CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------
(In thousands) June 30,
1997 1996
- ------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 32,788 $ 27,846
Marketable securities 15,024 29,315
Accounts receivable, less allowance for doubtful
accounts and returns of $1,754 and $840 as of
June 30, 1997 and 1996, respectively 10,646 7,526
Inventories 5,497 9,611
Deferred taxes -- 2,091
Prepaid expenses and other assets 528 311
-------- --------
Total current assets 64,483 76,700
Property and equipment, net 4,395 2,204
Marketable securities -- 3,973
Deferred taxes -- 1,154
Other assets 1,129 530
-------- --------
$ 70,007 $ 84,561
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,955 $ 1,495
Accrued expenses 2,584 2,621
Deferred revenue 282 247
-------- --------
Total current liabilities 6,821 4,363
-------- --------
Long-term obligations 475 --
Commitments
Shareholders' equity:
Common stock; authorized 15,000 shares; 7,303
and 7,468 issued and outstanding as of
June 30, 1997 and 1996, respectively 75,316 77,902
Deferred compensation, net -- (34)
Retained earnings (deficit) (12,605) 2,330
-------- --------
Total shareholders' equity 62,711 80,198
-------- --------
$ 70,007 $ 84,561
======== ========
- ------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements
</FN>
F-1
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data) FISCAL YEAR ENDED JUNE 30,
1997 1996 1995
- ------------------------------------------------------------------------------------------------
Net sales $ 37,482 $ 46,151 $ 22,193
Cost of sales 23,997 23,854 11,291
-------- -------- --------
Gross profit 13,485 22,297 10,902
-------- -------- --------
Operating expenses:
Engineering and product development 7,579 5,140 2,405
Sales and marketing 12,667 8,907 5,340
General and administrative 3,702 2,186 1,088
In process research and development 4,894 3,991 --
-------- -------- --------
Total operating expenses 28,842 20,224 8,833
-------- -------- --------
Operating income (loss) (15,357) 2,073 2,069
Interest income, net 2,867 3,345 738
-------- -------- --------
Income (loss) before income taxes (12,490) 5,418 2,807
Income tax expense (2,445) (1,734) (567)
-------- -------- --------
Net income (loss) $(14,935) $ 3,684 $ 2,240
======== ======== ========
Net income (loss) per share $ (2.02) $ 0.48 $ 0.44
======== ======== ========
Shares used to compute net income (loss) per share 7,402 7,689 5,110
======== ======== ========
- ------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements
</FN>
F-2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
Convertible Retained Total
preferred stock Common stock Deferred earnings shareholders'
(In thousands) Shares Amount Shares Amount compensation (deficit) equity
- -------------------------------------------------------------------------------------------------------------------------
Balances as of June 30, 1994 1,551 $ 6,504 1,057 $ 328 $ (113) $ (3,594) $ 3,125
Conversion of preferred stock
to common stock (1,551) (6,504) 1,600 6,504 --
Issuance of common stock in
initial public offering, net
of issuance costs of $2,268 -- -- 2,395 21,682 -- -- 21,682
Issuance of common stock
related to stock
plans and warrants -- -- 204 269 -- -- 269
Tax benefit from common
stock option exercise -- -- -- 387 -- -- 387
Amortization of deferred
compensation -- -- -- -- 40 -- 40
Net income -- -- -- -- -- 2,240 2,240
------- -------- ------- -------- --------- -------- --------
Balances as of June 30, 1995 -- $ -- 5,256 $ 29,170 $ (73) $ (1,354) $ 27,743
Issuance of common stock in
secondary public offering, net
of issuance costs of $2,831 -- -- 1,810 43,787 -- -- 43,787
Issuance of common stock
related to stock plans -- -- 402 1,248 -- -- 1,248
Tax benefit from common
stock option exercise -- -- -- 3,697 -- -- 3,697
Amortization of deferred
compensation -- -- -- -- 39 -- 39
Net income -- -- -- -- -- 3,684 3,684
------- -------- ------- -------- --------- -------- --------
Balances as of June 30, 1996 -- $ -- 7,468 $ 77,902 $ (34) $ 2,330 $ 80,198
Issuance of common stock
related to stock plans -- -- 152 1,041 -- -- 1,041
Repurchase of common stock -- -- (317) (3,627) -- -- (3,627)
Amortization of deferred
compensation -- -- -- -- 34 -- 34
Net loss -- -- -- -- -- (14,935) (14,935)
------- -------- ------- -------- --------- -------- --------
Balances as of June 30, 1997 -- $ -- 7,303 $ 75,316 $ -- $(12,605) $ 62,711
======= ======== ======= ======== ========= ======== ========
- -------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
(In thousands) Year Ended June 30,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(14,935) $ 3,684 $ 2,240
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Acquired research and development 4,894 3,991 --
Depreciation and amortization 1,599 736 285
Deferred taxes 3,245 (3,245) --
Tax benefit from exercise of common stock options -- 3,697 387
Loss on disposal of property and equipment 448 -- --
Changes in operating assets and liabilities:
Accounts receivable (3,120) (2,980) (2,755)
Inventories 4,649 (4,073) (2,924)
Accounts payable 2,460 (1,916) 2,350
Accrued expenses (512) 1,307 526
Deferred revenue 35 (170) (674)
Other (349) (152) (93)
-------- -------- --------
Net cash provided by (used in) operating activities (1,586) 879 (658)
-------- -------- --------
Cash flows from investing activities:
Cash payment for acquistions (5,270) (4,412) --
Purchase's of property and equipment (3,880) (1,834) (931)
Purchase's of marketable securities (14,644) (37,448) (9,840)
Proceeds from maturity of marketable securities 32,908 13,000 1,000
-------- -------- --------
Net cash provided by (used in) investing activities 9,114 (30,694) (9,771)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,041 45,035 21,951
Purchase of common stock (3,627) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (2,586) 45,035 21,951
-------- -------- --------
Net increase in cash and cash equivalents 4,942 15,220 11,522
Cash and cash equivalents at beginning of period 27,846 12,626 1,104
-------- -------- --------
Cash and cash equivalents at end of period $ 32,788 $ 27,846 $ 12,626
======== ======== ========
Supplemental disclosures of cash paid during the period:
Interest $ 11 $ 9 $ 23
======== ======== ========
Income taxes $ 442 $ 312 $ 2
======== ======== ========
Non-cash transactions:
Liabilities assumed in acquistion of certain assets
and liabilities $ 978 $ 161 --
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements
</FN>
F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of the Company and Significant Accounting Policies
Company Pinnacle Systems, Inc. and its subsidiaries (the Company) design,
manufacture and sell video post-production tools for high quality real time
video processing.
Basis of Presentation The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation. The Company's
first three fiscal quarters end on the last Friday in September, December and
March, respectively. For financial statement presentation, the Company has
indicated its fiscal quarters as ending on the month-end.
