
Tax benefit from common
stock option exercises -- -- -- 3,697 -- -- 3,697
Amortization of deferred
compensation -- -- -- -- 39 -- 39
Net income -- -- -- -- -- 3,684 3,684
----- ------ ----- ------- ----- ------- -------
Balances as of June 30, 1996 -- $ -- 7,468 $77,902 $ (34) $ 2,330 $80,198
===== ====== ===== ======= ===== ======= =======
- ----------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
18
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------
- ----------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 3,684 $ 2,240 $ (566)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Acquired research and development 3,991 -- --
Depreciation and amortization 736 285 142
Deferred taxes (3,245) -- --
Tax benefit from exercise of common stock options 3,697 387 --
Changes in operating assets and liabilities:
Accounts receivable (2,980) (2,755) (894)
Inventories (4,073) (2,924) (530)
Prepaid expenses (152) (102) (20)
Other assets -- 9 61
Accounts payable (1,916) 2,350 462
Accrued expenses 1,307 526 172
Deferred revenue (170) (674) 1,091
-------- -------- ------
Net cash provided by (used in) operating activities 879 (658) (82)
-------- -------- ------
Cash flows from investing activities:
Cash payment for acquisition of Video Director
product line (4,412) -- --
Purchases of property and equipment (1,834) (931) (258)
Purchases of marketable securities (37,448) (9,840) --
Proceeds from maturity of marketable securities 13,000 1,000 --
-------- -------- ------
Net cash used in investing activities (30,694) (9,771) (258)
-------- -------- ------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 2,978
Proceeds from issuance of common stock 45,035 21,951 15
Repayment of debentures -- -- (2,000)
-------- -------- ------
Net cash provided by financing activities 45,035 21,951 993
-------- -------- ------
Net increase in cash and cash equivalents 15,220 11,522 653
Cash and cash equivalents at beginning of period 12,626 1,104 451
Cash and cash equivalents at end of period $ 27,846 $ 12,626 $1,104
-------- -------- ------
Supplemental disclosures of cash paid during the period:
Interest $ 9 $ 23 $ 62
======== ======== ======
Income taxes $ 312 $ 2 $ 2
======== ======== ======
Non-cash transactions:
Liabilities assumed in acquisition of certain assets
and liabilities $ 161 $ -- --
======== ======== ======
<FN>
- -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</FN>
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(In thousands, except per share data)
NOTE 1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Company. Pinnacle Systems, Inc. and its subsidiaries (the Company) design,
manufacture and sell video post-production tools for high quality real time
video processing.
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
The Company's first three fiscal quarters end on the last Friday in September,
December and March. For financial statement presentation, the Company has
indicated its fiscal quarters as ending on the month-end.
Cash and Marketable Securities. The Company considers all highly liquid
investments purchased with an original maturity of three months or less at the
date of purchase to be cash equivalents. Marketable securities consist
principally of government securities with maturities between three and eighteen
months and are carried at cost which approximates market. These investments are
typically short-term in nature and therefore bear minimal interest rate risk.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company adopted the provisions
of SFAS 115 for investments held as of or acquired after July 1, 1994. Under the
provisions of SFAS No. 115, debt securities that the Company has both the
positive intent and ability to hold to maturity are carried at amortized cost.
Presently, the Company classifies all debt securities as held-to-maturity and
carries them at amortized cost. Interest income is recorded using an effective
interest rate, with the associated premium or discount amortized to "Interest
income." The adoption of SFAS No. 115 did not have a material impact on the
Company's consolidated financial statements.
The fair value of marketable securities is substantially equal to their
carrying value as of June 30, 1996. All investments at June 30, 1996 were
classified as held-to-maturity. Such investments mature through November 1997.
Inventories. Inventories are stated at the lower of first-in, first-out cost or
market and include a provision for excess and obsolete inventory. Raw materials
inventory represents purchased materials, components and assemblies, including
fully assembled circuit boards purchased from outside vendors.
Property and Equipment. Purchased property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years.
In 1995, the Financial Accounting Standards Board issued SFAS No. 121.
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of," which requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flow attributable to such assets. SFAS No. 121 will become effective in the
Company's fiscal 1997. Adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial position or results of operations.
