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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2001 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
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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 Avenue, Mountain View, CA 94043
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (650) 526-1600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Share Purchase Rights
(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. [X]
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 September
5, 2001 as reported on the Nasdaq National Market System, was approximately
$195,083,342. 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 September 5, 2001, registrant had outstanding 54,913,773 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 26, 2001.
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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, or
the Reform Act. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such forward-looking statements are based on
current expectations and include the last sentence of the paragraph related to
"Favorable Price/Performance Ratio", the second sentence of the paragraph
related to "Operating Structure", the last sentence of the first paragraph
regarding "Our Strategy", the first sentence of the paragraph related to our
"Core Technologies", the first sentence of the paragraph related to our "Video
Processing Platform", the second and third sentences of the paragraph related
to our "Worldwide Sales and Distribution Organization", the first and third
sentences of the paragraph related to acquiring "Complementary Businesses,
Products and Technologies", the last sentence of the paragraph related to the
"ReelTime Family" of products, the fourth sentence of the second paragraph and
the second sentence of the fifth paragraph related to "Sales", the first
sentence of the first paragraph and the second sentence of the second paragraph
related to "Service and Support", the third sentence of the first paragraph and
the first and third sentences of the fourth paragraph related to "Competition",
the second sentence of the second paragraph and the last sentence of the last
paragraph related to "Manufacturing and Supplies", the fifth sentence of the
first paragraph related to "Proprietary Rights and Licenses", the second
sentence of the fourth paragraph related to "Legal Proceedings", the last
sentence of the second paragraph of "Net Sales" for the years ended June 30,
2001 and 2000 related to international sales, the fifth and sixth sentences of
the third paragraph of "Gross Profit" for the years ended June 30, 2001 and
2000 related to the fiscal 2001 reorganization, the seventh and ninth sentences
of the fourth paragraph of "Gross Profit" for the years ended June 30, 2001 and
2000 related to the discontinuation of certain products, the last sentence of
"Engineering and Product Development" for the years ended June 30, 2001 and
2000 and the last sentence of "Engineering and Product Development" for the
years ended June 30, 2000 and 1999 related to engineering and product
development resources, the last sentence of the second and third paragraphs of
"General and Administrative" for the years ended June 30, 2001 and 2000 related
to the fiscal 2001 reorganization, the last sentence of the first paragraph of
"Liquidity and Capital Resources" related to cash flow from operations, the
last sentence of the paragraph entitled "Foreign Currencies" related to our
foreign currency transactions and the last sentence of the first and second
paragraphs of "Fixed Income Investments". Factors that may cause our future
results, performance or achievements to be materially different from the
expressed or implied in forward looking statements contained in this Report
include, among other things, the following: the risks associated with
successfully integrating acquired businesses; the risks associated with
dependence on resellers, contract manufacturers, dealers, Original Equipment
Manufacturers, or OEMs, and other third-party relationships; the uncertainty of
continued market acceptance of professional video products; significant
fluctuations in our operating results; our highly competitive industry and
rapid technological change within our industry; the risks associated with
development and introduction of new products; the need to manage product
transitions; the risks associated with product defects and reliability
problems; the risks associated with single source suppliers; the uncertainty of
patent and proprietary technology protection and reliance on technology
licensed from third parties; the risks of third party claims of infringement;
our dependence on retention and attraction of key employees; the risks
associated with future acquisitions; the risks associated with international
licensing and operations; the risks associated with our dependence on large
broadcast system sales to a few significant customers; the risks associated
with the potential volatility of our stock price; the risks associated with
generating a large proportion of our revenues from international sales; general
economic and business conditions; the risks associated with quarter-end
discounting; the risks associated with the loss of key employees; the risks
associated with net losses and negative cash flow; the risks associated with
our Vortex News systems; the risks associated with excess or obsolete inventory
and overdue or uncollectable accounts receivables; and other factors referenced
in this Report.
