SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_______________.
Commission file number: 0-24784
PINNACLE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 94-3003809
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
280 North Bernardo, Mountain View, CA 94043
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (415) 526-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Share Purchase Rights, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
August 22, 1997 as reported on the Nasdaq National Market System, was
approximately $ 154,096,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of August 22, 1997, registrant had outstanding 7,344,958 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held October 28, 1997. Portions of the Registrant's Annual
Report to Shareholders for the fiscal year ended June 30, 1997 are incorporated
by reference into Parts II and IV of this Form 10-K.
PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the risks associated with the acquisition of
products and technology; the risk associated with a concentration of sales to
significant customers; significant fluctuations in the Company's quarterly
operating results; risks associated with developing and selling products into
the Consumer market; risks associated with development and introduction of new
products; the Company's highly competitive industry, rapid technological change
and competition within the Company's industry; the Company's dependence on
retention and attraction of key employees; the risks associated with contract
manufacturers and 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 absence of a
direct sales force; the risks associated with international sales; the risks
associated with future acquisitions; general economic and business conditions;
and other factors referenced in this Report.
Pinnacle Systems is a registered trademark of Pinnacle Systems, Inc.
("Pinnacle" or the "Company"), and Pinnacle believes that all of its product
names, other than Alladin, are trademarks of Pinnacle Systems, Inc. This Report
also includes trademarks of companies other than Pinnacle Systems, Inc.
ITEM 1. BUSINESS
Pinnacle Systems, Inc. designs, manufactures, markets and supports
video post-production tools for high quality real time video processing. The
Company's products combine computer based and specialized video processing
technologies which perform a variety of video post production functions such as
the addition of special effects, graphics and titles to multiple streams of live
or previously recorded video material. The Company has sold over 10,000
post-production systems since the company's inception in 1986 to customers in
more than 60 countries. In 1994 the Company introduced Alladin, its first
PC-based product that connected directly to an external computer and offered
real-time video manipulation and special effects capabilities with performance
comparable to traditional video products but at a substantially lower price. The
Company has since introduced additional video products which address needs in
the Broadcast, Desktop and Consumer video post production markets.
To further Pinnacle's strategy of providing an expanded line of easy to
use computer based video production products, in July 1997, the Company signed a
letter of intent to acquire the miro Digital Video Products from miro Computer
Products AG. In the anticipated acquisition, the Company will acquire the assets
of the miro Digital Video Products group, including the miroVIDEO and miroMOTION
product lines, certain technology and other assets. The Company expects to pay
approximately $15 million in cash, $5 million in common stock, assume
liabilities of between $2 million and $3 million, and incur approximately $2
million in costs associated with executing the transaction and integrating the
businesses. The Company anticipates that a significant portion of the purchase
price will be charged as in-process research and development and other
non-recurring costs in the quarter ending September 30, 1997. The agreement also
includes an earnout provision in which miro Computer Products AG will receive
additional consideration equal to 50% of sales generated in excess of $37
million during the first twelve full months following the acquisition as long as
operating profits related to such sales exceed 3% of sales, increasing to 85% of
sales
-1-
for those sales which exceed $59 million during the same twelve month period.
Any earnout payments will be paid in common stock of the Company.
Industry Background
The video production industry has historically created program material
for commercial broadcast and television advertising. Producers of commercial
program material and advertising have traditionally used video editing suites
equipped with expensive, dedicated video production equipment to produce high
quality video programming. A large and established market exists for video
equipment used in traditional video editing suites. Expanding channels of
distribution, including cable television, direct satellite broadcast, the
Internet, CD-ROM , DVD (Digital Versatile Disk), and video-on demand, have led
to a rapid increase in demand for video content for existing and new
applications. New applications for video content include multimedia
entertainment, video games, music videos, special event videos, education and
training and corporate communications. These new applications cannot, in
general, support the high cost and complexity of video production associated
with traditional editing suites. Computer based video products, which combine
the technology of personal computers with specialized video processing hardware
and software, have reached a point where they can provide quality video output
comparable to that of traditional video editing suites at significantly lower
cost.
Video Production Process
The development of a video program involves three distinct processes,
which together comprise video production. The first phase, pre-production,
involves planning and preparation for the recording, or "shooting," of the video
program and includes scripting, storyboarding (the artist's rendering of planned
video segments) and developing the production budget. The second phase,
production, involves the actual shooting of video material either on location or
in a studio. This process follows the pre-production script, recording actual
video segments outlined by the storyboard sketches. Production also includes the
creation of still-images and computer animated images to be included in the
program.
The final phase, post-production, involves the organization of raw
video segments acquired in the production phase into a cohesive and appealing
program. During the post-production phase, the producer utilizes sophisticated
equipment to incorporate essential elements such as titles, graphics and
transitions between video segments and to composite multiple layers of video and
graphics. The overall quality and impact of a video production is, in many
cases, judged by the quality of the video processing performed in the
post-production phase. Viewers expect the same level of video program quality
that they see daily with broadcast television programming, where high quality
graphics, smooth transitions and compositing of multiple layers of graphics and
video are commonplace.
Video Editing Suites
To implement high quality post-production video effects, producers of
commercial broadcast and television advertising have traditionally used multiple
pieces of dedicated equipment, linked together with a complex interconnection,
routing and control system to form a video "editing suite." Typical editing
suites incorporate switchers, digital video effects systems ("DVEs), still image
management systems ("Still Stores"), character generators, electronic paint and
compositing systems and 3D modeling and animation tools, typically provided by
multiple manufacturers and used to implement a single effect or group of related
effects. Traditional editing suites allow video professionals to produce a high
quality finished product in real time, whereby the operator can touch a button
or move a joystick or mouse and see the desired effect
-2-
instantaneously. Real time interactivity, which allows the video producer
spontaneously and interactively to try many different video manipulations and
fine tune the resulting video content, is a critical requirement in the video
post-production process.
Because of the complexity and large number of components required,
traditional video editing suites are expensive, ranging in cost from $100,000 to
several million dollars for a fully equipped suite. Furthermore, each component
within the suite often has its own user interface and therefore its own user
training equipment. A video professional has therefore required significant
training to become proficient in the operation of equipment in a traditional
editing suite. Because traditional editing suites are expensive and complex,
they are usually operated as time-shared resources. Producers typically rent a
video editing suite together with highly trained operators for between $100 to
$1,000 per hour. The high cost of traditional editing suites makes them
unsuitable for video applications where high development costs cannot be
supported.
Computer based video post-production
Video post-production tools based on standard computer platforms have
become a real alternative to traditional video editing. Such tools are based on
a combination of personal computers, graphical user interfaces, video
input/output and specialized processing hardware and software. These tools are
designed to be much lower cost than traditional tools since they can take
advantage of the ongoing cost improvements in computer and video processing
technology. In addition, they are often easier to use since they can utilize
common computer user interfaces, and can be dedicated to an individual user
rather than time-shared between multiple projects.
Computer based video post-production tools are well-suited for many new
video applications, including multi-media entertainment, video games, music
videos, special event videos, education and training and corporate
communications as well as the traditional applications such as broadcast and
on-air applications. The low-cost of desktop video tools allows video programs
to be developed more efficiently and inexpensively. The lower cost and increased
ease of use of desktop video tools makes it easy for a large number of creative
individuals, previously untrained in video production, to produce professional
quality video programming.
Historically, the inability of computer based video post-production
tools to implement, in real time, the same sophisticated high quality video
effects as are available in traditional editing suites limited their use. To
produce special effects and compositing, computer based tools have historically
relied upon software to render the desired effect. The initial creation and each
subsequent alteration of complex video manipulations could require many hours of
software rendering time. Video rendering time has continued to improve as
computer processing power has improved, but complex video manipulations can
still not be performed on standard computer platforms in real time without
specialized video processing technology.
