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 27,1996
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)
(415)526-1600
----------------------------------------------------
(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 December 27, 1996 was
7,523,380.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed consolidated financial statements
Condensed consolidated balance sheets -
December 31, 1996 and June 30, 1996 3
Condensed consolidated statements of operations -
three months and six months ended 4
December 31, 1996 and 1995
Condensed consolidated statements of cash flows -
six months ended December 31, 1996 and 1995 5
Notes to condensed consolidated financial statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
See accompanying notes to condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PINNACLE SYSTEMS, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
1996 1996
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 34,815 $ 27,846
Marketable securities 24,106 29,315
Accounts receivable, less allowance for doubtful
accounts and returns of $1,286 and $840 as of
December 31, 1996 and June 30, 1996,
respectively 6,131 7,526
Inventories 5,242 9,611
Deferred taxes -- 2,091
Prepaid expenses 424 311
-------- --------
Total current assets 70,718 76,700
Property and equipment, net 4,400 2,204
Marketable securities -- 3,973
Deferred taxes -- 1,154
Other assets 628 530
-------- --------
$ 75,746 $ 84,561
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,565 $ 1,495
Accrued expenses 2,093 2,621
Deferred revenue 248 247
-------- --------
Total current liabilities 3,906 4,363
-------- --------
Commitments
Shareholders' equity:
Common stock; authorized 15,000 shares; 7,523 and
7,468 issued and outstanding as of December 31, and
June 30, 1996, respectively 78,266 77,902
Deferred compensation, net (23) (34)
Retained earnings (deficit) (6,403) 2,330
-------- --------
Total shareholders' equity 71,840 80,198
-------- --------
$ 75,746 $ 84,561
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED COLSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Six
Months Ended Months Ended
December 31, December 31,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net sales $ 5,345 $ 11,845 $ 16,787 $ 21,166
Cost of sales 7,328 6,139 13,324 10,950
-------- -------- -------- --------
Gross profit (loss) (1,983) 5,706 3,463 10,216
-------- -------- -------- --------
Operating expenses:
Engineering and product development 2,063 1,279 3,845 2,211
Sales and marketing 2,514 2,179 5,208 4,055
General and administrative 1,426 609 2,190 1,050
-------- -------- -------- --------
Total operating expenses 6,003 4,067 11,243 7,316
-------- -------- -------- --------
Operating income (loss) (7,986) 1,639 (7,780) 2,900
Interest income, net 729 927 1,492 1,608
-------- -------- -------- --------
Income (loss) before income taxes (7,257) 2,566 (6,288) 4,508
Income tax expense (2,087) (834) (2,445) (1,513)
-------- -------- -------- --------
Net income (loss) $ (9,344) $ 1,732 $ (8,733) $ 2,995
======== ======== ======== ========
Net income (loss) per share $ (1.25) $ 0.22 $ (1.17) $ 0.39
======== ======== ======== ========
Shares used to compute net income (loss) per share 7,505 7,911 7,489 7,603
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
PINNACLE SYSTEMS, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Six Months Ended December 31,
-----------------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net income (loss) $ (8,733) $ 2,995
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 671 269
Increase of valuation allowance on deferred tax assets 3,245 --
Tax benefit from exercise of common stock options -- 1,565
Loss on disposal of property and equipment 448 --
Changes in operating assets and liabilities:
Accounts receivable 1,395 (1,380)
Inventories 4,369 (2,925)
Accounts payable 70 1,827
Accrued expenses (528) 492
Other (301) (215)
-------- --------
Net cash provided by operating activities 636 2,628
-------- --------
Cash flows investing activities:
Purchases of property and equipment (3,213) (670)
Purchase of marketable securities (14,726) (28,274)
Proceeds from maturity of marketable securities 23,908 4,000
-------- --------
Net cash provided by (used in) investing activities 5,969 (29,944)
-------- --------
Cash flow from financing activities:
Proceeds from issuance of common stock 364 44,268
-------- --------
Net cash provided by financing activities 364 44,268
-------- --------
Net increase in cash and cash equivalents 6,969 21,952
Cash and cash equivalents at beginning of period 27,846 12,626
-------- --------
Cash and cash equivalents at end of period $ 34,815 $ 34,578
======== ========
Supplemental disclosures of cash paid during the period:
Interest $ 9 $ 6
======== ========
Income taxes $ 330 $ 48
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. General
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, 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 information furnished in this report reflects all adjustments
which, 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. The condensed consolidated financial statements included herein should
be read in conjunction with the financial statements and notes thereto, which
include information as to significant accounting policies, for the fiscal year
ended June 30, 1996 included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 17, 1996. Results
of operations for interim periods are not necessarily indicative of results for
the full year.