ITEM 1. BUSINESS
We are a supplier of video authoring, storage, distribution and Internet
streaming solutions for broadcasters, professionals, and consumers. Our
products are used to create, store, and distribute video content for television
programs, television commercials, pay-per-view, sports videos, corporate
communications and personal home movies. In addition, our products are
increasingly being used to stream video over the Internet. The dramatic
increase in distribution channels including cable television, direct satellite
broadcast, video-on-demand, digital video disks, or DVD, and the Internet have
led to a rapid increase in demand for video content. This is driving a market
need for affordable, easy-to-use video creation, storage, distribution and
streaming tools.
Our products use real time video processing and editing technologies to
apply a variety of video post-production and on-air functions to multiple
streams of live or recorded video material. These editing applications include
the addition of special effects, graphics and titles. To address the broadcast
market, we offer high
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performance, specialized computer-based solutions for high-end, production,
post-production, team sports analysis, broadcast on-air and Internet streaming
applications. For the professional market, we provide computer-based content
creation solutions, and solutions used to stream live and recorded video over
the Internet. To address the consumer market, we offer low cost, easy-to-use
video editing and viewing solutions that allow consumers to view TV on their
computer and to edit their home videos using a personal computer, camcorder and
VCR, outputting their productions to tape, CD, DVD or the Internet.
Industry Background
The development of a video program involves three distinct processes:
pre-production, which involves planning and preparation for the recording of
the video program; production, which involves the acquisition of video material
(shooting); and post-production, which involves the organization of raw video
segments acquired in the production phase into a cohesive and appealing program
(editing). During the post-production phase, elements such as titles, graphics,
and transitions between video segments are incorporated to enhance the overall
quality and impact of a video program.
Historically, the video production industry has focused on providing program
material for broadcast television and advertising. To create high quality video
programs, producers have traditionally used expensive, dedicated video
production equipment linked together in a complex interconnected system to form
a video-editing suite. Typical video-editing suites incorporate video
recorders, switchers, digital video effects systems, still image management
systems, character generators, electronic paint systems and other products,
often provided by multiple manufacturers. These video-editing suites require
highly skilled personnel to operate and maintain.
Recently, new and expanding channels of video content distribution,
including cable television, direct satellite broadcast, video rentals, CD-ROM,
DVD, video-on-demand, and now the Internet, have led to a rapid increase in
demand for video content for a wide variety of applications. This demand has
driven the market for editing approaches that are less expensive and easier to
use. New commercial and industrial applications for this market include
multimedia entertainment, video games, music videos, special event videos,
education and training and corporate communications. In addition, the
popularity of camcorders, VCRs and personal computers has fueled the growth of
an emerging consumer market for low cost video production technology that
enables consumers to create and edit home videos. These expanding channels of
video content distribution and new applications are increasing the demand for
video content production and distribution tools.
Computer-based video solutions combining personal computers with specialized
video processing technology can now provide video quality comparable to that of
traditional tape-based editing suites at significantly lower cost. As a result,
these computer-based video solutions are replacing the traditional tape-based
editing suites. In addition, such solutions are often easier to use since they
incorporate common graphical user interfaces. The lower cost and ease of use of
computer-based video tools enable large numbers of creative individuals,
previously untrained in video production, to produce professional quality video
programming. This programming can be used in traditional ways, such as
broadcasting over the air, via satellite, used in homes and businesses. In
addition, the growing popularity of DVD and the Internet provides entirely new
channels of communicating through the use of video.
With the widening deployment of broadband networks, video on the Internet
has expanded tremendously. The use of the Internet has already enjoyed
remarkable growth. The Internet has rapidly transitioned from text to still
images and now to video, as users demonstrate an appetite for more information,
presented in more persuasive and powerful ways. Video on the Internet is
fundamentally different than television. Broadcast, cable and satellite
delivery systems are ideal for reaching very broad markets, delivering content
with mass appeal. Video over the Internet represents a basic shift in how we
can communicate by providing the ability to affordably reach narrow targeted
markets, anywhere in the world. Streaming video on the Internet is still in its
infancy, but as broadband capability expands, these limitations should
diminish, and the ability to create, store, stream and display high-quality
video on the web will be an essential element for high-quality communications
and entertainment.