Company Strategy
Pinnacle has developed video processing technologies and products which
allow complex video manipulation in real time. Those technologies includes real
time digital video processing, real time software algorithms, video input/output
and advanced video manipulation user interfaces. Used in conjunction with
standard computer platforms these technologies provide high quality, cost
effective, computer based solutions for the video post production markets. As a
result, Pinnacle has become a leading supplier of real time computer based video
manipulation technology for video post production markets.
-3-
Pinnacle's strategy is to leverage its leading market and technological
position to continue to provide innovative, real time, computer based solutions
for three video post production markets which the Company characterizes as the
Broadcast market, the Desktop video market, and the Consumer video market.
The Broadcast market generally requires very high technical performance
such as real time 10-bit processing, control of multiple channels of live video,
and specialized filtering and interpolation. To address this market the Company
is pursuing a strategy of providing high performance, specialized, Windows NT
based, computer solutions for high end post production and broadcast on-air
applications.
The Desktop market is generally more cost conscious, demands products
that work in an open architecture computer environment but that still provide
high quality real time video processing capabilities. For this market, the
company expects to continue to pursue a strategy of providing real time video
manipulation technology to support both linear, or tape based, and non-linear,
or computer based, editing environments. In addition, the Company plans to
expand the scope of its products in this market to encompass certain
COmpression/DECompression (CODEC) technology required to control and transfer
video into and out of the computer. By combining the Company's real time video
processing technology with CODEC technology, the Company intends to provide a
complete video processing platform which can work with software from companies
specializing in video editing applications. The Company expects to commence
shipment of its first video processing platform product during fiscal 1998
The Consumer market requires a much lower price point and puts more
emphasis on ease of use and installation. The Company's strategy for this market
is to provide low cost, easy to use, complete video editing solutions which
allows consumers to edit their home videos using a combination of their home PC,
camcorder and VCR.
To effectively pursue these market strategies, the Company intends to
expand its core technologies, leverage its product design resources, drive down
the cost of real time manipulation technology, and expand its product lines, as
follows:
Expand Core Technologies: The Company has continued to expanded its
core software and hardware technologies since the Company's inception, and the
Company expects to continue to expand this technological base through both
internal development and through acquisitions. During fiscal 1997, the Company
completed the internal development of certain technology which allows 10-bit
real time video manipulation processing on multiple channels of live video. In
addition, the Company acquired certain technologies. In June 1996, the Company
acquired the Video Director product line from Gold Disk, Inc. which added
consumer oriented software editing capabilities, and camcorder and VCR control
to the Company's core technology base. In April 1997 the Company acquired the
Deko character generation technology from Digital Graphix, which allows real
time generation of video characters and graphics for the broadcast and on-air
applications.
Leverage Product Designs: The Company considers it important to
leverage design resources within the company to maximize the new product designs
and time-to-market. The Company uses an "object oriented" design mentality to
"mix and match" components of technology when developing new products. This
"object oriented" design methodology allows the company to leverage its
investment in reasearch and development since components of technology can be
used for multiple product designs. It also improves the Company's ability to get
products into the market faster since certain pieces of technology can be
quickly incorporated. This methodology has been applied to software code and to
hardware and ASIC designs. For example, the ASIC chip used in Studio 200, one of
the Company's consumer products, was originally designed for Genie, one of the
company's real time desktop products. Similarly, certain software and hardware
originally designed for Genie was subsequently designed into Lightning, the
company's new Image
-4-
Management product.
Reduce Cost of Real Time Video Manipulation Technology: Pinnacle has
continued to drive down the cost of its real time video manipulation technology
by integrating more of that technology into application specific integrated
circuits (ASIC). The company intends to continue to identify opportunities to
integrate more functionality into ASIC's so that real time video manipulation
technology can be provided at lower market price points. The Company believes
that as the cost of providing video processing technology decreases, the number
of potential market seats will likely increase. In addition, by using similar
components of technology, specifically ASIC and field programmable arrays,
material costs are reduced since the Company can take advantage of higher unit
volumes, especially when those components are included in the higher volume
consumer products.
Expand Product Lines: The company expanded its product offerings during
fiscal 1997, and expects to add new products during fiscal 1998. For example of
the Company's history, in June 1994, the Company commenced shipment of Alladin,
its first product designed to provide real time video manipulation for the
desktop video market. Since then, the Company has broadened the Alladin product
family to include a PAL version, and component and CCIR601 capabilities. In June
1996, the Company introduced the Genie family of products, designed to meet the
video manipulation needs of desktop video users at a price point much lower than
Alladin. During fiscal 1997, the Company combined the Video Director with
internally developed real time video processing technology and created
VideoDirector Studio 200. In April 1997, the Company acquired the Deko product
line from Digital Graphix and commenced shipment of the first Pinnacle branded
character generator that month. In June 1997, the Company commenced shipment of
the Windows NT based DVEextreme and Lightning product families. The Company
expects to continue to expand its product lines though both internal development
and possibly through additional acquisitions.
Products
Pinnacle has developed the following products to address video post
production needs for each the Broadcast, Desktop, and Consumer markets.
Broadcast Products:
For the Broadcast market the Company currently has products that
provide real time digital effects, still image management and storage, and real
time video character generation. These products generally include proprietary
Pinnacle hardware and software and specialized control panels and/or key boards
for ultra-quick operations, especially for on-air applications. The primary
broadcast products sold during fiscal 1997 were the Prizm and Flashfile family
of products. In April 1997, the Company introduced two new product families,
DVExtreme and Lightning, which are designed to address the markets previously
addressed by Prizm and Flashfile. Also in April 1997 the Company completed the
acquisition of the Deko product line from Digital Graphix, Inc. These three new
product families comprise Pinnacle's new suite of high performance real time
Windows NT-based products designed for broadcast and high end post production
applications.
Prizm Family
The Prizm family of products was first introduced in 1990. Prizm is
designed to provide sophisticated 3D digital video effects which includes real
time 3D warps, positioning, sizing, rotation with perspective and clipping of
live video images. Prizm operates on a Microsoft DOS based platform. Options
-5-
to Prizm include compositing, key processing, still image capture and storage,
and the DVEator option. The DVEator option permits the creation of unique
special effects by combining 3D modeling techniques with digital video
technology to map live video in real time onto animated 3D shapes. A base Prizm
system has a suggested list price of $23,990.
Flashfile Family
The FlashFile family of products was first introduced in 1992 and
provides broadcast quality still image creation and storage for the broadcast
television market. The FlashFile stillstore offers a broad set of features for
video still image acquisition, storage and on-air playback, including
transitions, file import and export and library management. Operating on a
Microsoft DOS platform, Flashfile offers a computer-based graphical user
interface and may also be controlled using a dedicated hardware control panel
for fast, on-air applications. The Company offers a networked version of
FlashFile, FlashNet, that is targeted toward broadcast applications requiring
online storage of up to several hundred thousand still images with distributed
access using standard Ethernet networking. Using the FlashBrowse PC software
package, a standard personal computer may be connected to the FlashNet network
enabling viewing and cataloging of video still images stored on a network
server. A base Flashfile system has a suggested list price of $16,990 for both
NTSC and PAL versions.