20
Employee Stock Plans. The Company accounts for its stock option plans and its
employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." SFAS No. 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after December
15, 1995. The Company intends to continue to account for its employee stock
plans in accordance with the provisions of APB 25. Accordingly, SFAS No. 123
will not have any impact on the Company's reported financial position or results
of operations.
Revenue Recognition. Revenue on product sales is recognized upon shipment.
Warranty costs are accrued at the time sales are recognized.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Net Income (Loss) Per Share. Net income per share is computed using the weighted
average number of common shares and dilutive common stock equivalents
outstanding using the treasury stock method. Dilutive common stock equivalents
include convertible preferred stock, stock options and warrants. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued for consideration below the assumed initial public offering (IPO)
price and stock options granted with exercise prices below the IPO price during
the 12-month period preceding the date of the initial filing of the Company's
IPO, even when antidilutive, have been included in the calculation of common
equivalent shares, using the treasury stock method based on the IPO price, as if
they were outstanding for all periods presented prior to the IPO date. The 1994
net income per share amounts are presented on a pro forma basis using the pro
forma weighted average number of common shares outstanding and common share
equivalents outstanding during the period, after giving retroactive effect to
the automatic conversion of all series of preferred stock into shares of common
stock at the IPO date.
Concentration of Credit Risk. The Company distributes and sells its products to
end users primarily through a combination of independent domestic and
international dealers and original equipment manufacturers ("OEMs"). The Company
performs periodic credit evaluations of its customer's financial condition and
generally does not require collateral.
Use of Estimates in Preparation of Financial Statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
21
NOTE 2. BALANCE SHEET COMPONENTS
- --------------------------------------------------------------------------------
JUNE 30,
----------------------
1996 1995
- --------------------------------------------------------------------------------
Marketable securities:
Amortized costs $32,872 $8,778
Accrued interest 416 62
------- ------
$33,288 $8,840
======= ======
Inventories:
Raw materials $ 7,695 $ 4,387
Work in process 405 239
Finished goods 1,511 772
------- -------
$ 9,611 $ 5,398
======= =======
Property and equipment:
Machinery and equipment $ 3,072 $ 1,824
Office furniture and fixtures 747 161
------- -------
3,819 1,985
Accumulated depreciation (1,615) (918)
------- -------
$ 2,204 $ 1,067
======= =======
Accrued expenses:
Payroll and commission related $ 382 $ 320
Taxes payable 1,145 179
Warranty reserve 388 200
Other 706 454
------- -------
$ 2,621 $ 1,153
======= =======
- --------------------------------------------------------------------------------
NOTE 3. PURCHASE OF VIDEO DIRECTOR PRODUCT LINE
In June 1996, the Company purchased certain assets and liabilities from Gold
Disk Inc., a developer and marketer of software products for video editing and
assembly. The Company paid $4,412 in cash and assumed liabilities of $161. The
assets acquired primarily included intangible assets consisting of software in
the development stage and existing software. The Company acquired inventory,
accounts receivable, and other tangible property of $240; intangible assets
including the Video Director Brand name, user list, and source code technology
totaling $342; and in process research and development of $3,991. The
capitalized intangible assets and purchased software are being amortized over a
3-year period.
To determine the value of the software in the development stage, the
Company considered, among other factors, the stage of development of each
project, the time and resources needed to complete each project, expected income
and associated risks. Associated risks include the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility and risks related to the viability of and potential changes in
future target markets. As a result of this analysis, the Company recorded an
expense of $3,991 for in process research and development on the acquisition
date.
22
NOTE 4. COMMITMENTS
The Company leases its Sunnyvale facilities under an operating lease will
terminate November 15, 1996. In June 1996, the Company entered into an operating
lease agreement for a new location which commences in August 1996. The Company's
future minimum commitments under all noncancelable leases at June 30, 1996 are
$897, $1,104, $1,094, $1,086, $1,096 and $3,034 for 1997, 1998, 1999, 2000, 2001
and thereafter, respectively. Rental income from noncancelable subleases will be
$225 and $135 for 1997 and 1998, respectively. Rent expense was $343, $256, and
$187 for the years ended June 30, 1996, 1995, and 1994, respectively.
NOTE 5. SHAREHOLDERS' EQUITY
Common Stock. In November 1994, the Company completed its initial public
offering (IPO) selling 2,395 shares of common stock for net proceeds of $21,682
after underwriting discounts and associated costs. In conjunction therewith,
1,551 shares of preferred stock outstanding were converted to 1,600 shares of
common stock. In July 1995, the Company completed a public selling offering
selling an additional 1,810 shares of common stock for net proceeds of $43,787
after underwriting discounts and associated costs.