Our Approach
We design, manufacture, market and support computer-based video products to
serve the broadcast, professional and consumer markets. Our products are based
on its proprietary software and hardware technologies that offer the following
benefits:
Sophisticated Video Processing. Our products provide advanced video
processing and manipulation capabilities, such as the creation and addition of
special effects, graphics and titles. Videographers constantly seek effects to
give their programs a new look and to allow them to differentiate and enhance
their end product.
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Real Time Interactivity. Our products allow users to create video
productions in real time. This real time interactivity gives users the
flexibility to try many different effects and fine-tune the resulting content.
Open Systems. Our products conform to generally accepted industry standards
for video input/output and control, allowing interoperability with a wide
variety of video processing and storage equipment. Furthermore, we have
developed and published, and are encouraging others to adopt, open interface
specifications for computer-based video post-production products. These
specifications include video input/output, manipulation and control.
Ease of Use. Our products include menu-driven interfaces for selecting and
controlling the various video manipulation functions. This reduces technical
obstacles to the operation of the system, permitting the user to focus on the
artistic aspects of the post-production process.
Favorable Price/Performance Ratio. Our products have a favorable price to
performance ratio, in part because we use the same proprietary components
across our product lines. We intend to continue lowering the cost of our
products by further integrating our video manipulation and video capture
technologies into application specific integrated circuits, or ASICs.
Operating Structure. We are organized into three separate business
divisions to serve the broadcast, professional and consumer markets. We believe
this organizational structure enables us to effectively address varying product
requirements, rapidly implement our core technologies, efficiently manage
different distribution channels and anticipate and respond to changes in each
of these markets.
Our Strategy
Our goal is to take advantage of the growing traditional and Internet video
opportunities to become the leading supplier of solutions for the creation,
storage, streaming and viewing of video for a wide variety of purposes and
applications. As broadband capability continues to increase, the need to
create, store, stream and view high-quality video becomes more urgent. We have
a proven ability to successfully migrate technology developed for broadcasters
down to the professional and even the consumer markets, and we are now moving
aggressively toward web-based solutions in each of our businesses. To pursue
our goal, we intend to implement the following strategies:
Expand and Leverage Core Technologies. We intend to expand our core
software and hardware technology base through both internal development and
acquisitions. We use a modular approach to product development. This allows us
to leverage our investment in research and development across multiple product
designs and minimize time to market.
Establish an Industry Standard Video Processing Platform. We believe that
as the professional market continues to move toward an open architecture
environment, companies will either provide an open architecture
video-processing platform or develop end user editing applications. Our
strategy is to establish an industry standard video-processing platform
compatible with a broad range of applications. Our platform technology combines
real time video manipulation, video capture technology and a unified applied
programming interface.
Develop and Expand Worldwide Sales and Distribution Organization. Our sales
organization focuses on a variety of distribution channels, including OEMs,
value-added resellers, or VARs, distributors, retail stores and other
resellers. We believe that our development of a worldwide sales and
distribution organization gives us a strategic advantage in the rapidly
changing video post-production industry. We intend to persist in strengthening
and developing this organization and to continue to develop strong strategic
relationships with key OEMs and resellers.