DVExtreme Family
DVExtreme is Pinnacle's newest high performance real time DVE for
broadcast and post production customers to incorporate unique special effects
into their programming. It is a Windows NT-based, multi-channel system with
10-bit digital processing. It can simultaneously manipulate up to three channels
of live video and can generate effects such as four-corner page peels and turns
with highlights and shadows, water ripples, ball effects, wave patterns, and
other effects, all in real time. It also includes Pinnacle's proprietary
ParticalFX and PainterlyFX technology which allows the creation of video
textures and paint-look effects. Because it is based on a Windows NT platform it
can be connected to a standard computer network to easily transfer files and
effects throughout the network. A standard two channel digital DVEextreme has a
suggested list price of $44,990 for an NTSC version and $51,990 for a PAL
version.
Lightning Family
Lightning is Pinnacle's new high performance image and graphics
management system designed for broadcast and post production applications such
as news and sports programs. It is a Windows NT-based system that can have up to
three channels of video, plus additional virtual channels for previewing on a
monitor. It uses 4:2:2:4 digital video processing to ensure broadcast quality
images. Lightning has an internal storage capacity for over ten thousand images,
and a fast SCSI interface to external disks for expanded storage needs.
Lightning can also perform 3D digital video effects on captured video images. A
standard single channel Lightning with digital serial input has a suggested list
price of $25,990 for an NTSC version and $28,990 for a PAL version.
Deko Family
The Deko family of products are designed to provide high performance
titling and character generation for broadcast and on-air applications. Based on
a Windows NT operating systems, Type Deko includes powerful text and graphics
tools such as real time text scrolling, text manipulation, font enhancement,
multiple layers for text composition, TrueType fonts and it supports a wide
range of international character sets. The product supports a large variety of
file import and export graphic file
-6-
formats to import backgrounds, textures and images. In addition, a Fast Action
Keyboard is available as an option for on-air applications. A standard
TypeDeko-Pentiium Pro 200 system has a suggested list price of $26,300 for an
NTSC version and $30,245 for a PAL version.
Desktop Products:
The Company's desktop products are designed to provide high quality
real time video manipulation capabilities for computer based video
post-production systems. They are generally offered at significantly lower price
points than traditional systems having comparable capabilities, are sold
separate from the computer and are integrated into the computer by a value added
reseller, an OEM, or the end user. The Company has two families of Desktop
products, the Alladin family and the Genie family products.
Alladin Family
The Alladin product family is designed to provide high quality real
time video manipulation capabilities for desktop video post-production. It
allows the user to manipulate and process up to four simultaneous streams of
live video supplied from either video tape or computer disk. It provides a
variety of high quality real time video effects including dissolves, compositing
of live video with text or graphics, transparency, clipping of a live image,
sizing, rotation with perspective, 3D positioning and warping. The Alladin
connects to and is controlled by a standard Microsoft Windows-based personal
computer. The Company commenced shipment of Alladin in June 1994. A standard
Alladin with composite analog I/O has a suggested list price of $10,490 for an
NTSC version and $12,490 for a PAL version.
Genie Family
The Genie family of products offers a complete set of professional
quality, real-time 3D digital effects, switching, character generation, paint
and still storage on a single PCI board. It has much of the functionality of
Alladin but at a much lower price point and fits inside the computer rather than
connecting through an external port as does Alladin. There are two versions of
Genie, GeniePlus for the linear market and an OEM version for the non-linear
market. GeniePlus integrates into linear desktop editing environments and
includes an input/output piggyback card and software allowing the user to
process up to two simultaneous streams of live video. The Company commenced
shipments of the GeniePlus in June 1996, and the OEM version in September 1996.
The non-linear version is sold to OEM vendors, including Avid Technology, Inc.
and Media 100, Inc. who integrate and sell it with their non-linear editing
products. GeniePlus has a suggested list price of $5,990 for an NTSC version and
$6,990 for a PAL version.
Consumer Products
The Company's Consumer products provide complete video editing
solutions which allows consumers to edit their home videos using a combination
of their home PC, camcorder and VCR. They are sold at lower price points than
the Company's other products and are sold as software packages and as computer
peripheral products. The Company entered the consumer video editing market by
acquiring the VideoDirector product line from Gold Disk, Inc. in June 1996. In
March 1997, the Company commenced shipment of its first in house developed
consumer editing product, the VideoDirector Studio 200.
VideoDirector Suite
VideoDirector Suite is a low-cost video editing software package which
allows home enthusiasts to edit their personal videos by eliminating unwanted
sections of video, rearranging the sequence of video clips
-7-
and add audio to the finished product. It includes the VideoDirector software, a
title and audio editor, and a smart cable for connecting a camcorder. It is
compatible with most camcorders and VCRs, and uses a Windows based PC to control
the editing process. VideoDirector Suite has a suggested list price of $99.
Video Director Studio 200
VideoDirector Studio 200 combines the functionality of VideoDirector
Suite with certain real time effects technology originally developed for
Pinnacle's desktop products. The product includes all of the functionality of
VideoDirector, and includes the Studio 200 mixer which contains the real time
processing hardware. VideoDirector Studio 200 not only allows basic editing, but
it provides an array of special effects for titles and graphics, animation,
fade-in and out, full linear keying for translucent titles or backgrounds, and
Windows fonts with shadows, outline, and frame options. The product is easy to
install since it doesn't require users to open up their PC and it does not
require hard disc space for the storage of video since the final video
production is output to tape in real time. VideoDirector Studio 200 has a
suggested list price of $299.
Technology
The Company is a technological leader in video manipulation technology.
The National Academy of Television Arts and Sciences' Outstanding Technical
Achievement EMMY award that has been awarded to the Company on two occasions. In
1990, the Company received an EMMY for pioneering the concept of the video
workstation, and in 1994 the Company received an EMMY for developing technology
which allows real time mapping of live video onto animated 3D surfaces.
Video Manipulation Architecture
Many of the Company's products share a common internal architecture.
This design approach allows the Company to maximize the return on its research
and development expenditures by utilizing similar hardware and software modules
in multiple products. The Company's video manipulation architecture is
fundamental to the performance and capabilities of its products.
All of the Company's products use or work with an industry standard
Intel microprocessor running Microsoft DOS/Windows or Windows NT for control of
video manipulation functions. In all of the Broadcast products the control
microprocessor is embedded within the product. The Desktop and Consumer products
are inserted into or connect externally to a Windows based personal computer.
The use of industry standard microprocessors for control offers three main
advantages over traditional video products: lower software development costs due
to the availability of powerful off-the-shelf software development tools; lower
product manufacturing costs due to the low costs of standard microprocessors;
and the ability to integrate third party software such as networking or 3D
rendering software to provide additional functionality.
Essentially all real-time video manipulation must be performed on
uncompressed video data. Since uncompressed digital video rates are too high to
be processed by a microprocessor in real-time, video signals are internally
distributed over a separate high-speed digital video bus ("DVB") and processed
using the Company's proprietary real time video manipulation hardware. The video
data on the DVB is processed in the standard digital component format, which
fully complies with the highest digital component video standards of the
International Radio Consultation Committee ("CCIR"), an organization which
develops and publishes standards for international telecommunication systems.
The DVB supports a digital key channel that defines the edges of an irregularly
shaped image for proper manipulation. The wide bandwidth and
-8-
industry standard format of the DVB helps to ensure high quality video output.
The software in all of the Company's video manipulation products is
divided into two layers: the user interface layer and the video manipulation
algorithm layer. The user interface layer is different and has been optimized
for each product family. The video manipulation algorithm layer is, for the most
part, common to most Pinnacle products and incorporates all the proprietary low
level routines which allow Pinnacle products to perform high quality real-time
video manipulations. This software architecture has three main advantages:
real-time video manipulation algorithms that are complex and difficult to
develop can be used in multiple products; the user interface can be tailored to
meet specific user requirement; and the user interface can independently be
ported to alternative computer platforms.