Cash and Marketable Securities The Company considers all highly liquid
investments with a remaining maturity of three months or less at the date of
purchase to be cash equivalents. Marketable securities consist principally of
government securities with maturities between three and eighteen months and are
carried at cost which approximates fair value. These investments are typically
short-term in nature and therefore bear minimal interest rate risk.
All investments are classified as held-to-maturity and are carried at amortized
cost as the Company has both the positive intent and the ability to hold to
maturity. Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to "Interest income." Due to the
relatively short term until maturity, the fair value of marketable securities is
substantially equal to their carrying value as of June 30, 1997. Such
investments mature through December 1997.
Inventories Inventories are stated at the lower of first-in, first-out cost or
market. Raw materials inventory represents purchased materials, components and
assemblies, including fully assembled circuit boards purchased from outside
vendors.
Property and Equipment Purchased property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years. The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," effective as of the beginning of fiscal 1997. This adoption had
no material effect on the Company's financial statements.
Revenue Recognition Revenue on product sales is recognized upon shipment.
Warranty costs are accrued at the time sales are recognized. Provision is made
currently for estimated product returns and price allowances which may occur
under programs the Company has with certain distributors.
Income Taxes Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Net Income (Loss) Per Share Net income per share is computed using the weighted
average number of common shares and dilutive common stock equivalents
outstanding using the treasury stock method. Dilutive common stock equivalents
include convertible preferred stock, stock options and warrants. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued for consideration below the assumed initial public offering (IPO)
price and stock options granted with exercise prices below the IPO price during
the 12-month period preceding the date of the initial filing of the Company's
IPO, even when antidilutive, have been included in the calculation of common
equivalent shares, using the treasury stock method based on the IPO price, as if
they were outstanding for all periods presented prior to the IPO date. The 1995
net income per share amounts are presented on a pro forma basis using the pro
forma weighted average number of common shares outstanding and common share
F-5
equivalents outstanding during the period, after giving retroactive effect to
the automatic conversion of all series of preferred stock into shares of common
stock at the IPO date.
Recent Accounting Pronouncements The Financial Accounting Standards Board
recently issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires the
presentation of basic earnings per share ("EPS") and, for companies with complex
capital structures (or potentially dilutive securities, such as convertible
debt, options and warrants), diluted EPS. SFAS No. 128 is effective for annual
and interim periods ending after December 15, 1997. The Company has not yet
determined the impact of adopting SFAS No. 128.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for annual and interim periods
beginning after December 15, 1997. The Company has not yet determined the impact
of adopting SFAS No. 130.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
Statement establishes standards for the way public business enterprises are to
report information about operating segments in annual Financial Statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. This Statement is
effective for financial statements for periods beginning after December 31,
1997. The Company has not yet determined whether it has any separately
reportable business segments.
Stock-Based Compensation The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" beginning with the fiscal year ended June 30, 1996.
Upon adoption of SFAS No. 123, the Company continued to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB (Accounting Principles Board) Opinion Number 25,
"Accounting for Stock Issued to Employees," and has provided in Note 6 pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
Concentration of Credit Risk The Company distributes and sells its products to
end users primarily through a combination of independent domestic and
international dealers and original equipment manufacturers ("OEMs"). The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral. The Company maintains cash and cash
equivalents, short and long-term investments with various financial
institutions. Company policy is designed to limit exposure with any one
institution. As part of its cash and risk management process, the Company
performs periodic evaluations of the relative credit standing of the financial
institutions. The Company has not sustained material credit losses from these
institutions.
Use of Estimates in Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Note 2 Balance Sheet Components
- --------------------------------------------------------------------------------
June 30,
In thousands 1997 1996
---- ----
- --------------------------------------------------------------------------------
Marketable securities:
Amortized cost $ 14,982 $ 32,872
Accrued interest 42 416
-------- --------
$ 15,024 $ 33,288
======== ========
Inventories:
Raw materials $ 3,554 $ 7,695
Work in process 771 405
Finished goods 1,172 1,511
-------- --------
$ 5,497 $ 9,611
======== ========
Property and equipment:
Machinery and equipment $ 3,462 $ 3,072
Office furniture and fixtures 2,917 747
-------- --------
6,379 3,819
Accumulated depreciation (1,984) (1,615)
-------- --------
$ 4,395 $ 2,204
======== ========
F-6
Accrued expenses:
Payroll and commission related $ 508 $ 382
Taxes payable -- 1,145
Warranty reserve 613 388
Other 1,463 706
-------- --------
$ 2,584 $ 2,621
======== ========
- --------------------------------------------------------------------------------
Note 3 Acquisitions
In April 1997, the Company purchased the Deko titling systems product line and
technology from Digital GraphiX, Inc. The Company paid $5,270,000 in cash, and
assumed liabilities of $978,000. The assets acquired primarily included
intangible assets consisting of software in the development stage and existing
software. The Company acquired inventory and other tangible property of
$593,000; intangible assets including the Deko Brand name, work force-in-place,
and source code technology totaling $762,000; and in process research and
development of $4,894,000. The capitalized intangible assets and purchased
software are being amortized over a seven year period.
In June 1996, the Company purchased certain assets and liabilities from Gold
Disk Inc., a developer and marketer of software products for video editing and
assembly. The Company paid $4,412,000 in cash and assumed liabilities of
$161,000. The assets acquired primarily included intangible assets consisting of
software in the development stage and existing software. The Company acquired
inventory, accounts receivable, and other tangible property of $240,000;
intangible assets including the VideoDirector Brand name, user list, and source
code technology totaling $342,000; and in process research and development of
$3,991,000. The capitalized intangible assets and purchased software are being
amortized over a three year period.
To determine the value of the software in the development stage for both
acquisitions, the Company considered, among other factors, the stage of
development of each project, the time and resources needed to complete each
project, expected income and associated risks. Associated risks include the
inherent difficulties and uncertainties in completing the project and thereby
achieving technological feasibility and risks related to the viability of and
potential changes in future target markets.
Note 4 Commitments
The Company's future minimum commitments under all noncancelable leases at June
30, 1997 are $1,316,000, $1,316,000, $1,307,000, $1,228,000, $1,210,000 and
$1,151,000 for 1998, 1999, 2000, 2001, 2002 and thereafter, respectively. Rental
income from noncancelable subleases will be $305,000 and $40,000 for 1998 and
1999, respectively. Rent expense was $817,000, $343,000 and $256,000 for the
years ended June 30, 1997, 1996, and 1995, respectively.
Note 5 Shareholders' Equity
Common Stock In November 1994, the Company completed its initial public offering
(IPO) selling 2,395,000 shares of common stock for net proceeds of $21,682,000
after underwriting discounts and associated costs. In conjunction therewith,
1,551,000 shares of preferred stock outstanding were converted to 1,600,000
shares of common stock. In July 1995, the Company completed a public selling
offering selling an additional 1,810,000 shares of common stock for net proceeds
of $43,787,000 after underwriting discounts and associated costs.