Acquire Complementary Businesses, Products and Technologies. We have grown
and intend to continue to grow both internally as well as through the
acquisition of complementary businesses, product lines or technologies. We
frequently evaluate strategic acquisition opportunities that could enhance our
existing product offerings or provide an avenue for developing new
complementary product lines. We believe that the video production industry is
in a period of consolidation and that strategic acquisition opportunities may
arise. For example, in August 1999, we acquired certain assets of the Video
Communications Division of the Hewlett-Packard Company, or HP. The HP business
was integrated with our video server group to provide a broad and powerful
suite of video server solutions for traditional broadcast and Internet
applications. In March 2000, we acquired Puffin Designs, Inc., or Puffin, which
provides an extended suite of video software applications, and combined with
our titling, character generator and graphics applications, allows us to offer
a very powerful and complete set of software tools that further enhance our
leading position in video content creation. In March 2000
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and June 2000, we acquired Digital Editing Services, Inc., or DES, and Avid
Sports, Inc., respectively, adding technology and software related to sports
editing. In April 2000, we acquired The Montage Group, Ltd., or Montage, a
leading supplier of news editing systems to the broadcast market. In December
2000, we acquired certain software and technology from Minerva Networks, Inc.,
or Minerva, for DVD authoring.
Broadcast Solutions Products
For the broadcast market, we currently offer products that provide systems
solutions to broadcasters. This includes products that provide real time
digital effects, still image management and storage, and real time video
character generation. We also sell digital video servers for on-air video
content distribution. These products generally include proprietary hardware and
software and specialized control surfaces for rapid execution, especially for
on-air applications. The primary broadcast products sold during fiscal 2001
were the DVExtreme, Lightning, Deko, Thunder, Media Stream, and Sports family
of products. In addition, we sell BroadNet solutions, which is a network
technology that enables our broadcast products to be networked together for
easy interoperability, and to exchange information through the Internet. The
acquisition of HP's Video Communications Division included key technologies,
intellectual property, the MediaStream server family of products as well as
most managers and employees from that division. The MediaStream server family
complements our Thunder family, to provide a more complete line of broadcast
quality video-server solutions. DES and Avid Sports, Inc. supply sports editing
software used by professional and school teams around the world. Combined,
these businesses give us a leading position in this important video market. We
continue to develop Montage's Vortex News products and have initiated some
customer installations but did not recognize any Vortex News revenue during
fiscal 2001.
DVExtreme Family. DVExtreme is our high performance, real time digital
video effects system for broadcast and high-end, post-production customers who
seek to incorporate unique special effects into their programming. DVExtreme, a
Windows NT-based, multi-channel system, can simultaneously manipulate up to
three channels of live video and can generate real time effects such as
four-corner page peels and turns, highlights and shadows, water ripples, ball
effects, wave patterns and other visual effects. The suggested list price for a
DVEtreme ranges from $44,990 to $63,990, depending on the configuration.
Lightning Family. Lightning is our high performance, networkable image
management system designed for broadcast and high-end, post-production
applications such as news and sports programs. Lightning is a Windows NT-based
system that can accommodate up to three channels of video, plus additional
virtual channels for previewing. It has internal storage capacity for over
10,000 images, and an interface to external disks for expanded capacity.
Lightning can also perform digital video effects on captured video images. The
suggested list price for a Lightning ranges from $25,990 to $45,000, depending
on the configuration.
Deko Family. The Deko family of products is designed to provide high
performance titling, real time effects and character generation for broadcast
and on-air applications. Deko is a Windows NT-based system that includes
powerful text and graphics tools such as real time text scrolling, text
manipulation, font enhancement, multiple layers for text composition and
supports a wide range of standard and international character fonts. The
suggested list price for a Deko ranges from $26,900 to $75,000, depending on
the configuration.
Thunder Family. The Thunder family of digital video servers is designed to
record, store, retrieve and process digital video content for broadcast over
conventional mediums or the Internet. The Thunder server family currently
includes the four-channel Thunder MCS 4000 server, the two-channel MCS 2000
server, and iThunder. Thunder uses MPEG-2 and native DV video formats.
Thunder's on-air application offers sophisticated asset management capabilities
for identifying clips, transitions and stills and sequencing their play-out to
air. By pairing the Thunder system with its Internet companion, iThunder, clips
and programs can be instantly 'broadcast' over the World Wide Web. Through the
iThunder HTML browser, remote Internet users can access and view video proxies
via standard streaming technologies directly from their remote desktop
location. The suggested list prices range from $38,000 to $69,000, depending on
configuration.