Core Technologies
The Company's core technical expertise is in real-time digital video
processing, real-time software algorithms, video input/output, advanced user
interfaces and, in the case of Video Director, software control of commercially
available camcorders and VCRs.
o Real-Time Digital Video Processing. The Company has devoted
significant resources to the development of proprietary technology for
real time video processing, including high speed digital filters, image
transformation buffers, plane and perspective addressing, and nonlinear
image manipulation. The Company's patented DVEator technology allows
real-time mapping of live video onto multiple, complex, animated 3D
shapes and surfaces. This technology includes a proprietary data
compression algorithm that compresses the address information and
allows inexpensive decompression of this data in real time.
o Real-Time Software Algorithms. The digital video manipulation
functions of the Company's products use common core software that
performs complex computations in real-time (at video rates) under user
control. The Company has developed certain algorithms that allow the
high speed computation of multiple complex equations which are required
for real-time video effects.
o Video Input/Output. The Company has developed technology for video
input and output of both composite analog and component digital video
data streams. All of the Company's products work with NTSC and PAL
video standards. In addition, the Company has developed interfaces to
support input/output of video streams stored on computer disks.
o User Interface Design. The Company has extensive experience in design
of computer-based user interfaces for video control and manipulation.
The Company uses interactive menu driven user interfaces to control
video manipulation functions.
o Camcorder and VCR Control. With the acquisition of the VideoDirector
product line in June 1996, the Company obtained software code which
enables a computer to control most commercially available camcorders
and VCRs.
The Company has historically devoted a significant portion of its
resources to engineering and product development programs and expects to
continue to allocate significant resources to these efforts. In addition, the
Company has acquired certain technologies which has aided the company's ability
to more rapidly develop and market new products, such as the VideoDirector
Studio 200. The Company's future operating results will depend to a considerable
extent on its ability to continually develop, acquire, introduce
-9-
and deliver new hardware and software products that offer its customers
additional features and enhanced performance at competitive prices. Delays in
the introduction or shipment of new or enhanced products, the inability of the
Company to timely develop and introduce such new products, the failure of such
products to gain market acceptance or problems associated with new product
transitions could adversely affect the Company's business, operating results and
financial condition, particularly on a quarterly basis.
As of June 30, 1997, the Company had 47 people engaged in engineering
and product development. The Company's engineering and product development
expenses (excluding purchased in process research and development) in fiscal
1997, 1996 and 1995 were $ 7.6 million, $5.1 million and $2.4 million,
respectively, and represented 20.2%, 11.1% and 10.8%, respectively, of net
sales.
Customers, Marketing and Sales
Customers
Since the introduction of its first video workstation in 1987, the
Company has shipped over 10,000 systems to customers in more than 60 countries.
End users of the Company's products, none of whom accounted for a material
amount of the Company's net sales during any period, range from individual users
to major corporate/government, video production and broadcast facilities
worldwide. There can be no assurance that any of the end users of the Company's
products will purchase the Company's products in the future. The Company's
customers and their locations include:
Broadcast Corporate/Government
- --------- --------------------
The Walt Disney Co./ABC-New York ABC Home Health Services, Inc. - Georgia
ESPN-Singapore and USA Essex Corp. - New Mexico
Providence Journal Broadcast Corp.-Rhode Island Federal Reserve Bank - San Francisco
MCOT-Thailand Hyundai Corporate Culture Office - Korea
Australis-Australia National Cattlemens' Assn. - Colorado
Swiss Television-Switzerland Nissan Motors - Tennessee
RTBF-Belgium Primerica - Georgia
Gameshow Network-California PSE&G Training Center - New Jersey
Trane Corporation - Tennessee
Post-Production Independent Videographers
- --------------- -------------------------
Armour Productions - California Christie Entertainment -Illinois
Cable Video Entertainment - New Jersey Colin Campbell Communications - North Carolina
China Motion Picture Co. - Taiwan Eric Blum Productions - California
Helical Post - Colorado Innovision - Pennsylvania
Studio Hamburg - Germany Northwest Video - Washington
Terra Firma Productions - California Spot Productions - California
The Video Company - Louisiana Video Vision - Maryland
Video Imagen Communications Ltd. - Brazil Video Productions - Florida
Marketing
The Company's marketing efforts are targeted at users of broadcast and
desktop post production suites, and at home video editing enthusiasts. In order
to increase awareness of its products, the Company
-10-
attends a number of tradeshows, the major ones being National Association of
Broadcasters (NAB) show and the Comdex show, both in the United States, and the
International Broadcasters Convention (IBC) in Europe. The Company uses targeted
direct mail campaigns and advertisements in trade and computer publications for
most of its product lines.
Sales
The Company sells its broadcast and desktop products to end users
through an established domestic and international network of independent dealers
and through OEMs. The Company also maintains a sales management organization
consisting of six US regional sales managers and five international regional
sales managers primarily responsible for supporting independent dealers and
making direct sales in geographic regions without dealer coverage or to
customers that prefer to transact directly with the Company. The Company sells
its consumers products through large consumer electronic chains and through
direct customer orders placed by phone or through the Company's web site.
The Company's broadcast and desktop products are sold to end users
through independent dealers who specialize in selling video production
equipment. As of June 30, 1997, the Company had over 170 dealers covering more
than 40 countries. These independent dealers are selected for their ability to
provide effective field sales and technical support to the Company's customers.
Dealers generally carry the Company's products as demonstration units, advise
customers on system configuration and installation and perform ongoing
post-sales customer support. The Company believes that many end users depend on
the technical support offered by independent dealers in making product purchase
decisions. In North America, the Company manages its independent dealers with
six regional sales managers and independent sales representatives. In Europe,
the Company manages its independent dealers with an office of twelve people
located in the United Kingdom. Independent dealers in the Far East are managed
by regional sales managers located in Japan and Singapore. Central and South
America is managed by a regional sales manager located in Miami, Florida. No
single dealer individually accounted for more than 10% of the Company's net
sales in fiscal 1997, 1996 or 1995.
The Company sells and distributes its products through OEMs that
incorporate the Company's products into their video editing products and resell
these products to other resellers and end users. OEM partners generally purchase
the Company's products and are responsible for conducting their own marketing,
sales and support activities. The Company attempts to identify and align itself
with OEMs that are market share and technology leaders in the Company's target
market segments.
In particular, the Company is highly dependent on sales of Alladin and
Genie to Avid. Avid is a leading supplier of digital, nonlinear video and audio
editing systems for the professional video and film editing market. Sales to
Avid accounted for approximately 26.4% of net sales in fiscal 1997, and 43.3% of
sales in fiscal 1996. No customer accounted for more than 10% of the Company's
net sales during fiscal 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 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. 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.
With the introduction of the Genie product line, the Company adopted a
similar OEM distribution
-11-
strategy. The Company expects that a substantial portion of sales of the Genie
product line will continue to be to OEMs who could also develop and offer
products which compete with Genie. The Company is dependent upon these resellers
to assist it in promoting market acceptance of the professional video products
and desktop video systems and creating demand for the Company's products. There
can be no assurance that these dealers and OEMs will devote the resources
necessary to provide effective sales and marketing support to the Company. In
addition, there is a risk that these dealers may give higher priority to
products of other suppliers, thus reducing their efforts to sell the Company's
products. If a significant number of its dealers were to experience financial
difficulties, or otherwise become unable or unwilling to promote, sell or pay
for the Company's products, the Company's results of operations would be
adversely affected.