Stock Repurchase Program In January 1997, the Board of Directors authorized a
stock repurchase program pursuant to which the Company may repurchase up to
750,000 shares of its common stock on the open market. Through June 30, 1997,
the Company has repurchased and retired 317,000 shares at an average purchase
price of $11.43 per share for a total cost of $3,627,000.
F-7
Shareholder Rights Plan In December 1996, the Company adopted a Shareholder
Rights Plan pursuant to which one Right was distributed for each outstanding
share of common stock. Each Right entitles stockholders to buy one
one-thousandth of a share of Series A Participating Preferred Stock at an
exercise price of $65.00 upon certain events.
The Rights become exercisable if a person acquires 15% or more of the Company's
common stock or announces a tender offer that would result in such person owning
15% or more of the Company's common stock. If the Rights become exercisable, the
holder of each Right (other than the person whose acquisition triggered the
exercisability of the Rights) will be entitled to purchase, at the Right's
then-current exercise price, a number of shares of the Company's common stock
having a market value of twice the exercise price. In addition, if the Company
were to be acquired in a merger or business combination after the Rights became
exercisable, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, common stock of the acquiring company having a
market value of twice the exercise price. The Rights are redeemable by the
Company at a price of $0.001 per Right at any time within ten days after a
person has acquired 15% or more of the Company's common stock.
Note 6 Employee Benefit Plans
Stock Option Plans The Company's 1987 Stock Option Plan (the "1987 Plan")
provides for the grant of both incentive and nonstatutory stock options to
employees, directors and consultants of the Company. Pursuant to the terms of
the 1987 Plan, after April 1997 no further shares are available for future
grants.
In September 1994, the shareholders approved the 1994 Directors' Option Plan
(the "Director Plan"), reserving 100,000 shares of common stock for issuance.
The Plan provides for the granting of nonstatutory stock options to non-employee
directors of the Company. Under the Director Plan, upon joining the Board, each
non-employee director automatically receives an option to purchase 5,000 shares
of the Company's common stock vesting over four years. Following each annual
shareholders meeting, each non-employee director receives an option to purchase
1,250 shares of the Company's common stock vesting over a twelve month period.
All Director Plan options are granted at an exercise price equal to fair market
value on the date of grant and have a ten year term. There were 75,000 and
80,000 shares available for grants under the Director Plan at June 30, 1997 and
1996, respectively.
In October 1996, the shareholders approved the 1996 Stock Option Plan (the "1996
Plan"), reserving 370,000 shares of common stock for issuance thereunder. The
1996 Plan provides for grants of both incentive and nonstatutory common stock
options to employees, directors and consultants to purchase common stock at a
price equal to the fair market value of such shares on the grant dates. Options
pursuant to the 1996 Plan are generally granted for a 10-year term and generally
vest over a four-year period. At June 30, 1997, there were 325,000 shares
available for grant under the 1996 Plan. Subject to shareholder approval at the
1997 annual meeting of Shareholders, the Board of Directors approved increasing
the number of shares available for exercise by 365,000 shares.
In November 1996, the Board of Directors approved the 1996 Supplemental Stock
Option Plan (the "1996 Supplemental Plan"), reserving 350,000 shares of common
stock for issuance thereunder. The 1996 Supplemental Plan provides for grants of
nonstatutory common stock options to employees and consultants other than
officers and directors at a price determined by the Board of Directors. Options
pursuant to the 1996 Supplemental Plan are generally granted for a 10-year term
and generally vest over a four-year period. At June 30, 1997, there were 39,000
shares available for grant under the 1996 Supplemental Plan. In July 1997, the
Board of Directors increased the number of shares available for exercise by
500,000.
In addition to the above mentioned plans, an officer of the Company holds 73,000
options at an exercise price of $1.00 and 140,000 options at an exercise price
of $2.25, all of which are outside of the Plan and were exercisable as of June
30, 1997 and 1996.
Stock option activity under stock option plans was as follows:
Available Options Weighted Average
(shares in thousands) For Grant Outstanding Exercise Price
- --------------------------------------------------------------------------------
F-8
Balance at June 30, 1994 597 956 $ 1.45
Additional shares reserved 100 -- --
Exercised -- (188) $ 1.02
Granted (494) 494 $ 11.77
Canceled 14 (14) $ 3.54
- --------------------------------------------------------------------------------
Balance at June 30, 1995 217 1,248 $ 5.57
Additional shares reserved 360 -- --
Exercised -- (367) $ 2.12
Granted (516) 516 $ 20.71
Canceled 139 (139) $ 26.33
- --------------------------------------------------------------------------------
Balance at June 30, 1996 200 1,258 $ 10.50
Additional shares reserved 720 -- --
Exercised -- (81) $ 4.71
Granted (708) 708 $ 11.22
Canceled 227 (248) $ 15.41
- --------------------------------------------------------------------------------
Balance at June 30, 1997 439 1,637 $ 10.35
The following table summarizes stock options outstanding and execisable at June
30, 1997.
Outstanding Exercisable .
------------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Shares Remaining Exercise Shares Exercise
Price Range in thousands Life in years Price In thousands Price
$ 0.85 to 6.25 512 4.1 $ 3.05 441 $ 2.67
$10.00 to 11.19 437 9.2 $10.19 17 $10.49
$11.50 to 16.00 507 8.9 $14.27 97 $15.30
$17.00 to 31.75 181 8.2 $20.38 79 $19.81
- -----------------------------------------------------------------------------------------------------------
Total 1,637 7.4 $10.35 634 $6.96
Stock Compensation The Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees". In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Issued to
Employees" which established a fair value based method of accounting for
employee stock option plans. The Company has elected to adopt the disclosure
method of SFAS No. 123. The fair value of options at date of grant was estimated
using the Black-Scholes option pricing model with the following assumptions:
Employee Stock Options Stock Purchase Plan
Year ended June 30, Year ended June 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
- --------------------------------------------------------------------------------
Expected life (in years) 6 6 .5 .5
Risk-free interest rate 6.33% 6.01% 5.89% 5.46%
Volatility 55.5% 55.5% 55.5% 55.5%
Dividend yield 0% 0% 0% 0%
Had compensation expense for the Company's stock based compensation plans been
determined consistent with SFAS No. 123, the Company's net income (loss) and net
income (loss) per share would have been as follows:
Year ended June 30,
-------------------
F-9
1997 1996
---- ----
- --------------------------------------------------------------------------------
Net income (loss)
As reported $ (14,935,000) $ 3,684,000
Pro forma $ (17,245,000) $ 2,418,000
Earnings (loss) per share
As reported $ (2.02) $ 0.48
Pro forma $ (2.33) $ 0.31
Because the method of accounting prescribed by SFAS No. 123 has not been applied
to options granted prior to July 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Retirement Plan The Company has a defined contribution 401(k) plan covering
substantially all of its domestic employees. Participants may elect to
contribute up to 15% of their eligible earnings to this plan (up to the
statutory maximum amount). The Company can make discretionary contributions to
the plan determined solely by the Board of Directors. The Company has not made
any such contributions to the plan to date.