Stock Options. As of June 30, 1996, the Company had reserved 1,660 shares of
common stock for issuance under its 1987 Stock Option Plan (the Plan). The Plan
provides for grants of common stock options to employees, directors and
consultants to purchase common stock at a price at least equal to 85% of the
fair market value of such shares on the grant dates. The options are generally
granted for a 10-year term and the vesting periods range from immediate vesting
to vesting over a 4-year period.
A summary of stock option activity under The Plan follows:
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING
----------------------------------
NUMBER OF PRICE PER
SHARES SHARE
- --------------------------------------------------------------------------------
Balance at June 30, 1993 466 $ 0.20-$ 2.25
Exercised (19) $ 0.20-$ 1.00
Granted 183 $ 2.25
Canceled (20) $ 0.85-$ 2.25
Balance at June 30, 1994 610 $ 0.20-$ 2.25
Exercised (186) $ 0.20-$ 2.25
Granted 494 $ 6.25-$19.50
Canceled (17) $ 0.85-$17.00
Balance at June 30, 1995 901 $ 0.20-$19.50
Exercised (234) $ 0.20-$19.50
Granted 496 $16.00-$31.75
Canceled (139) $ 2.25-$31.75
Balance at June 30, 1996 1,024 $ 0.20-$31.75
- --------------------------------------------------------------------------------
Approximately 286 outstanding options were exercisable as of June 30,
1996. At June 30, 1996, 120 shares were reserved for future issuance under the
Plan.
In addition to the Plan, an officer of the Company holds 73 options at
an exercise price of $1.00 and 140 options at an exercise price of $2.25, all of
which are outside of the Plan and were exercisable as of June 30, 1996. At June
30, 1995, this officer held 207 options at an exercise price of $1.00 and 140
options at an exercise price of $2.25.
23
As of June 30, 1996, the Company had reserved 75 shares of common stock
for issuance under its 1994 Directors' Option Plan. The Company issued options
to purchase 20 shares during fiscal 1996 at prices ranging from $30.25 to
$31.75. No shares were issued under this plan during fiscal 1995 or 1994, and no
shares were exercisable as of June 30, 1996. The options are granted for a
10-year term and vest over a 4-year period.
1996 Stock Option Plan. Subject to shareholder approval at 1996 annual
meeting of Shareholders, the Board of Directors adopted the 1996 Stock Option
Plan and approved the reservation of 370 shares of common stock hereunder.
Stock Purchase Plan. The Company's has a 1994 Employee Stock Purchase
Plan for which a total of 100 shares of the Company's common stock have been
reserved for issuance. The Company issued 34 and 6 shares for the years ended
June 30, 1996 and 1995, respectively.
NOTE 6. INCOME TAXES
A summary of the components of income tax expense follow:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Current:
U.S. federal $ 1,185 $ 886 $--
State 539 242 2
Foreign 15 5 --
Less: benefit of net operating losses (457) (953) --
------- -------- ------
Total current 1,282 180 2
Deferred:
U.S. Federal (2,467) -- --
State (778) -- --
------- -------- ------
Total deferred (3,245) -- --
Charge in lieu of taxes attributable to
employer stock option plans 3,697 387 --
------- -------- ------
Total tax expense $ 1,734 $ 567 $2
======= ======== ======
- --------------------------------------------------------------------------------
Total income tax expense differs from expected income tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to profit (loss)
before taxes) as follows:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Income taxes at federal statutory rate $ 1,842 $ 954 $(192)
State income taxes, net of federal income tax
benefit 738 143 2
Domestic international sales corporation benefit -- (215) --
Elimination of domestic international sales
corporation election 566 -- --
Unutilized net operating loss -- -- 192
Research tax credit -- (81) --
Change in beginning of the year valuation allowance (1,572) (311) --
Other, net 160 77 --
------- -------- ------
$ 1,734 $ 567 $ 2
======= ======== ======
- --------------------------------------------------------------------------------
24
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities as of June 30, 1996, 1995
and 1994, are as follows:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
1996 1995 1994
Deferred tax assets:
Accrued expense and reserves $ 1,682 $ 811 $ 414
Acquired intangibles 1,622 -- --
Net operating loss carry forwards 122 792 1,311
Tax credit carryforwards 286 560 261
Other 146 -- --
------- ------- -------
Total gross deferred tax assets 3,858 2,163 1,986
Less: valuation allowance -- (2,115) (1,957)
------- ------- -------
Net deferred tax assets 3,858 48 29
------- ------- --------
Deferred tax liabilities:
Accumulated domestic international
sales corporation income (566) -- --
Fixed assets and other assets (47) (48) (29)
------- ------- -------
Total gross deferred tax liabilities (613) (48) (29)
Net deferred tax assets $ 3,245 $ -- $ --
======= ======= =======
- --------------------------------------------------------------------------------
As of June 30, 1996, the Company has net operating loss carryforwards of
$122 which expire in 2009 and research and experimentation credit carryforwards
of $286 which expire between 2006 and 2011.