Media Stream Server Family. The Media Stream digital video server is
designed to record, store, retrieve and process digital video content for
broadcast over conventional mediums or the Internet. The Media Stream servers
can handle up to 16 channels of MPEG-2 I/O. It includes a redundant array of
independent disks, or RAID, disk expansion chassis that can be expanded to
provide over 1000 hours of online storage. The RAIDs are protected with hot
swappable power supplies and the entire system can be networked with high-speed
fibre channel to allow multiple servers to access the same content. The
suggested list prices start at $10,000 but can run as high as a few million
dollars for a large system.
PDS9000 Digital Video Switcher Family. The PDS 9000 family provides real
time image processing for live on-air products. It includes nine integrated 3D
digital effects systems, real time color correction, and is
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Broadnet compliant to provide the ability to share graphic images over the
Internet. The PDS9000 began production shipments in September 2000, and has a
suggested list prices ranging from $89,000 to $110,000, depending on
configuration.
Team Sports Product Family. The Team Sports products are designed for use
by sports teams to capture, edit and view video from team sports events
including Football, Basketball and Baseball. Team Sports products can be used
as stand alone products or networked together to give the coaching staff access
to current and historic video footage of games and practice events and
training. Networked Sports products allow users to access and view videos from
anywhere on the net. The suggested list prices range from $25,000 to $1,000,000
for a large networked system.
Professional Media Products
Our professional media products are designed to provide video professionals
with the tools to create high quality digital video productions and to
distribute those products in the form of videotape, CD, DVD, or over the
Internet. We have two general classes of professional products: content
creation and Internet streaming products. The content creation products allow
users to create professional video productions and include hardware-based
products including the TARGA family of digital video boards and software
products, including Commotion. The Internet streaming products allow users to
send or "stream" live or previously recorded rich media, including video, over
the Internet. The streaming products include the StreamGenie, which is used to
produce and broadcast live events over the Internet, and the StreamFactory,
which encodes video and audio sources in real time for streaming over the
Internet.
We sell our professional video products to end users over the Internet,
through direct sales activities and through specialized dealers and resellers.
OEM sales are handled through a dedicated direct sales force.
Professional Media Content Creation Products
TARGA Family. The TARGA products are designed to power the non-linear video
and audio editing solutions targeted at professional videographers and digital
content creation applications and are based on the memory-centric HUB3
architecture, a Pinnacle-designed technology for very high bandwidth video
processing. The TARGA products can support uncompressed video processing,
multiple codec formats such as DV and MPEG2, variable picture resolutions and
aspect ratios for standard definition and high definition television, variable
frame rates, and very high precision color processing in both YUV and RGB.
In April 2000, we introduced TARGA3000 and CineWave to retail market. Both
products are based on the TARGA architecture. The TARGA3000 is a single-slot
PCI card designed for Windows(TM) based PC's. The TARGA3000 is capable of real
time wipes, dissolves, color correction, scaling, keying and compositing of up
to three streams of uncompressed video with up to seven full-color graphics
streams. The TARGA3000 comes bundled with Adobe Premiere for non-linear
editing, augmented with custom Pinnacle software for real time performance and
advanced color correction. List price is $6,595 for an entry-level system and a
ready to edit system with computer and a modest amount of storage start at
$12,000.
CineWave is designed for the Apple Macintosh platform and includes our
Commotion Pro and Knoll Light Factory, and Apple's FinalCut Pro software
packages. CineWave is targeted at digital cinematographers, broadcast
designers, post-production specialists, webcasters and special effects artists,
as well as the large community of video and multimedia producers working
exclusively on the Macintosh platform. The products offer professional
audio/video tools at an affordable price. The CineWave system has an entry
level suggested list price of $6,995 for standard definition. High definition
systems, including the computer and a modest amount of storage, start as low as
$30,000, which is substantially less than previous high definition
post-production systems used for these advanced digital video formats.