Stock Purchase Plan The Company has a 1994 Employee Stock Purchase Plan (the
"Purchase Plan") under which all eligible employees may acquire Common Stock at
the lesser of 85% of the closing sales price of the stock at specific,
predetermined dates. In April 1997, the shareholders increased the number of
shares authorized to be issued under the Purchase Plan to 350,000 shares, of
which 238,000 are available for issuance at June 31, 1997. Employees purchased
72,000, 34,000 and 6,000 shares for the years ended June 30, 1997, 1996 and
1995, respectively.
Note 7 Income Taxes
A summary of the components of income tax expense follow:
- --------------------------------------------------------------------------------
Year ended June 30,
-------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
- --------------------------------------------------------------------------------
Current:
U.S federal $ (841) $ 1,185 $ 886
State 5 539 242
Foreign 36 15 5
Less: benefit of net operating losses -- (457) (953)
------- ------- -------
Total current 1,282 180
Deferred:
U.S. Federal 2,467 (2,467) --
State 778 (778) --
------- ------- -------
Total deferred 3,245 (3,245) --
F-10
Charge in lieu of taxes attributable to
employer stock option plans -- 3,697 387
------- ------- -------
Total tax expense $ 2,445 $ 1,734 $ 567
======= ======= =======
- --------------------------------------------------------------------------------
Total income tax expense differs from expected income tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to profit (loss)
before taxes) as follows:
- --------------------------------------------------------------------------------
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
(in thousands)
- --------------------------------------------------------------------------------
Income tax expense (benefit) at federal
statutory rate $(4,246) $ 1,842 $ 954
State income taxes, net of federal income
tax benefit 5 738 143
Domestic international sales corporation
benefit -- -- (215)
Termination of domestic international sales
corporation election -- 566 --
Unutilized net operating loss 3,305 -- --
Research tax credit -- -- (81)
Change in beginning of the year valuation
allowance 3,245 (1,572) (311)
Other, net 136 160 77
------- ------- -------
$ 2,445 $ 1,734 $ 567
======= ======= =======
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities as of June 30, 1997, 1996
and 1995, are as follows:
- --------------------------------------------------------------------------------
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
(in thousands)
- --------------------------------------------------------------------------------
Deferred tax assets:
Accrued expense and reserves $ 3,965 $ 1,682 $ 811
Acquired intangibles 3,410 1,622 --
Net operating loss carry forwards 1,121 122 792
Tax credit carryforwards 1,225 286 560
Other 53 146 --
------- ------- -------
Total gross deferred tax assets 9,774 3,858 2,163
Less: valuation allowance (9,243) -- (2,115)
------- ------- -------
Net deferred tax assets 531 3,858 48
------- ------- -------
Deferred tax liabilities:
Accumulated domestic international
sales corporation income (503) (566) --
Fixed assets and other assets (28) (47) (48)
------- ------- -------
Total gross deferred tax
liabilities (531) (613) (48)
------- ------- -------
Net deferred tax assets $ -- $ 3,245 $ --
======= ======= =======
- --------------------------------------------------------------------------------
As of June 30, 1997, the Company has federal and state net operating loss
carryforwards of $3,065,000 and $1,349,000, respectively, which expire from 2002
to 2012. The Company also has federal research and
F-11
experimentation and alternative minimum tax credit carryforwards of $886,000
which expire between 2006 and 2012, and state research and experimentation
credit carryforwards of $339,000 which have no expiration provision. Included in
gross deferred tax assets above is approximately $300,000 related to stock
option compensation for which the benefit, when realized, will be recorded to
equity.
Note 8 Industry and Geographic Information
The Company markets its products in North America and in foreign countries
through its sales personnel, dealers, distributors and subsidiaries. Export
sales account for a significant portion of the Company's net sales. Net sales
are summarized by geographic areas as follows:
- --------------------------------------------------------------------------------
Year ended June 30,
-------------------
1997 1996 1995
-----------------------------------------
- --------------------------------------------------------------------------------
North America 60% 61% 53%
Europe 26 26 26
Rest of World 14 13 21
----- ----- ----
100% 100% 100%
- --------------------------------------------------------------------------------
One customer, Avid Technology, Inc. (Avid), accounted for approximately 26.4%
and 43.3% of the Company's net sales for the years ended June 30, 1997 and 1996,
respectively. Avid also accounted for approximately 20.0% and 36.7% of net
accounts receivable at June 30, 1997 and 1996, respectively. No customer
accounted for 10% of the Company's net sales at the year ended June 30, 1995.
Note 9 Related Parties
The Company and Bell Microproducts Inc. ("Bell") are parties to an agreement
("the Agreement") under which value-added turnkey services are performed by Bell
on behalf of the Company. Pursuant to the Agreement, Bell builds certain
products in accordance with the Company's specifications. A director of the
Company is also a director of Bell. During the years ended June 30, 1997, 1996
and 1995, the Company purchased materials totaling $4,451,000, $16,466,000 and
$8,286,000, respectively, from Bell pursuant to the Agreement.
Note 10 Subsequent Events
On July 22, 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 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.
F-12
Note 11 Quarterly Financial Data (Unaudited)
Summarized quarterly financial information for fiscal 1997 and 1996 is as
follows:
- -----------------------------------------------------------------------------------------
(thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------------------
Fiscal 1997:
Net sales $ 11,443 $ 5,345 $ 8,265 $ 12,430
Gross profit (loss) 5,447 (1,983) 3,556 6,466
In process research and development -- -- -- (4,894)
Income (loss) from operations 207 (7,986) (2,038) (5,539)
Net income (loss) 612 (9,344) (1,319) (4,883)
Net income (loss) per share 0.08 (1.25) (0.18) (0.67)
Shares used to compute
net income (loss) per share 7,823 7,505 7,353 7,276
Market price range for Common Stock
High 21.00 13.25 14.75 18.75
Low 11.19 9.50 9.75 13.00
Fiscal 1996:
Net sales $ 9,321 $ 11,845 $ 12,766 $ 12,219
Gross profit 4,510 5,706 6,192 5,889
In process research and development -- -- -- (3,991)
Income (loss) from operations 1,261 1,639 1,820 (2,647)
Net income (loss) 1,263 1,732 1,822 (1,133)
Net income (loss) per share 0.17 0.22 0.23 (0.15)
Shares used to compute
net income (loss) per share 7,534 7,911 7,894 7,417
Market price range for Common Stock
High 32.50 34.75 25.25 29.25
Low 22.50 24.38 16.00 17.75
- -----------------------------------------------------------------------------------------
The Company has not paid any dividends since its inception and does not intend
to pay any dividends in the foreseeable future.