The Company's consumer products are sold through a different channel
than the Company's other products. VideoDirector Suite and VideoDirector Studio
200 products are sold primarily through large computer software distributors
such as Ingram Micro Inc. who then distribute the products to large computer
software and hardware retailers such as CompUSA, ComputerCity, and Egghead
Software who in turn sell the products to end-users. The Company also sells its
VideoDirector products directly to some retailers such as The Good Guys. In
addition, VideoDirector products are sold via direct telemarketing, mail order
and over the Internet. The consumer market is characterized by longer payment
terms and higher sales returns than the Company's broadcast and desktop markets.
There can be no assurance that computer retailers will continue to stock and
sell the Company's VideoDirector products. If a significant number of computer
retailers were to discontinue selling VideoDirector products, the Company's
results of operations would be adversely affected.
Sales outside of North America represented approximately 39.7%, 38.7%
and 46.5% of the Company's net sales for fiscal 1997, 1996 and 1995,
respectively. All of the Company's international sales through fiscal 1994 were
denominated in U.S. dollars. In fiscal 1995, the Company began foreign currency
denominated sales in the United Kingdom. From time to time the Company makes
foreign currency denominated sales in other countries, but the dollar amount was
nominal during fiscal 1997. It is likely that the Company will increase the
amount of sales denominated in foreign currency during fiscal 1998, especially
for sales of Consumer products into Europe. International sales and operations
may be subject to risks such as currency fluctuations, the imposition of
governmental controls, export license requirements, restrictions on the export
of critical technology, generally longer receivable collection periods,
political instability, trade restrictions, changes in tariffs, difficulties in
staffing and managing international operations, potential insolvency of
international dealers and difficulty in collecting accounts receivable. There
can be no assurance that these factors will not have an adverse effect on the
Company's future international sales and, consequently, on the Company's
business, operating results and financial condition.
Service and Support
The Company believes that its ability to provide customer service and
support is an important element in the marketing of its products. The customer
service and support operation also provides the Company with a means of
understanding customer requirements for future product enhancements. The Company
maintains an in-house repair facility and also provides telephone access to its
technical support staff. The Company's technical support engineers not only
provide assistance in diagnosing problems, but work closely with customers to
address system integration issues and to assist customers in increasing the
efficiency and productivity of their systems. The Company supports its customers
in Europe and Asia primarily through its international dealers. The Company
typically warrants its products against defects in materials and workmanship for
one year after shipment to the dealer. The Company believes its warranties are
similar to those offered by other video production equipment suppliers. To date,
the Company has not
-12-
encountered any significant product maintenance problems.
Competition
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over the
life of a product. Competition is fragmented with several hundred manufacturers
supplying a variety of products to this market. The Company anticipates
increased competition in the video post-production equipment market from both
existing manufacturers and new market entrants.
Competition for Pinnacle's broadcast products are generally based on
product performance, breadth of product line, service and support, market
presence and price. The Company believes that it competes favorably for sales of
video production equipment used in traditional editing suites in situations
where price/performance is a primary factor in equipment selection. The
Company's principal competitors in this market include Scitex Video (a division
of Scitex Corporation Ltd.)("Scitex"), The Grass Valley Group, Inc. (a
subsidiary of Tektronix, Inc.) ("Grass Valley Group"), Matsushita Electric
Industrial Co. Ltd. ("Matsushita"), Quantel Ltd. (a division of Carlton
Communications Plc) ("Quantel") and Sony Corporation ("Sony"), each of which has
substantially greater financial, technical, marketing, sales and customer
support resources, greater name recognition and larger installed customer bases
than the Company. In addition, these companies have established relationships
with current and potential customers of the Company. Some of the Company's
competitors also offer a wide variety of video equipment, including professional
video tape recorders, video cameras and other related equipment. In some cases,
these competitors may have a competitive advantage based upon their ability to
bundle their equipment in certain large system sales.
The Company expects that potential competition in the desktop market
may come from a number of potential groups of video companies such as
traditional video equipment suppliers, providers of desktop editing solutions,
video software application companies, or others. Suppliers of traditional video
equipment such as Grass Valley Group, Matsushita, Quantel, Scitex and Sony have
the financial resources and technical know-how to develop high quality real time
video manipulation products for the desktop video market. Suppliers of desktop
editing video systems such as Avid Technology, Media 100, Fast Electronic,
Matrox, Newtek, Inc., Truevision, Inc.and Scitex Video, which have established
desktop video distribution channels, experience in marketing low price products
and significant financial resources, may acquire or develop high quality real
time video manipulation products for the desktop video market. Suppliers of
video manipulation software such as Adobe Systems, Inc. or SoftImage, a
subsidiary of Microsoft Corporation may develop products which compete directly
with the Company's real time manipulation products. The software products
supplied by these companies are, and will continue to be, significantly less
expensive than the systems marketed by the Company, but they generally require
lengthy rendering time and therefore do not provide the real time capabilities
currently offered by both Alladin and Genie.
Increased competition could result in price reductions, reduced margins
and loss of market share, all of which would materially and adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors.
Manufacturing and Suppliers
The Company's manufacturing operations, located at its Mountain View,
California facility, consist primarily of testing printed circuit assemblies,
final product assembly, configuration and testing, quality
-13-
assurance and shipping for the Company's broadcast and desktop products.
Manufacturing of the Company's consumer products is performed by an independent
subcontractor and products are generally shipped directly to the distributor or
retailer. Each of the Company's products undergoes quality inspection and
testing at the board level and final assembly stage. The Company manages its
materials with a software system that integrates purchasing, inventory control
and cost accounting.
The Company relies on independent subcontractors who manufacture to the
Company's specifications major subassemblies used in the Company's products.
This approach allows the Company to concentrate its manufacturing resources on
areas where it believes it can add the most value, such as product testing and
final assembly, and reduces the high cost of owning and operating a full scale
manufacturing facility. The Company has manufacturing agreements with Quadrus, a
division of Bell Microproducts, Inc., for the manufacture of major subassemblies
used in its broadcast and desktop products, and with Solectron for the
manufacture of the Company's consumer products. The Company's reliance on
subcontractors to manufacture major subassemblies used in its products involves
a number of significant risks including the loss of control over the
manufacturing process, the potential absence of adequate capacity, the
unavailability of or interruptions in access to certain process technologies and
reduced control over delivery schedules, manufacturing yields, quality and
costs. In the event that any significant subcontractor were to become unable or
unwilling to continue to manufacture these subassemblies in required volumes,
the Company's business, operating results and financial condition would be
materially adversely affected.
To the extent possible, the Company and its manufacturing
subcontractors use standard parts and components available from multiple
vendors. However, the Company and its subcontractors are dependent upon single
or limited source suppliers for a number of key components and parts used in all
of its products, including a proprietary application specific integrated
circuits manufactured only by LSI Logic Corp., several video processing
integrated circuits manufactured only by Raytheon Corporation, field
programmable gate arrays manufactured only by Altera Corporation and serial RAM
memory modules manufactured only by Hitachi, Ltd. The Company's manufacturing
subcontractors generally purchase these single or limited source components
pursuant to purchase orders placed from time to time in the ordinary course of
business, do not carry significant inventories of these components and have no
guaranteed supply arrangements with such suppliers. In addition, the
availability of many of these components to the Company's manufacturing
subcontractors is dependent in part on the Company's ability to provide its
manufacturers, and their ability to provide suppliers, with accurate forecast of
its future requirements. The Company and its manufacturing subcontractors
endeavor to maintain ongoing communication with its suppliers to guard against
interruptions in supply. Any extended future interruption or limitation of any
of the components currently obtained from single or limited source suppliers
could result in delays or reductions in product shipments which would have a
material adverse effect on the Company's results of operations. Also, because of
the reliance on these single or limited source components, the Company may be
subject to increases in component costs which could have an adverse effect on
the Company's results of operations. The Company has experienced interruptions
in the supply of certain key integrated circuits from suppliers which
accordingly delayed product shipments, and any extended interruption or
reduction in the future supply of any key components currently obtained from a
single or limited source could have a significant adverse effect on the
Company's business, operating results and financial condition in any given
period.