2. Significant Accounting Policies
Fiscal Year
Pinnacle Systems, Inc. and its subsidiaries (the Company) reports on a fiscal
year which ends on June 30. 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.
Net Income 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.
3. Financial Instruments
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (FAS 115). The Company adopted the provisions of FAS
115 for investments held as of or acquired after July 1, 1994. Under the
provisions of FAS 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 FAS 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 December 31, 1996. All investments at December 31, 1996 were
classified as held-to-maturity. Such investments mature through December 1997.
4. Inventories
A summary of inventories follows:
December 31, June 30,
1996 1996
------ ------
Raw materials $3,089 $7,695
Work in process 1,382 405
Finished goods 771 1,511
------ ------
$5,242 $9,611
====== ======
Raw materials inventory represents purchased materials, components and
assemblies, including fully assembled circuit boards purchased from outside
vendors.
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
5. Customers and Credit Concentrations
During the three and six months ended December 31, 1996, Avid Technology Inc.
accounted for approximately 19.1% and 24.6%, respectively, of net sales,
compared to 46.0% and 40.6% for the comparable periods ending December 31, 1995.
No other customer accounted for more than 10% of sales.
Avid Technology Inc. accounted for approximately 12.3% and 36.7% of accounts
receivable at December 31, 1996 and June 30, 1996, respectively. Media 100, Inc.
(formerly Data Translation, Inc.) accounted for approximately 23.0% of accounts
receivable at December 31, 1996.
6. 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 three months ended December 31,
1996 and 1995, the Company purchased materials totaling $834 and $4,635,
respectively, from Bell pursuant to the Agreement. During the six months ended
December 31, 1996 and 1995, the Company purchased materials totaling $2,921 and
$7,984, respectively from Bell pursuant to the Agreement.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain Forward-Looking Information
Certain statements in this Management's Discussions and Analysis 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" and "Significant Fluctuations
in Future Operating Results." These forward-looking statements include
statements in the paragraphs below relating to "Net Sales," the last sentences
of the paragraphs below relating to "Engineering and Product Development,"
"Sales and Marketing" and "Income Tax Expense," and the statements below in the
fourth, sixth, seventh and tenth paragraphs under "Overview," 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.
With the introduction of 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 have been largely dependent on the
success of the Alladin. Alladin sales represented approximately 44.6% and 71.0%
of net sales for the three month periods ended December 31, 1996 and 1995,
respectively. Sales of Alladin declined significantly during the three months
ended December 31, 1996. This decline had a significant impact on the company's
overall sales for the period, and resulted from a decline in sales through both
the company's dealer channel and to OEM customers. See "Results of
Operations--Net Sales."
In June 1996, the Company commenced shipment of Genie, a new desktop
video product family. The Company is critically dependent upon the successful
market acceptance, manufacture, distribution and sale of Genie to increase
revenue and profitability in the future. Sales of Genie products represented
approximately 15.3% of net sales for the three months ended December 31, 1996.
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
success 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 original equipment manufacturers ("OEMs") 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, 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. VideoDirector is low-cost video software package sold primarily
to home video enthusiasts. Pinnacle intends to develop a new family of products
that combine a subset of its video manipulation technology with VideoDirector
technology to enable home video enthusiasts to create professional-looking video
content. The introduction of the first such follow-on product, VideoDirector
Studio 200, was recently announced by the Company and initial commercial
shipments are currently expected to commence during the quarter ending March 31,
1997.
The sources of competition for home video market products are not yet
well defined. The Company expects that existing computer software manufacturers
and new market entrants will develop new products that may compete directly with
the Video Director derivative products. Increased competition could result in
lower prices, margins and market share than are currently anticipated in
designing and developing these products. In addition, the Company expects to
expend considerable resources to introduce and promote products in this home
video market category. There can be no assurance that the Company will be able
to compete successfully against current and future competitors in the home video
markets, and to the extent the Company is not successful with the development,
introduction and sale of products in this market segment, the Company's
business, operating results and financial condition could be adversely affected.