The common stock of the Company has been traded on the Nasdaq National market
under the symbol PCLE since the Company's initial public offering in November
1994. Prior to that time, there was no public market for the Company's common
stock.
At August 19, 1997, there were 76 shareholders of record.
F-13
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PINNACLE SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of
Pinnacle Systems, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KMPG PEAT MARWICK LLP
Palo Alto, California
July 22, 1997
F-14
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) FISCAL YEAR ENDED JUNE 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 37,482 $ 46,151 $ 22,193 $ 10,230 $ 7,331
Cost of sales 23,997 23,854 11,291 5,057 3,816
-------- -------- -------- -------- --------
Gross profit 13,485 22,297 10,902 5,173 3,515
-------- -------- -------- -------- --------
Operating expenses:
Engineering and product development 7,579 5,140 2,405 1,806 1,447
Sales and marketing 12,667 8,907 5,340 3,274 2,054
General and administrative 3,702 2,186 1,088 567 546
In process research and development 4,894 3,991 -- -- --
-------- -------- -------- -------- --------
Total operating expenses 28,842 20,224 8,833 5,647 4,047
-------- -------- -------- -------- --------
Operating income (loss) (15,357) 2,073 2,069 (474) (532)
Interest income (expense), net 2,867 3,345 738 (90) (282)
Income (loss) before income taxes (12,490) 5,418 2,807 (564) (814)
Income tax expense (2,445) (1,734) (567) (2) (2)
-------- -------- -------- -------- --------
Net income (loss) $(14,935) $ 3,684 $ 2,240 $ (566) $ (816)
======== ======== ======== ======== ========
Net income (loss) per share $ (2.02) $ 0.48 $ 0.44 $ (0.21)
======== ======== ======== ========
Shares used to compute net income (loss) per share 7,402 7,689 5,110 2,745
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
(In thousands) JUNE 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 57,662 $ 72,337 $ 26,588 $ 2,647 $ 275
Total assets 70,007 84,561 32,724 5,904 3,731
Long-term debt 475 -- -- -- --
Retained earnings (deficit) (12,605) 2,330 (1,354) (3,594) (3,028)
Shareholders' equity 62,711 80,198 27,743 3,125 677
- ----------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain Forward-Looking Information
Certain statements in this Management's Discussions and Analysis, elsewhere in
this Annual Report to Shareholders and in the Company's 1997 Annual Report on
Form 10-K into which this discussion and analysis is incorporated are
forward-looking statements based on current expectations, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth below under "Risks and Uncertainties." These
forward-looking statements include the last sentences of the paragraphs below
relating to "Engineering and Product Development" and "Sales and Marketing," the
"Expanding Product Line" section below under "Overview," the statements
regarding the Company's expected investment in property, machinery and equipment
under "Liquidity and Capital Resources" below, among others.
Overview
The Company designs, manufactures, markets and supports video
post-production tools for high quality real time video processing. The Company's
products are used to perform a variety of video manipulation functions,
including the addition of special effects, graphics and titles to multiple
streams of live or previously recorded video material. Pinnacle's strategy is to
leverage its existing market and technological position to continue to provide
innovative, real time, computer based solutions for three video post production
markets which the Company characterizes as the Broadcast, Desktop and the
Consumer video markets.
Broadcast Market
The Broadcast market generally requires very high technical performance
such as real time 10-bit processing, control of multiple channels of live video
and specialized filtering and interpolation. From the Company's inception in
1986 until 1994, substantially all of the Company's revenues were derived from
the sale of products into the Broadcast Market. The primary broadcast products
sold during fiscal 1997 were the Prizm and Flashfile family of products. In June
1997, the Company commenced shipment of DVExtreme and Lightning, two new Windows
NT based products designed to serve the traditional Broadcast market. The
introduction of the DVExtreme and Lightning is expected to slow or replace sales
of Prizm and FlashFile in the fiscal year ending June 30, 1998. The Broadcast
market accounted for approximately 25.4%, 26.1% and 43.3% of net sales in the
years ended June 30, 1997, 1996 and 1995, respectively.
Desktop Market
The Company's Desktop products are designed to provide high quality
real time video manipulation capabilities for computer based video
post-production systems at significantly lower price points than broadcast
products. The Company's first desktop product was the Alladin, which commenced
shipment in June 1994. The Company further expanded the desktop product line
with the introduction of Genie in June 1996. The Desktop market accounted for
approximately 59.8%, 73.5% and 56.7% of net sales in the fiscal years ending
June 30, 1997, 1996 and 1995, respectively.
Consumer Market
The Company's Consumer products provide complete video editing
solutions which allow consumers to edit their home videos using their home PC,
camcorder and VCR. The Company's Consumer products are sold at lower price
points than the Company's other products and are sold as software packages or 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, and commenced shipment of its first internally developed consumer editing
product, the VideoDirector Studio 200, in March 1997. The Consumer market
accounted for approximately 14.8% and 0.4% of net sales in the fiscal years
ending June 30, 1997 and 1996, respectively.
Expanding Product Line
In April 1997, the Company purchased the Deko titling systems product
line and technology from Digital GraphiX, Inc. TypeDeko, in conjunction with
DVExtreme and Lightning furthers Pinnacle's strategy of offering an
interconnected family of Windows NT-based video production systems. In addition,
the Company hired 27
employees from Digital Graphix to help support the ongoing development,
marketing and sales of the Deko product line. The Company paid $5.3 million in
cash, and assumed liabilities of $978,000 for the purchase of the Deko products,
technology and assets. The Company recorded an in process research and
development charge of $4.9 million, and incurred $315,000 related to the
integration of the Deko product line into the Company.
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 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.
Pinnacle 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.
Results of Operations
The following table sets forth, for the periods indicated, certain consolidated
statement of operations data as a percentage of net sales:
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
-------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.0 51.7 50.9
------ ------ ------
Gross profit 36.0 48.3 49.1
Operating expenses:
Engineering and product development 20.2 11.1 10.8
Sales and marketing 33.8 19.3 24.1
General and administrative 9.9 4.7 4.9
In process research and development 13.1 8.7 --
------ ------ ------
Total operating expenses 77.0 43.8 39.8
------ ------ ------
Operating income (loss) (41.0) 4.5 9.3
Interest income, net 7.7 7.2 3.3
------ ------ ------
Income (loss) before income taxes (33.3) 11.7 12.6
Income tax expense (6.5) (3.8) (2.6)
------ ------ ------
Net income (loss) (39.8)% 7.9% 10.0%
- --------------------------------------------------------------------------------
Fiscal 1997 Compared to Fiscal 1996
Net Sales. The Company's net sales decreased by 18.8% to $37.5 million in fiscal
1997 from $46.2 million in fiscal 1996. The decrease was attributable to a
decline in sales of both Broadcast and Desktop products, partially offset by
an increase in sales of Consumer products. The most significant decline in sales
was of desktop products to OEMs, in particular Avid. Sales to Avid were
approximately 26.4% and 43.3% of the Company's net sales for the years ended
June 30, 1997 and 1996, respectively. Sales outside of North America were
approximately 39.7% and 38.7% of the Company's net sales in fiscal 1997 and
1996, respectively.