NOTE 7. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company markets its products in North America and in foreign countries
through its sales personnel, dealers, distributors and only one subsidiary.
Export sales account for a significant portion of the Companys net sales. Net
sales are summarized by geographic areas as follows:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------
1996 1995 1994
- --------------------------------------------------------------------------------
North America 61% 53% 53%
Europe 26 26 29
Rest of World 13 21 18
--- --- ---
100% 100% 100%
- --------------------------------------------------------------------------------
One customer, Avid Technology, Inc. (Avid), accounted for approximately
43.3% of the Company's net sales for the year ended June 30, 1996. Avid also
accounted for approximately 36.7% of net accounts receivable at June 30, 1996.
No customer accounted for 10% of the Company's net sales at the year ended June
30, 1995. Another customer accounted for 19.8% of the Company's net revenues for
the year ended June 30, 1994.
NOTE 8. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering substantially all of
its domestic employees. Participants may elect to contribute up to 15% of their
eligible earnings to this plan (up to the statutory maximum amount). The Company
can make discretionary contributions to the plan determined solely by the Board
of Directors. The Company has not made any such contributions to the plan to
date.
25
NOTE 9. RELATED PARTIES
The Company and Bell Microproducts Inc. ("Bell") are parties to an agreement
("the Agreement") under which value-added turnkey services are performed by Bell
on behalf of the Company. Pursuant to the Agreement, Bell builds certain
products in accordance with the Company's specifications. A director of the
Company is also a director of Bell. During the years ended June 30, 1996, 1995
and 1994, the Company purchased materials totaling $16,466, $8,286 and $1,979,
respectively, from Bell pursuant to the Agreement.
NOTE 10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial information for fiscal 1996 and 1995 is as
follows:
- -----------------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -----------------------------------------------------------------------------------------
Fiscal 1996:
Net sales $ 9,321 $ 11,845 $ 12,766 $ 12,219
Gross profit 4,510 5,706 6,192 5,889
In process research and development -- -- -- (3,991)
Income (loss) from operations 1,261 1,639 1,820 (2,647)
Net income (loss) 1,263 1,732 1,822 (1,133)
Net income (loss) per share 0.17 0.22 0.23 (0.15)
Shares used to compute
net income (loss) per share 7,534 7,911 7,894 7,417
Market price range for Common Stock
High 32.50 34.75 25.25 29.25
Low 22.50 24.38 16.00 17.75
Fiscal 1995:
Net sales $ 4,274 $ 4,908 $ 5,779 $ 7,232
Gross profit 1,984 2,458 2,905 3,638
Income from operations 308 385 566 810
Net income 236 389 687 928
Net income per share 0.07 0.08 0.11 0.15
Shares used to compute
net income per share 3,438 4,833 6,030 6,125
Market price range for Common Stock
High -- 15.50 18.50 24.00
Low -- 9.75 9.75 15.00
- -----------------------------------------------------------------------------------------
The Company has not paid any dividends since its inception and does not intend
to pay any dividends in the foreseeable future.
The common stock of the Company has been traded on the Nasdaq National
market under the symbol PCLE since the Company's initial public offering in
November 1994. Prior to that time, there was no public market for the Company's
common stock.
At August 15, 1996, there were approximately 94 shareholders of record.
26
INDEPENDENT AUDITORS' REPORT
- ----------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PINNACLE SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Kent Marwick LLP
Palo Alto, California
July 17, 1996