The Company has been highly dependent on sales of Alladin and Genie
products through OEM's, in particular Avid Technology, Inc. ("Avid") and Media
100, Inc. ("Media 100"). Sales to Avid declined significantly from the year ago
period, and accounted for approximately 19.1% and 46.0% of net sales during the
three months ended December 31, 1996 and 1995, respectively. Though sales to
Media 100 were nominal this quarter, the company has signed an OEM agreement
with Media 100 and expects that sales to Media 100 will be an important source
of revenues in future quarters.
This concentration of net sales to a few OEM's 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 the OEM customers. Variations in the timing of revenues can cause significant
fluctuations in quarterly results of operations. The Company's results of
operations have in the past and could in the future 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 and Media 100
requirements. For example, sales to Avid have decreased sequentially for each of
the last three quarters contributing to the overall decline in net sales for the
Company during those same periods. Although there can be no assurance that this
trend will not continue, the Company currently believes that sales to Avid in
the quarter ending March 31, 1997 will increase as compared to sales to Avid in
the quarter ended December 31, 1996. However, if the Company were to lose Avid
or Media 100 as a customer, or if orders from these customers were to further
decrease, the Company's business, operating results and financial condition
would be materially adversely affected. See "Results of Operations-Net Sales."
The Company currently has two product families designed to serve the
traditional 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. The Company currently intends to
develop and market follow-on products for the traditional video market during
calendar 1997. The introduction of such products would have the same market
acceptance, distribution and sales risks as described for the Genie family. The
introduction of new traditional products could significantly slow or replace
sales of Prizm and FlashFile. If this were to occur prior to shipment of any new
products, the Company's business, operating results and financial condition
would be materially adversely affected.
The Company distributes and sells its products to end users through the
combination of independent domestic and international dealers, retail
distributors, OEMs and, to a lesser extent, a direct sales force. Sales to
dealers, distributors 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 incurred a significant loss for the quarter ended December
31, 1996, and currently expects to incur an operating loss in the quarter ending
March 31, 1997. The Company anticipates that an increase in OEM desktop and
Video Director product sales will likely lead to an overall increase in net
sales for the March 31, 1997 quarter as compared to the quarter just ended.
Operating expenses in total for the quarter ending March 31, 1997 are expected
to remain relatively consistent with the December 31, 1997 quarter. However,
operating expenses will most likely exceed total gross margins during the
quarter ending March 31, 1997, resulting in an operating loss for the quarter.
Results of Operations
Net Sales. The Company's net sales decreased by 54.9% to $5,345,000 in
the three months ended December 31, 1996 from $11,845,000 during the comparable
three months in the prior year. Net sales decreased by 20.7% to $16,787,000 in
the six months ended December 31, 1996 from $21,166,000 in the six months ended
December 31, 1995. The decrease in both periods was primarily attributable to a
decline in sales across all product lines, the most significant of which was a
decline in sales of desktop products to OEMs, in particular Avid. Sales of
desktop products to OEM customers during the three and six month periods ended
December 31, 1996 decreased approximately 77% and 30%, respectively, from the
comparable periods in the prior year. See "Overview" above. Sales outside of
North America were approximately 46.4% and 35.4% of net sales in the three
months ended December 31, 1996 and 1995, respectively and 39.4% and 36.7% in the
six months ended December 31, 1996 and 1995, respectively. The increase in sales
outside of North America in both periods was primarily attributable to the
decrease of sales to Avid's North American facility.
As previously discussed, sales to the Company's largest customers, Avid and
Media 100, declined from the first quarter of fiscal 1997 to the second quarter
of fiscal 1997. The Company believes that much of this trend is the result of
Avid and Media 100 having previously purchased enough product to satisfy their
needs for the quarter ended December 31, 1996. The Company believes that sales
to Avid and Media 100 will increase sequentially during the quarter ending March
31, 1997. To
the extent that sales to these OEM customers do not increase sequentially, the
Company's business, operating results and financial condition will be materially
adversely effected.