In addition to retail sales of the TARGA based products, a number of OEM's
have chosen the TARGA family for a wide range of applications including medical
imagery, non-linear video editing and content capture and delivery. The OEM
TARGA boards are available in several configurations ranging from the TARGA
3200 with dual channel video capture, quad DVCPRO 50 decompression and 24
channel audio mixing, to less expensive versions without hardware codecs or
audio DSP's. A key competitive advantage of the TARGA products is common
denominator interface, or CODI, the robust real-time TARGA applied programming
interface. We publish an extensive software developer's kit for CODI and
support OEM and other developers through a dedicated Developer Services Group.
DVD Family. The DVD 2000 is a professional quality video encoding and
editing solution with real-time editing and DVD output capabilities. It
combines frame accurate dual stream MPEG-2 video editing and DVD
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authoring. The DVD2000 is designed for corporate, event, and professional
digital video artists who create marketing presentations, product
demonstrations, training, entertainment, or educational DVDs. The dual stream
nature of the product allows higher productivity by reducing the need to render
video segments to finish a production. The product uses our Smart GOP MPEG-2
technology, and is capable of real time processing of titles and transitions,
including more than 300 real time video effects. The suggested list price is
$2,495.
Professional Video Software Products: Our range of professional content
creation software solutions includes Commotion, a professional level video
composting and painting solution that enables sophisticated video image
manipulation. Commotion was used in the production of all the nominee pictures
for the Best Visual Effects category in the 2001 National Academy of Motion
Pictures Oscar awards. We acquired Commotion through our acquisition of Puffin
in March 2000. In addition to Commotion, we manufacture and resell TitleDeko
Pro, an advanced titling solution, Impression Pro, a professional level DVD
authoring software, and a range of sophisticated plug-in filters, including
Knoll Light Factory and Image Lounge, for advanced video image adjustment. Our
software products are sold through web sales and tele-sales, in addition to
specialized third party resellers and dealers. Our software products are also
sold to other manufacturers for bundling with their solutions. Suggested list
prices for our software products range from $395 to $1,475.
Genie and Alladin Family. The Genie and Alladin family of products offer a
complete set of professional quality, real time 3D digital effects, or DVE's,
switching, character generation, paint and still storage on a single personal
computer interface, or PCI, board. A non-linear version of Genie is sold to OEM
vendors who integrate and sell it with their non-linear editing products. We
ceased retail sales of Alladin and GeniePlus in August 2001 but continue to
supply OEM customers with Genie products. In addition, a custom version of the
GeniePlus is a key component of our StreamGenie web casting system.
ReelTime Family. ReelTime is a dual stream video and audio capture and
playback card with real time special effects. ReelTime open architecture
supports the Adobe Premiere editing software and a wide variety of third-party
video applications. We announced that we would discontinue selling the ReelTime
family in September 2001 following the launch of our Pro-ONE solution.
Professional Media Internet Streaming Products
StreamGenie Family. The StreamGenie Presenter is designed to broadcast live
events over the Internet. It is a portable Internet broadcast station in a
single box and supports multiple camera switching, titling, DVE's and provides
live output for the Internet and video archiving. StreamGenie Presenter enables
integration of PowerPoint(tm) graphics that can be viewed simultaneously with
the associated video. Ideally suited for webcasting corporate events, distance
learning, conferences and concerts in both Real Networks SureStream and
Microsoft Windows Media formats, the ease of use of StreamGenie Presenter is
unrivalled. StreamGenie is more versatile, more powerful, better integrated,
more compact, less expensive and easier to use than competitive products. List
price ranges from $19,995 to $24,995 depending on system configuration.