In the traditional video market segment, the Company's customers
generally order on an as-needed basis. The Company typically ships its products
within 30 to 60 days of receipt of an order, depending on customer requirements,
although certain customers, including OEMs, may place substantial orders with
the expectation that shipments will be staged over several months. A substantial
majority of product shipments in a period relate to orders received in that
period, and accordingly, the Company generally operates with a limited backlog
of orders. The absence of a significant historical backlog means that quarterly
results are
-14-
difficult to predict and delays in product delivery and in the closing of sales
near the end of a quarter can cause quarterly revenues to fall below anticipated
levels. In addition, customers may cancel or reschedule orders without
significant penalty and the prices of products may be adjusted between the time
the purchase order is booked into backlog and the time the product is shipped to
the customer. As a result of these factors, the Company believes that the
backlog of orders as of any particular date is not necessarily indicative of the
Company's actual sales for any future period.
Proprietary Rights and Licenses
The Company's ability to compete successfully and achieve future
revenue growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company
relies on a combination of patent, copyright, trademark and trade secret laws
and other intellectual property protection methods to protect its proprietary
technology. In addition, the Company generally enters into confidentiality and
nondisclosure agreements with its employees and OEM customers and limits access
to and distribution of its proprietary technology. The Company currently holds
two United States patent covering certain aspects of the technologies utilized
by Prizm and DVExtreme. Although the Company intends to pursue a policy of
obtaining patents for appropriate inventions, the Company believes that the
success of its business will depend primarily on the innovative skills,
technical expertise and marketing abilities of its personnel, rather than upon
the ownership of patents. Certain technology used in the Company's products is
licensed from third parties on a royalty-bearing basis. Such royalties to date
have not been, and are not expected to be, material. Generally, such agreements
grant to the Company nonexclusive, worldwide rights with respect to the subject
technology and terminate only upon a material breach by the Company.
The Company has in the past received communications suggesting that its
products may utilize concepts covered by patent rights of third parties and, in
the future, may receive communications asserting that the Company's products
infringe patents or other intellectual property rights of third parties. There
can be no assurance that there will not be any future such communications. The
Company's policy is to investigate the factual basis of such communications and
to negotiate licenses where appropriate. While it may be necessary or desirable
in the future to obtain licenses relating to one or more of its products, or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all. There
can be no assurance these or other future communications can be settled on
commercially reasonable terms or that they will not result in protracted
litigation.
There has been substantial industry litigation regarding patent,
trademark and other intellectual property rights involving technology companies.
In the future, litigation may be necessary to enforce any patents issued to the
Company to protect trade secrets, trademarks and other intellectual property
rights owned by the Company to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of others. Any such litigation could be costly and a
diversion of management's attention, which could have material adverse effect on
the Company's business, operating results and financial condition. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Employees
As of June 30, 1997, the Company had 158 full-time employees, including
47 engaged in engineering and product development activities, 33 in
manufacturing, 68 in marketing and sales and 10 in administration
-15-
and finance. The Company believes that its future success will depend, in part,
on its continuing ability to attract, retain and motivate qualified technical,
marketing and managerial personnel. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced work stoppages. The Company believes that its relations with its
employees are good.
Subsidiaries:
The Company has two subsidiaries which were organized to take advantage of
certain tax benefits related to export sales. The Company established a Domestic
International Sales Corp. ("DISC) in fiscal 1988. In fiscal 1996, the Company
discontinued use of the DISC and established a Foreign Sales Corporation
("FSC"). The FSC provides certain permanent federal income tax benefits for
export sales by the Company.
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, manufacturing and
product development facility is located in Mountain View, California. This
facility occupies approximately 106,500 square feet pursuant to a lease which
commenced August 15, 1996 and which will terminate December 31, 2003. The
Company has also entered into an agreement to sublease approximately 41,500 of
the Mountain View Facility to Network Computing Devices. That sublease agreement
is currently scheduled to terminate on August 31, 1998.
In addition, the Company occupies sales and customer support facilities
in Uxbridge, United Kingdom; Singapore; and Tokyo, Japan consisting of 6,000
square feet, 850 square feet and 350 square feet, respectively. The Company has
two engineering development facilities outside of California. One is in
Gainesville, Florida, consisting of 1,000 square feet and the other is in
Paramus, New Jersey, consisting of approximately 4,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
-16-
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of August 27,
1997 are as follows:
- ---------------------------------- -------- ------------------------------------------------------------------------
Name Age Position
---- --- --------
- ---------------------------------- -------- ------------------------------------------------------------------------
Mark Sanders.................... 54 President, Chief Executive Officer and Director
Ajay Chopra...................... 40 Chairman of the Board, Vice President, General Manager, Desktop
Products
Arthur D. Chadwick............... 40 Vice President, Finance and Administration and Chief Financial Officer
Pat Burns........................ 50 Vice President, Corporate Marketing and Domestic Sales
Brian R. Conner.................. 51 Vice President, Sales, Europe, Africa & Middle East
Tavy A. Hughes................... 42 Vice President, Manufacturing
William Loesch................... 43 Vice President, General Manager, Consumer Products
William Ludwig................... 49 Vice President, Sales, Latin America & Asia
Keith Trickett................... 57 Vice President, General Manager, Deko Products
Robert Wilson.................... 43 Vice President, General Manager, Broadcast Products
- ---------------------------------- -------- ------------------------------------------------------------------------
Mr. Sanders has served as President, Chief Executive Officer and a
director of the Company since January 1990. From 1988 to 1990, Mr. Sanders was
an independent business consultant. Prior to that time, Mr. Sanders served in a
variety of management positions, most recently as Vice President and General
Manager of the Recording Systems Division, of Ampex Incorporated, a manufacturer
of video broadcast equipment.
Mr. Chopra, a founder of the Company, has served as Chairman of the
Board of Directors since January 1990, and has served as a director of the
Company since its inception in May 1986. Mr. Chopra has served as Vice
President, General Manager, Desktop products since April 1997. He previously
served as Chief Technology Officer from June 1996 to April 1997, Vice President
of Engineering from January 1990 to June 1996, and President and Chief Executive
Officer of the Company from its inception to January 1990. From 1983 to 1986,
Mr. Chopra served as Engineering Supervisor for Mindset Corporation, a computer
graphics manufacturer.
-17-
Mr. Chadwick has served as Vice President, Finance and Administration
and Chief Financial Officer of the Company since January 1989. From February
1987 to January 1989 he served as Plant Manager, Gould Semiconductor,
Philippines, a semiconductor company. From March 1984 to February 1987 he served
as Corporate Controller for Gould Semiconductor Inc., a semiconductor company.
From February 1982 to March 1984 as Controller, Austria Microsystems, an
Austrian subsidiary of American Microsystems, Inc., a semiconductor company.
Mr. Burns has served as Vice President, North American Sales and
Corporate Marketing of the Company since December 1996. From March 1996 to
November 1996, Mr. Burns served as a marketing and strategy consultant to
software developers in the film and video markets. From April 1995 to February
1996, he served as Vice President and General Manager of Video and Graphics
products at Radius, Inc., a graphics company. From May 1994 to April 1995, Mr.