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. During the quarter ending December 31, 1996, the Company
incurred a significant charge to cost of sales totaling $4,021,000 relating
primarily to inventory write downs in connection with the decline in sales
during the quarter. Excluding the charge, gross profit as a percentage of net
sales was 38.1% and 48.2% in the three months ended December 31, 1996 and 1995,
respectively, and 44.6% compared to 48.3% in the six months ended December 31,
1996 and 1995, respectively. The decrease in gross profit percentage is due to a
decreased manufacturing overhead absorption due to lower production volume and
higher manufacturing overhead costs related to the new facility in Mountain
View, California.
Engineering and Product Development. Engineering and product
development expenses increased 61.3% to $2,063,000 in the three months ended
December 31, 1996 from $1,279,000 during the comparable three months in the
prior year. The Company's engineering and product development expenses increased
73.9% to $3,845,000 in the six months ended December 31, 1996 from $2,211,000
during the comparable six months in the prior year. Engineering and product
development expenses as a percentage of net sales were 38.6% and 10.8% during
the three months ended December 31, 1996 and 1995, and 22.9% and 10.4% during
the six months ended December 31, 1996 and 1995, respectively. The increases in
each period resulted primarily from growth in the number of persons in the
Company's engineering design team. The Company is preparing to introduce several
new professional and consumer video products during calendar 1997 and the
Company expects to continue to allocate significant resources to engineering and
product development efforts.
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 15.4% to
$2,514,000 in the three months ended December 31, 1996 from $2,179,000 during
the comparable three months in the prior year. The Company's sales and marketing
expenses increased 28.4% to $5,208,000 in the six months ended December 31, 1996
from $4,055,000 during the comparable six months in the prior year. Sales and
marketing as a percentage of net sales were 47.0% and 18.4% for the three month
periods ending December 31, 1996 and 1995, and 31.0% and 19.2% for the six month
periods ending December 31, 1996 and 1995, respectively. The increase in sales
and marketing expenses was primarily attributable to increased expenditures
related to continued promotion of Alladin and Genie products, including
expenditures for trade shows, advertising creation and placement, professional
fees for marketing services and increases in the number of sales and marketing
personnel. The Company expects to allocate significant resources to sales and
marketing, particularly during the March 31, 1997 and June 30, 1997 quarters,
for the introduction of several new professional and consumer video products.
General and Administrative. General and administrative expenses
increased 134% to $1,426,000 in the three months ended December 31, 1996 from
$609,000 during the comparable three months in the prior year. General and
administrative expenditures increased 109% to $2,190,000 in the six months ended
December 31, 1996 from $1,050,000 during the comparable six months in the prior
year. As a percentage of net sales, general and administrative expenses were
26.7% and 5.1% during the three months ended December 31, 1996 and 1995 and
13.0% and 5.0% during the six months ended December 31, 1996 and 1995,
respectively. Included in general and administrative expenses for the three
months ended December 31, 1996 is approximately $700,000 relating to an increase
in the allowance for doubtful accounts and the disposal of leasehold
improvements, furniture and equipment, moving costs and rent overlap incurred as
a result of the move to the Company's new facility.
Interest Income (Expense), Net. In the three and six months ended
December 31, 1996, interest income, net was $729,000 and $1,492,000,
respectively, as compared to net interest income of $927,000 and $1,608,000 in
the comparable periods a year ago. The decrease was due to a decline in cash and
marketable securities as well as a decline in investment yields. All of the
Company's cash and marketable securities have maturities of less than one year.
Changes in the market interest rates will have an effect on interest income in
future periods.
Income Tax Expense. The Company recorded a provision for income taxes
of $2,087,000 and $834,000 for the three months ended December 31, 1996 and
1995, respectively. Income tax expense was $2,445,000 and $1,513,000 for the six
months ended December 31, 1996 and 1995, respectively. Included in income tax
expense for the three months and six months ended December 31, 1996 is a charge
of $3,245,000 resulting from the establishment of a valuation allowance against
the Company's deferred tax asset. The Company does not anticipate any tax
benefit or expense for the remaining two quarters in the fiscal year ending June
30, 1997.