StreamFactory. The StreamFactory is a real-time web stream encoder that
accepts professional video and audio inputs. StreamFactory enables multiple
data rate output in Microsoft Windows Media, Real Networks SureStream and
QuickTime formats. Designed to be a rack-mounted infrastructure appliance,
StreamFactory can be configured and managed remotely, either across a LAN, or
from across the Internet. Simply connect a VTR, video camera, or other
audiovisual source direct to StreamFactory and convert to popular streaming
formats in real-time. The StreamFactory can be controlled by its own built in
management application or by other third-party automation applications. In
addition, StreamFactory has an open applied programming interface and SDK for
developers to create their own automation applications. We have designed
StreamFactory from the ground up expressly for the constant demands of Internet
broadcasters, ISP's, Telcos and content delivery networks. Suggested list
prices range from $9,995 to $18,995 depending on system configuration.
Personal Web Video Products
Our personal web video products are aimed at the consumer and prosumer
markets, and allow users to edit video and to create professional looking home
movies, corporate presentations, wedding video and other productions using a
standard personal computer and camcorder. Our prosumer products consist of
bundled hardware/software solutions, which include Adobe's Premiere video
editing software. These products include:
DV200. DV200 is a combination of a standard 1394-interface card with
Adobe's Premiere video editing program. DV200 also includes software from
Pinnacle to support batch capture, titling and special effects. The suggested
list price for DV200 in the U.S. is $299.
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DV500plus. DV500plus is a combination of a proprietary analog/digital video
interface card with Adobe's Premiere video editing program. DV500 includes
software from Pinnacle to support batch capture, titling, special effects and
DVD authoring. DV500plus allows simultaneous playback of two streams of video
with simple real-time effects such as dissolves and wipes. The suggested list
price for DV500plus in the U.S. is $649.
Pro-ONE. Pro-ONE is a combination of a proprietary analog/digital video
interface card with Adobe's Premiere video editing program. Pro-ONE also
includes our software to support batch capture, titling, special effects and
DVD authoring. Pro-ONE allows simultaneous playback of two streams of video
with complex real-time effects such as slow motion and page turns. The
suggested list price for Pro-ONE in the U.S. is $1299.
Our consumer products allow home users to edit their home video to create
professional looking "home movies" using a personal computer and camcorder. We
have developed an easy-to-use software interface called the Studio application,
which serves as the primary interface for all of its Studio consumer video
editing products. We currently offer either a stand-alone software solution, or
software bundled with video capture hardware.
Studio Version 7. Studio is a Windows-based non-linear video editing
software program that works with standard video capture hardware installed on
the end-user's personal computer. Studio is specifically designed to allow
consumers to edit their home movies. With the use of the Studio software, users
can "drop and drag" video clips in the order they desire, add simple
transitions between scenes and simple graphic, titles and music or audio to the
production. The suggested list price for the Studio version 7 software in the
U.S. is $99.
Studio DV. Studio DV is a bundled solution, which combines a standard 1394
PCI interface card and cable (to connect a DV camcorder to a PC) with our
Studio Version 7 software. The suggested list price for the Studio DV product
in the U.S. is $129.
Studio DVplus. Studio DVplus is a bundled solution, which combines a
proprietary 1394 PCI interface card and cable (to connect a DV camcorder to a
PC) with our Studio Version 7 software. The proprietary 1394 interface card
included with Studio DVplus includes (i) a standard 1394 digital interface for
connection of a DV camcorder to a personal computer and (ii) an analog video
output to allow output of finished video productions to standard VHS and SVHS
analog video tape recorders. Studio DVplus is sold only in Europe. The
suggested list price for the Studio DVplus product in Europe is approximately
$199.
Studio DC10plus. Studio DC10plus is a bundled solution, which combines a
proprietary analog video PCI interface card and cable (to connect an analog
camcorder to a PC) with our Studio Version 7 software. The suggested list price
for the Studio DC10 product is $129.
Technology
We are a technological leader in digital video processing, which includes
real time video manipulation, video capture, digital video editing and storage.