Cost of sales. Cost of sales consists primarily of costs related to the
acquisition of components and subassemblies, labor and overhead associated with
procurement, assembly and testing of finished products, warehousing, shipping
and warranty costs. Gross profit as a percentage of net sales was 36.0% and
48.3% in fiscal 1997 and 1996, respectively. The decrease in gross profit
percentage is due primarily to a significant charge to cost of sales totaling
$4.0 million relating primarily to inventory write downs.
Engineering and Product Development. Engineering and product development
expenses increased by 47.5% to $7.6 million in fiscal 1997 from $5.1 million in
fiscal 1996. The increases was primarily attributable to increased expenditures
in connection with the continued expansion of the Company's engineering design
teams and product development costs for DVExtreme, Lightning and VideoDirector
Studio 200. Engineering and product development expenses as a percentage of net
sales were 20.2% and 11.1% in fiscal 1997 and 1996, respectively. The Company
expects to continue to allocate significant resources to engineering and product
development efforts, including the Deko engineering team located in Paramus, New
Jersey.
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 42.2% to $12.7
million in fiscal 1997 from $8.9 million in fiscal 1996. The increase in sales
and marketing expenses was primarily attributable to promotional costs for the
introduction of several new Broadcast and Consumer video products. Sales and
marketing expenses as a percentage of net sales were 33.8% and 19.3% in fiscal
1997 and 1996, respectively. The Company expects to continue to allocate
significant resources to sales and marketing.
General and Administrative. General and administrative expenses increased by
69.4% to $3.7 million in fiscal 1997 compared to $2.2 million in fiscal 1996.
General and administrative expenses as a percentage of net sales were 9.9% and
4.7%, respectively. Included in general and administrative expenses in fiscal
1997 were $315,000 of non-recurring spending related to the acquisition of the
Deko group, and approximately $500,000 relating to the disposal of leasehold
improvements and other capital equipment, moving costs and rent overlap incurred
as a result of the move to the Company's new facility in Mountain View,
California.
In Process Research and Development. In April 1997, the Company purchased the
Deko titling systems product line and technology from Digital GraphiX, Inc. The
Company paid $5.3 million in cash, and assumed liabilities of $978,000. The
assets acquired primarily included inventory and other tangible property of
$593,000; intangible assets including the Deko Brand name, work force-in-place,
and source code technology totaling $762,000; and in process research and
development of $4.9 million. The in process research and development was
recorded as an expense during the fourth quarter of fiscal 1997. The intangible
assets and purchased software are being amortized over a seven year period.
In June 1996, the Company purchased certain assets for $4.5 million from Gold
Disk, Inc., a developer and marketer of software products for video editing and
assembly. The assets acquired primarily included tangible assets of $240,000,
intangible assets including the VideoDirector Brand name, user list, and source
code technology totaling $342,000, and in process research and development of
$4.0 million. The in process research and development were recorded as an
expense during the fourth quarter of 1996. The intangible assets are being
amortized over a three year period.
Interest Income Net. Net interest income decreased 14.3% to $2.9 million in
fiscal 1997 from $3.3 million in fiscal 1996. The decrease was due to a decline
in cash and marketable securities as well as a decline in investment yields.
Cash was used by operations and by the repurchase of common stock.
Income Tax Benefit (Expense). The Company recorded provisions for income taxes
of $2.4 million and $1.7 million for the fiscal years ended 1997 and 1996,
respectively. Included in income tax expense for the year ended June 30, 1997 is
a charge of $3,245,000 resulting from the establishment of a valuation allowance
against the Company's deferred tax asset due to significant operating losses in
the current year and the introduction of new products for which market
acceptance is uncertian. As of June 30, 1997, the Company has federal and state
net operating loss carryforwards of $3,065,000 and $1,349,000, respectively,
which expire from 2002 to 2012. The Company also has federal research and
experimentation and alternative minimum tax credit carryforwards of $886,000
which expire between 2006 and 2012, and state research and experimentation
credit carryforwards of $339,000 which have no expiration provision.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. The Company's net sales increased by 108.0% in fiscal 1996 from $22.2
million fiscal 1995. The increase in net sales were primarily attributable to
the Alladin product, particularly to Avid. See "Overview." Sales outside of
North America were approximately 38.7% and 46.5% of the Company's net sales in
fiscal 1996 and 1995, respectively. The decrease in sales outside of North
America was primarily attributable to the significant increase in sales of
Alladin to Avid's North American facility.
Cost of sales. Cost of sales consists primarily of costs related to the
acquisition of components and subassemblies, labor and overhead associated with
procurement, assembly and testing of finished products, warehousing, shipping
and warranty costs. Gross profit as a percentage of net sales was 48.3% and
49.1% in fiscal 1996 and 1995, respectively. The decrease in gross profits
percentage of net sales was due primarily to an increase in sales to OEM
customers, which typically carry a lower gross profit percentage, partially
offset by increased efficiency due to higher production volume.
Engineering and Product Development. Engineering and product development
expenses increased by 113.7% to $5.1 million in fiscal 1996 from $2.4 million in
fiscal 1995. The increase in each period was primarily attributable to increased
expenditures in connection with the continued expansion of the Company's design
engineering team. Engineering and product development expenses as a percentage
of net sales were 11.1% and 10.8% in fiscal 1996 and 1995, respectively.
Sales and Marketing. Sales and marketing expenses include compensation and
benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show and advertising expenses and professional fees
for marketing services. Sales and marketing expenses increased by 67.9% to $8.9
million in fiscal 1996 from $5.3 million in fiscal 1995. The increase in sales
and marketing expenses was primarily attributable to increased expenditures
related to continued promotion of the Alladin including expenditures for trade
shows, advertising creation and placement, professional fees for marketing
services and increases in the number of sales and marketing personnel. Sales and
marketing expenses as a percentage of net sales were 19.3% and 24.1% in fiscal
1996 and 1995, respectively. The decrease of sales and marketing as a percentage
of net sales was due primarily to the increase in sales through the OEM
distribution channel, in particular through Avid, which requires less direct
sales and marketing expenditures by the Company.
General and Administrative. General and administrative expenses increased by
100.9% to $2.2 million in fiscal 1996 from $1.1 million in fiscal 1995. General
and administrative expenses as a percentage of net sales were 4.7% and 4.9% in
fiscal 1996 and 1995. The increase in general and administrative expenses in
each period resulted from an increase in expenditures related to the overall
growth of the Company's operations including the Company's expanded facility in
fiscal 1995 and increased administrative costs associated with being a public
company.