Significant Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have in the past varied, and
are expected to vary significantly in the future as a result of a number of
factors, including the timing of significant orders from and shipments to
customers, in particular Avid and Media 100, the timing and market acceptance of
new products or technological advances by the Company and its competitors, the
mix of distribution channels through which the Company's products are sold,
changes in pricing policies by the Company and its competitors, the accuracy of
resellers' forecasts of end user demand, the ability of the Company to obtain
sufficient supplies of the major subassemblies used in its products from its
subcontractors, the ability of the Company and its subcontractors to obtain
sufficient supplies of sole or limited source components for the Company's
products, and general economic conditions both domestically and internationally.
The Company's expense levels are based, in part, on its expectations as to
future revenue and, as a result, net income would be disproportionately affected
by a reduction in net sales. The Company experiences significant fluctuations in
orders and sales, due mainly to reduced customer purchasing activity during the
summer months and the timing of major trade shows. The Company expects that its
operating results will fluctuate in the future as a result of these and other
factors, including changes in the rate of sales to OEM customers, in particular
Avid and Media 100, and the Company's success in developing, introducing and
shipping new products, in particular Genie and new products designed for the
consumer market. Due to these factors and the potential quarterly fluctuations
in operating results, the Company believes that quarter-to-quarter comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance.
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 public offerings of common stock in November
1994 and July 1995 raising approximately $65.5 million, net of offering
expenses.
The Company's operating activities generated cash of $636,000 in the
six months ended December 31, 1996, compared to $2,628,000 for the same period
in 1995. The cash generated by operating activities during the six months ended
December 31, 1996 was the result of net decreases in the components of working
capital, primarily accounts receivable and inventory, partially offset by the
net loss of $8,733,000 as adjusted inventory write-downs of $4,021,000, an
increase in the valuation allowance on deferred tax assets of $3,245,000,
depreciation and amortization of $671,000, and a loss on disposal of property
and equipment of $448,000. The Company expects operations to consume a modest
amount of cash during the six months ending June 30, 1997 as a result of an
anticipated operating loss and an increase in working capital.
During the six months ended December 31, 1996, $3,213,000 was invested
in property and equipment, compared to $670,000 in the six months ended December
31, 1995. The increase over the prior year is primarily related to leasehold
improvements, furniture and equipment for the new Mountain View facility. See
"Overview." The Company expects to continue to purchase property and equipment,
however at a reduced rate following the completion of improvements to the
Mountain View facility. Such investing will be financed from working capital.
In January 1997, the Company's board of directors authorized a stock
repurchase program pursuant to which the Company may purchase up to 750,000
shares of its common stock on the open market.
As of December 31, 1996, the Company had working capital of
approximately $66.8 million, including $34.8 million in cash and cash
equivalents and $24.1 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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On October 24, 1996, the Company held an 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 items 1 and 3 below.
1. To elect six directors to serve until the next Annual Meeting
of Shareholders and until their successors are elected.
VOTES
NOMINEE VOTES WITHHELD
------- ----- --------
Mark L. Sanders 5,867,402 14,738
Ajay Chopra 5,867,402 14,738
John Lewis 5,866,402 15,738
Nyal D. McMullin 5,867,202 14,938
Glenn E. Penisten 5,867,402 14,738
Charles J. Vaughan 5,867,402 14,738
2. To approve the adoption of 1996 Stock Option Plan to reserve
370,000 shares for grant thereunder.
FOR: 4,842,084 AGAINST: 926,302 ABSTAIN: 102,635 BROKER NON-VOTES: 11,119
3. To confirm the appointment of KPMG Peat Marwick, LLP as
independent auditors of the Company for the fiscal period
ending June 30, 1997.
FOR: 5,875,939 AGAINST: 4,985 ABSTAIN: 4,762
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.20 Industrial Lease Agreement, dated November 19,
1996 between Registrant and CNC Grand Union
Limited
11.1 Statement of Computation of Net Income (Loss) Per
Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1996.
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 10, 1997 By: /s/Mark L. Sanders
-----------------------
Mark L. Sanders
President, Chief Executive Officer
and Director
Date: February 10, 1997 By: /s/Arthur D. Chadwick
--------------------------
Arthur D. Chadwick
Vice President, Finance and
Administration and
Chief Financial Officer