Burns served as Vice President and General Manager of Chyron's West Coast
operations. From April 1993 to May 1994, Mr. Burns served as Director of
International Marketing for VeriFone, Inc., a financial transaction company.
From November 1991 through January 1993, Mr. Burns was Vice President of
Macrovision, Inc., a video encryption company.
Mr. Conner has served as Vice President, Sales of the Company and
General Manager of Pinnacle Systems Ltd., the Company's sales subsidiary
covering Europe, Africa and the Middle East, since February 1995. From January
1993 to February 1995, Mr. Conner was a founder and served as President of BCA
Inc., an independent European sales representative company. From January 1991 to
January 1993, Mr. Conner served as General Manager of European, African and
Middle East Sales of Videomedia, Inc., a manufacturer of video editing systems.
Prior to that, Mr. Conner was Managing Director of Videomedia Europe Ltd., a
European sales representative.
Ms. Hughes has served as Vice President, Manufacturing of the Company
since January 1995, Director of Manufacturing from April 1994 to January 1995
and a Manager from September 1993 until April 1994. From July 1991 to September
1993, Ms. Hughes served as an independent business consultant. From 1985 to June
1991, Ms. Hughes served as Manufacturing Manager of Alta Group, Inc., a
manufacturer of digital video post-production equipment.
Mr. Loesch has served as Vice President, General Manager, Consumer
Products since April, 1997, and as Vice President, New Business Development of
the Company since May 1994. From July 1993 to May 1994, Mr. Loesch served as an
independent business consultant. From June 1990 to November 1992, Mr. Loesch
co-founded and served as President of SHOgraphics Inc., a 3D graphics systems
company, and from November 1992 until July 1993 served as its Executive Vice
President and Chief Technical Officer. From 1989 to June 1990, Mr. Loesch was an
independent business consultant. Prior to that time, Mr. Loesch co-founded and
served as Chief Executive Officer and President of IKOS Systems, Inc., a
computer aided engineering company.
Mr. Ludwig has served as Vice President, Latin American and Far East
Sales of the Company since July 1996. From January of 1996 to June of 1996, Mr.
Ludwig served as Director of Sales for Americas / Pacific Region for FAST
Electronics, a video equipment manufacturer. From 1985 until January 1996, Mr.
Ludwig served in several executive sales positions with Abekas Video Systems, a
video equipment manufacturer, including International Sales Director for
Americas / Pacific Region.
Mr. Trickett has served as Vice President, Deko Products since April
1997. Prior to that, Mr. Trickett served as the President and CEO of Digital
GraphiX Inc, from November 1994 until the recent acquisition of its Deko product
by Pinnacle in April 1997. Mr. Trickett was President of Montage Group Ltd., a
video company, from August 1993 to September of 1994, and before that spent nine
years with Techexport Inc and
-18-
an Executive Director and Vice President of Strategic Planning, and European
Operations.
Mr. Wilson has served as Vice President, Broadcast Products since April
1997. From May 1994 to April 1997, Mr. Wilson served as Executive Vice
President, Chief Operating Officer and Chief Financial officer of Accom, Inc., a
video company. Mr. Wilson has served on the board of directors at Accom since
April 1995. From March 1991 to April 1994, Mr. Wilson served as President and
Chief Executive Officer of The Grass Valley Group (a subsidiary of Tektronix,
Inc.), which provides video systems to the high-end production, post-production
and broadcast market. From March 1989 to March 1991, Mr. Wilson was a Vice
President of the Merchant Banking Group of Wasserstein Perella & Co., Inc., an
investment bank; in that capacity, he was Chief Financial Officer and director
of the Wickes Companies, which was an affiliate of Wasserstein Perella.
-19-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to
Note 11 of Notes to Consolidated Financial Statements in the Company's 1997
Annual Report to Shareholders for the fiscal year ended June 30, 1997, filed as
Exhibit 13.1 hereto (the "Annual Report to Shareholders").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the captions entitled "Statement of Operations Data" and "Balance Sheet Data" in
of the Company's Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
pages F-1 to F-14 of the Company's Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
directors is incorporated by reference from the section captioned "Election of
Directors" contained in the Company's Proxy Statement related to the Annual
Meeting of Shareholders to be held October 28, 1997, to be filed by the Company
with the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the
"Proxy Statement"). The information required by this item concerning executive
officers is set forth in Part I of this Report. The information required by this
item concerning compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the section captioned " Section 16(a) Beneficial
Ownership Reporting Compliance" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section captioned "Executive Compensation and Other Matters" contained in
the Proxy Statement.
-20-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the section captioned "Record Date and Principal Share Ownership" contained in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions With Management" contained in the Proxy
Statement.
-21-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The financial statements are incorporated by reference in Item 8 of
this Report:
Independent Auditors' Report
Consolidated Balance Sheets, June 30, 1997 and 1996
Consolidated Statements of Operations for years ended June 30, 1997, 1996 and
1995
Consolidated Statements of Shareholders' Equity for the years ended June 30,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996
and 1995 Notes to Financial Statements
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a)(3) Exhibits
3.1(1) Restated Articles of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant, as amended to date.
4.1(2) Preferred Share Rights Agreement, dated December
12, 1996, between Registrant and Chase Mellon
Shareholder Services, L.L.C.
10.1(1) Registration Rights Agreement, dated December
21, 1990, as amended on September 9, 1993.
10.2(1) Series G Preferred Stock Purchase Agreement,
dated September 9, 1993.
10.3(1) 1987 Stock Option Plan, as amended, and form of
agreements thereto.
10.4(3) 1994 Employee Stock Purchase Plan, as amended
and form of agreement thereto.
10.5(1) 1994 Director Stock Option Plan, and form of
agreement thereto.
10.6(1) Form of Indemnification Agreement between the
Registrant and its officers and directors.
10.7(1) Business Loan Agreement and ancillary documents
thereto between Registrant and Imperial Bank,
dated January 3, 1994.
10.8(1) Amendment to Business Loan Agreement between
Registrant and Imperial Bank, dated October 12,
1994.
10.9(1) Software Development and License Agreement,
effective as of November 23, 1987, between
Registrant and CrystalGraphics, Inc.
10.10*(1) Systems Marketing Agreement, dated December 7,
1990, as amended, between Registrant and BTS
Broadcast Television Systems.
10.11*(1) Development and Original Equipment Manufacturing
and Supply Agreement, dated March 16, 1994,
between Registrant and Avid Technology, Inc.
10.12*(1) Value-added Reseller Agreement, dated July 15,
1994, between Registrant and Matrox Corporation.
10.13*(1) Letter Agreement, dated December 17, 1993,
between Registrant and Capital
-22-
Cities/ABC, Inc.
10.14(1) Master Agreement, dated March 4, 1994, between
Registrant and Bell Microproducts, Inc.
10.15*(1) Contract Services Agreement, dated May 31, 1994,
between Registrant and Liberty Contract
Services, a division of Wyle Laboratories.
10.16.1(1) Industrial Lease Agreement, dated July 20, 1992,
as amended, between Registrant and Aetna Life
Insurance Company.
10.16.2(4) Amendment to Industrial Lease Agreement, dated
June 8, 1995 between Registrant and Aetna Life
Insurance Company.
10.17(1) Agreement, dated September 8, 1994, between
Registrant and Mark L. Sanders.
10.18.1(5) Agreement Concerning Assignment of Leases, dated
June 5, 1996, between Registrant and Network
Computing Devices, Inc.
10.18.2(5) Assignment and Modification of Leases, dated
August 16, 1996, between Registrant, Network
Computing Devices, Inc. and D.R. Stephens &
Company.
10.19.1(6)* OEM Agreement between Registrant and Data
Translation, Incorporated.