In Process Research and Development. In June 1996, the Company purchased certain
assets for $4.5 million from Gold Disk, Inc., a developer and marketer of
software products for video editing and assembly. The assets acquired primarily
included tangible assets of $240,000, intangible assets including the
VideoDirector Brand name, user list, and source code technology totaling
$342,000, and in process research and development of $3,991,000. The intangible
assets are being amortized over a 3 year period.
Interest Income (Expense), Net. Net Interest income increased to $3.3 million in
fiscal 1996 from $0.7 million in fiscal 1995. The increase was due to interest
earned on the investment of cash proceeds received from the Company's public
offerings in November 1994 and July 1995.
Income Tax Benefit (Expense). The Company recorded provisions for income taxes
of $1.7 million and $0.6 million for the fiscal year ended 1996 and 1995,
respectively, at effective rates of 32.0% and 20.2%, respectively. The Company's
general business credit carryforwards were estimated to be approximately $0.3
million for federal tax purposes, expiring in various amounts from 2006 through
2011.
Inflationary Impact
Since the inception of operations, inflation has not significantly
affected the operations results of the Company. However, inflation and changing
interest rates have had a significant effect on the economy in general and
therefore could affect the operating results of the Company in the future.
Liquidity and Capital Resources
The Company completed its initial and follow-on public offerings in
November 1994 and July 1995 raising approximately $65.5 million, net of offering
expenses.
The Company's operating activities used $1.6 million in fiscal 1997,
provided $900,000 in fiscal 1996 and used $700,000 in fiscal 1995, respectively.
The cash used by operating activities during fiscal 1997 was the result of the
net loss of $14.9 million as adjusted by the acquired research and development
charge of $4.9 million, an increase in the valuation allowance on deferred tax
assets of $3.2 million, depreciation and amortization of $1.6 million, and a
loss on disposal of property and equipment of $448,000, partially offset by net
decreases in the components of working capital, primarily inventory. In fiscal
1996 cash provided by operating activities was the result of net income as
adjusted for the effects of depreciation and amortization, tax benefits from the
exercise of common stock options, partially offset by net increases in the
components of working capital.
During fiscal 1997, $3.9 million was invested in property and
equipment, compared to $1.8 million in fiscal 1996. The increase over the prior
year is primarily related to leasehold improvements, furniture and equipment for
the new Mountain View facility. 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 capital expenditures 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. Through June 30, 1997, the
Company had repurchased and retired approximately 317,000 shares of its common
stock in the open market at an average purchase price of $11.43 for a total cost
of $3,627,000.
In April 1997, the Company purchased the Deko product line and
technology, including the TypeDeko product from Digital GraphiX. The Company
paid $5.3 million in cash and assumed liabilities of $978,000 to consummate the
transaction. See "Overview."
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
purchase, 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 will also pay
additional consideration if certain revenue and profitability objectives are
achieved during the first twelve months following the acquisition. See
"Overview."
As of June 30, 1997, the Company had working capital of approximately
$57.7 million, including $32.8 million in cash and cash equivalents and $15.0
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.
Risks and Uncertainties
Risks Associated with Acquisition. 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. Anticipated benefits of the
acquisition will not be achieved unless the operations being acquired are
successfully combined with those of the Company in a timely manner. Such
combination will require substantial attention from management. The diversion of
the attention of management and any difficulties encountered in the transition
process could have a material adverse impact on the revenues and operating
results of the Company. The integration of the Digital Video Products Group will
also require integration of the newly acquired product offerings and the
coordination of the research and development and sales and marketing efforts of
the Digital Video Group and the Company. The difficulties of assimilation may be
increased by the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining two different corporate cultures. In addition, the process of
assimilating the Digital Video Products Group into the Company could cause the
interruption of, or a loss of momentum in, the activities of the Company's
business, which could have a material adverse effect on the Company. There can
be no assurance that the Company will realize any of the anticipated benefits of
the acquisition. In addition, the announcement and consummation of the
acquisition could cause customers and potential customers of the Company or the
Digital Video Products Group to delay or cancel orders for products as a result
of customer concerns and uncertainty over product evaluation, integration and
support. Such a delay or cancellation of orders could have a material adverse
effect on the business, results of operations and financial condition of the
Company. 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. In addition, the
negotiation and implementation of the acquisition will result in aggregate
[pre-tax] expenses to the Company of approximately $2.0 million for costs
associated with executing the transaction and integrating the businesses.
Although the Company does not believe costs will exceed the aforementioned
amount, there can be no assurance that the Company's estimate is correct or that
unanticipated contingencies will not occur that could substantially increase the
costs of combining the operations of the miro Digital Video Products Group with
those of the Company. In any event, costs associated with the acquisition will
negatively impact the Company's results of operations in the quarter in which
the transaction closes, currently expected to be the quarter ending September
30, 1997.
Concentration of Sales With OEMs. The Company has been highly dependent
on sales of Alladin and Genie products through OEM's, in particular Avid
Technology, Inc. ("Avid"). This concentration of net sales 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, by
deferrals or cancellations of orders, or if overall OEM demand were to decline.
For example, sales to Avid decreased sequentially for the quarters ended June
30, September 30, and December 31, 1996 contributing to the overall decline in
net sales for the Company during those same periods, and then sales to Avid
increased sequentially for the quarter ended March 31, 1997, and then again in
the quarter ended June 30, 1997. If orders from OEM customers, and in particular
Avid, were to decrease, the Company's business, operating results and financial
condition would be materially adversely affected.
Significant Fluctuations in Quarterly Operating Results. The Company's
quarterly operating results have in the past varied, and are expected to vary in
the future as a result of a number of factors, including the timing of
significant orders from and shipments to major OEM customers, in particular
Avid, 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 the
timing of major trade shows and the sale of consumer products in anticipation of
the holiday season. Sales usually slowdown during the summer months, especially
in Europe. The Company attends a number of trade shows which can influence the
order pattern of products shown at those shows including the National
Association of Broadcasters (NAB) convention held in April, the International
Broadcasters Convention (IBC) held in September and the COMDEX show held in
November of each year. 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 the
Company's success in developing, introducing and shipping new products, in
particular DVExtreme, Lightning, and VideoDirector Studio 200. 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.
Risks Associated with the Consumer Market. The Company recently entered
the Consumer market with the purchase of Video Director product in June 1996 and
began shipping the VideoDirector Studio 200 product in March 1997. In addition,
the Company expects to expend considerable resources to develop, market and sell
products into the consumer video market. The Company has limited prior
experience developing, marketing and selling products into this market which has
certain risks. Because the VideoDirector Studio 200 must be used with a personal
computer, a camcorder and a VCR not supplied by the Company, consumer acceptance
will be adversely affected to the extent end users experience difficulties
installing and using the VideoDirector Studio 200 with these components. The
Company has limited experience selling products through the consumer
distribution channel. To be successful in this market it is necessary that the
Company establish and maintain an effective consumer distribution channel
including consumer distributors, electronic retail stores and the ability to
effectively handle phone and Internet orders. Although the Company believes that
the consumer video market will continue to develop for products which offer
consumers the ability to edit home videos, there can be no assurance that this
market will continue to develop, or that the Company can successfully compete in
this market. There can also be no assurance that the Company will be able to
compete successfully against current and future competitors in the consumer
video market, 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.