10.19.2(6)* Amendment to OEM Agreement between Registrant
and Data Translation, Incorporated.
10.20(7) Industrial Lease Agreement, dated November 19,
1996 between Registrant and CNC Grand Union
Limited.
10.21(8) 1996 Stock Option Plan, and form of agreements
thereto.
10.22(8) 1996 Supplemental Stock Option Plan, and form of
agreements thereto.
10.23 Lease Agreement, dated July 28, 1995, between
Digital Graphics Incorporated and Allied
Securities Co.
11.1 Statement of Computation of Net Income (Loss)
Per Share.
13.1 Portions of Annual Report to Shareholders for
the fiscal year ended June 30, 1997.
22.1 List of subsidiaries of the Registrant.
23.1 Report on Financial Statement Schedule and
Consent of Independent Auditors Schedule.
24.1 Power of Attorney (See Page 25).
27.1 Financial Data Schedule.
- ------------------
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
1 Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S- 1 (Reg. No. 33-83812) as declared
effective by the Commission on November 8, 1994.
2 Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 8-A (Reg. No. 000-24784) as declared
effective by the Commission on February 17, 1997.
3 Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (Reg. No. 333-25697) as filed on
April 23, 1997.
4 Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995.
5 Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996.
6 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the three months ended September 27, 1996.
7 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the three months ended December 27, 1996.
-23-
8 Incorporated by reference by reference to exhibits filed with
Registrant's Registration Statement on Form S-8 (Reg. No. 333-16999) as
filed on November 27, 1996.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the last quarter of the fiscal year ended June
30, 1997.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedule. See Item 14(a)(2) above.
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
By: /s/ MARK L. SANDERS
--------------------------------------
Mark L. Sanders
President, Chief Executive Officer and
Director
Date: August 28, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark L. Sanders and Arthur D. Chadwick,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ MARK L. SANDERS President, Chief Executive Officer and Director August 28, 1997
- ------------------------------- (Principal Executive Officer)
Mark L. Sanders
/s/ ARTHUR D. CHADWICK Vice President, Financial and Administration and August 28, 1997
- ------------------------------- Chief Financial Officer (Principal Financial and
Arthur D. Chadwick Accounting Officer)
/s/ AJAY CHOPRA Chairman of the Board, Vice President, Desktop August 28, 1997
- ------------------------------- Products
Ajay Chopra
/s/ JOHN LEWIS Director August 28, 1997
- -------------------------------
John Lewis
-25-
/s/ CHARLES J. VAUGHAN Director August 28, 1997
- -------------------------------
Charles J. Vaughan
/s/ NYAL D. McMULLIN Director August 28, 1997
- -------------------------------
Nyal D. McMullin
/s/ GLENN E. PENISTEN Director August 28, 1997
- -------------------------------
Glenn E. Penisten
-26-
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Provision Balance
beginning charged to Account at end
of period expense charge-off of period
--------- ------- ---------- ---------
Year ended June 30, 1995, allowance for doubtful
accounts and returns............................. $173 $204 $16 $361
==== ==== === ====
Year ended June 30, 1996, allowance for doubtful
accounts and returns............................. $361 $522 $43 $840
==== ==== === ====
Year ended June 30, 1997, allowance for doubtful
accounts and returns............................. $840 $1,151 $237 $1,754
==== ====== ==== ======
S-1
EXHIBIT INDEX
(a)(3) Exhibits
3.1(1) Restated Articles of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant, as amended to date.
4.1(2) Preferred Share Rights Agreement, dated December
12, 1996, between Registrant and Chase Mellon
Shareholder Services, L.L.C.
10.1(1) Registration Rights Agreement, dated December
21, 1990, as amended on September 9, 1993.
10.2(1) Series G Preferred Stock Purchase Agreement,
dated September 9, 1993.
10.3(1) 1987 Stock Option Plan, as amended, and form of
agreements thereto.
10.4(3) 1994 Employee Stock Purchase Plan, as amended
and form of agreement thereto.
10.5(1) 1994 Director Stock Option Plan, and form of
agreement thereto.
10.6(1) Form of Indemnification Agreement between the
Registrant and its officers and directors.
10.7(1) Business Loan Agreement and ancillary documents
thereto between Registrant and Imperial Bank,
dated January 3, 1994.
10.8(1) Amendment to Business Loan Agreement between
Registrant and Imperial Bank, dated October 12,
1994.
10.9(1) Software Development and License Agreement,
effective as of November 23, 1987, between
Registrant and CrystalGraphics, Inc.
10.10*(1) Systems Marketing Agreement, dated December 7,
1990, as amended, between Registrant and BTS
Broadcast Television Systems.
10.11*(1) Development and Original Equipment Manufacturing
and Supply Agreement, dated March 16, 1994,
between Registrant and Avid Technology, Inc.
10.12*(1) Value-added Reseller Agreement, dated July 15,
1994, between Registrant and Matrox Corporation.
10.13*(1) Letter Agreement, dated December 17, 1993,
between Registrant and Capital
Cities/ABC, Inc.
10.14(1) Master Agreement, dated March 4, 1994, between
Registrant and Bell Microproducts, Inc.
10.15*(1) Contract Services Agreement, dated May 31, 1994,
between Registrant and Liberty Contract
Services, a division of Wyle Laboratories.
10.16.1(1) Industrial Lease Agreement, dated July 20, 1992,
as amended, between Registrant and Aetna Life
Insurance Company.
10.16.2(4) Amendment to Industrial Lease Agreement, dated
June 8, 1995 between Registrant and Aetna Life
Insurance Company.
10.17(1) Agreement, dated September 8, 1994, between
Registrant and Mark L. Sanders.
10.18.1(5) Agreement Concerning Assignment of Leases, dated
June 5, 1996, between Registrant and Network
Computing Devices, Inc.
10.18.2(5) Assignment and Modification of Leases, dated
August 16, 1996, between Registrant, Network
Computing Devices, Inc. and D.R. Stephens &
Company.
10.19.1(6)* OEM Agreement between Registrant and Data
Translation, Incorporated.
10.19.2(6)* Amendment to OEM Agreement between Registrant
and Data Translation, Incorporated.
10.20(7) Industrial Lease Agreement, dated November 19,
1996 between Registrant and CNC Grand Union
Limited.
10.21(8) 1996 Stock Option Plan, and form of agreements
thereto.
10.22(8) 1996 Supplemental Stock Option Plan, and form of
agreements thereto.
10.23 Lease Agreement, dated July 28, 1995, between
Digital Graphics Incorporated and Allied
Securities Co.
11.1 Statement of Computation of Net Income (Loss)
Per Share.
13.1 Portions of Annual Report to Shareholders for
the fiscal year ended June 30, 1997.
22.1 List of subsidiaries of the Registrant.
23.1 Report on Financial Statement Schedule and
Consent of Independent Auditors Schedule.
24.1 Power of Attorney (See Page 25).
27.1 Financial Data Schedule.
- ------------------
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
1 Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S- 1 (Reg. No. 33-83812) as declared
effective by the Commission on November 8, 1994.
2 Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 8-A (Reg. No. 000-24784) as declared
effective by the Commission on February 17, 1997.
3 Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (Reg. No. 333-25697) as filed on
April 23, 1997.
4 Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995.
5 Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996.
6 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the three months ended September 27, 1996.
7 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the three months ended December 27, 1996.
8 Incorporated by reference by reference to exhibits filed with
Registrant's Registration Statement on Form S-8 (Reg. No. 333-16999) as
filed on November 27, 1996.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the last quarter of the fiscal year ended June
30, 1997.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedule. See Item 14(a)(2) above.