Risks Associated with Recent Product Introductions. The Company is
critically dependent on the successful introduction, market acceptance,
manufacture and sale of its recently introduced products to increase revenues
and return to profitability. These products include the VideoDirector Studio 200
which is sold into the Consumer market and which began shipping in March 1997,
and DVExtreme and Lightning which are sold into the Broadcast market both of
which began shipping in June 1997. There can be no assurance that these products
will achieve significant market acceptance, and to the extent they do not, the
Company's business, operating results and financial condition could be
materially adversely affected. In addition, 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.
Competition. The market for the Company's products 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. The Company anticipates increased
competition in all three markets into which Pinnacle products are sold: the
Broadcast, Desktop, and Consumer video production markets. In particular, the
consumer video production market in which VideoDirector Studio 200 competes is
an emerging market and the sources of competition are not yet well defined.
There are several established video companies that are currently offering
products or solutions that compete indirectly with VideoDirector Studio 200 by
providing some of the same features and video editing capabilities. In addition,
the Company expects that existing manufacturers and new market entrants will
develop new, higher performance, lower cost consumer video products that may
compete directly with VideoDirector Studio 200. The Company expects that
competition will intensify significantly as the market for consumer video
editing products develops. The Company expects that potential competition in
this market is likely to come from existing video editing companies, software
application companies, or new entrants into the market. Suppliers of existing
video editing equipment have the financial resources and technical know-how
to develop products for the consumer video market. Suppliers of computer
application software also compete in the Consumer editing market. 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.
Dependence on Key Personnel. The Company's success depends in part upon
the continued service of its senior management and key technical personnel, none
of whom is bound by an employment agreement or the subject of key man life
insurance. The Company's success is also dependent upon its ability to attract
and retain qualified technical and managerial personnel. Significant competition
exists for such personnel and there can be no assurance that the Company can
retain its key technical and managerial employees or that it will be able to
attract, assimilate and retain such other highly-qualified technical and
managerial personnel as may be required in the future. There can be no assurance
that employees will not leave the employ of the Company and compete against the
Company, or that contractors will not perform services for competitors of the
Company. If the Company is unable to retain key personnel, its business,
operating results and financial condition could be adversely affected.
Technological Change and Obsolescence: Risks Associated with
Development and Introduction of New Products. The video post-production
equipment industry is characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions. The introduction of
products embodying new technologies or the emergence of new industry standards
can render existing products obsolete or unmarketable. The Company's future
operating results will depend to a considerable extent on its ability to
continually develop, introduce and deliver new hardware and software products
that offer its customers additional features and enhanced performance at
competitive prices. Inherent in this process are a number of risks. The
development of new, technologically advanced products is a complex and uncertain
process requiring high levels of innovation, as well as accurate anticipation of
technological market trends. Once a new product is developed, such as the
Companies most recently introduced products, VideoDirector Studio 200,
DVExtreme, and Lightning, the Company must rapidly bring it into volume
production, a process that requires accurate forecasting of customer
requirements and the attainment of acceptable manufacturing costs. The
introduction of new or enhanced products also requires the Company to manage the
transition from older, displaced products in order to minimize disruption in
customer ordering patterns, avoid excessive levels of older product inventories
and ensure that adequate supplies of new products can be delivered to meet
customer demand. For example, the Company expects that the introduction of
DVExtreme and Lightning will result in a significant decline in sales of Prizm
and Flashfile. In addition, since the Company's products are based in part on
proprietary, internally-developed software, delays in software development could
delay the ability of the Company to ship new products. The Company has
experienced delays in the shipment of new products in the past, and these delays
adversely affected sales of existing products and results of operations. 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.
Dependence on Contract Manufacturers and Single Source Suppliers. The
Company relies on manufacturing subcontractors to manufacture major
subassemblies of the Company's products. The Company and its manufacturing
subcontractors are dependent upon single or limited source suppliers for a
number of components and parts used in the Company's products, including certain
key integrated circuits. The Company's strategy to rely on subcontractors for
major subassemblies and single source suppliers 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 or single source suppliers were to become unable or
unwilling to continue to manufacture these subassemblies or provide critical
components in required volumes, the Company would have to identify and qualify
acceptable replacements. The process of qualifying manufacturing subcontractors
and suppliers could be lengthy and no assurance can be given that any additional
sources would be available to the Company on a timely basis. Any extended
interruption in the future supply of or increase in the cost of the
subassemblies manufactured by third party subcontractors could materially and
adversely affect the Company's business, operating results and financial
condition.
Dependence on Resellers; the Absence of Direct Sales Force. The Company
distributes its products primarily through a network of dealers, original
equipment manufacturers ("OEMs") and other resellers. Accordingly, the Company
is dependent upon these resellers to assist it in promoting market acceptance of
the Broadcast, Desktop, and Consumer video products. There can be no assurance
that these dealers, OEMs and retailers will devote the resources necessary to
provide effective sales and marketing support to the Company. The Company's
dealers and retailers are generally not contractually committed to make future
purchases of the Company's products and therefore could discontinue carrying the
Company's products in favor of a competitor's product or for any other reason.
Because the Company sells a significant portion of its products through dealers
and retailers, it is difficult to ascertain current demand for existing products
and anticipated demand for newly introduced products such as DVExtreme,
Lightning and Studio 200 regardless of the level of dealer inventory for the
Company's products. Moreover, initial orders for a new product may be caused by
the interest of dealers to have the latest product on hand for potential future
sale to end users. As a result, initial stocking orders for a new product, such
as DVExtreme, Lightning, and Studio 200 may not be indicative of long term end
user demand. In addition, the Company is dependent upon the continued viability
and financial stability of these dealers and retailers, some of which are small
organizations with limited capital. The Company believes that its future growth
and success will continue to depend in large part upon its dealer and retail
channels. Accordingly, if a significant number of its dealers and/or retailers
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 could be adversely affected.
Risks of Third Party Claims of Infringement. 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 effects on the Company's business, operating results
and financial condition. Adverse determination 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.
International Sales are Subject to a Number of Risks. Sales of the
Company's products outside of North America represented approximately 39.7%,
38.7% and 46.5% of the Company's net sales in fiscal 1997, 1996 and 1995,
respectively. The Company expects that international sales will continue to
represent a significant portion of its net sales. International sales and
operations may also be subject to risks such as the imposition of governmental
controls, export license requirements, restrictions on the export of critical
technology, currency exchange fluctuations, 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.