The National Academy of Television Arts and Sciences' Outstanding Technical
Achievement EMMY award has been awarded to us on four occasions. In 1990, we
received an EMMY for pioneering the concept of the video workstation. In 1994,
we received an EMMY for developing technology, which allows real time mapping
of live video onto animated 3D surfaces and, in 1997, we received an EMMY for
utilization of real time video manipulation technology in non-linear editing
applications. In 2000, we received an EMMY for pioneering development in full
motion broadcast quality PC video and compression plug-in cards utilized in the
manufacture of non-linear editing systems and video servers. In addition, the
technology that we acquired from Digital Graphix was awarded two Emmy's prior
to its acquisition by us. Montage was also awarded one EMMY, prior to its
acquisition by us, for enabling technology and for non-linear editing systems
using digital imaging and sound.
Many of our products share a common internal architecture. This design
approach allows us to leverage our research and development expenditures by
utilizing similar hardware and software modules in multiple products. Our video
manipulation architecture is fundamental to the performance and capabilities of
our products. As a result of the acquisition of the video division of Miro
Computer Products AG in August 1997, we acquired video capture technology that
allows high quality live video and audio to be captured and played back from a
standard personal computer. We further developed and augmented this technology
with the acquisition of Truevision, Inc. in March 1999.
All of our products use or work with a standard personal computer for
control of video manipulation functions. In all products targeting the
broadcast market, the control microprocessor is embedded within the product.
The professional and consumer products are inserted into or connect externally
to a personal computer.
8
The use of industry standard microprocessors 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, or DVB, and processed
using our proprietary real time video manipulation hardware. The video data on
the DVB is processed in the standard digital component format that fully
complies with the highest digital component video standards of the
International Radio Consultation Committee, an organization that develops and
publishes standards for international telecommunication systems.
The software in our video capture and video manipulation products is divided
into two layers: the user interface application and the applied programming
interface. The user interface application is different and has been optimized
for each product family. The applied programming interface is, for the most
part, common to most of our products and incorporates all the proprietary
low-level routines that allow our 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 requirements; and applications can be quickly ported to our
products using the applied programming interface.
Our core technical expertise is in real time digital video processing, video
capture technology, real time software algorithms, video input/output, advanced
user interfaces and software control of commercially available camcorders and
VCRs.
Real Time Digital Video Processing. We have 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 non-linear image manipulation. We have patented
technology related to 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
decompression of this data in real time.
CODEC Technology. We have devoted significant resources to developing and
acquiring hardware and software for real time video capture, or CODEC. This
technology includes audio/video effect synchronization methodologies,
compression algorithms, drivers and software for real time playback from disks.
Real Time Software Algorithms. The digital video manipulation functions of
our products use common core software that performs complex computations in
real time under user control. We have developed certain algorithms that enable
the high-speed computation of multiple complex equations that are required for
real time video effects.
Video Input/Output. We have developed technology for video input and output
of composite analog, component analog and component digital video data streams.
All of our products work with the National Television Standards Committee, or
NTSC, and Phase Alternating Line, or PAL, which are the two primary television
standards in North America and Europe, respectively. In addition, we have
developed interfaces to support input/output of video streams stored on
computer disks.
User Interface Design. We have extensive experience in the design of
graphical user interfaces for video control and manipulation. We use
interactive, menu-driven user interfaces to control video manipulation
functions.
We have historically devoted a significant portion of our resources to
engineering and product development programs and expects to continue to
allocate significant resources to these efforts. In addition, we have acquired
certain products and technologies that have aided our ability to more rapidly
develop and market new products. Our future operating results will depend to a
considerable extent on our ability to continually develop, acquire, introduce
and deliver new hardware and software products that offer our customers
additional features and enhanced performance at competitive prices. Delays in
the introduction or shipment of new or enhanced products, our inability to
timely develop and introduce such new products, the failure of such products to
gain market acceptance or problems associated with product transitions could
adversely affect our business, financial condition and results of operations,
particularly on a quarterly basis.
9
As of June 30, 2001, we had 207 people engaged in engineering and product
development. Our engineering and product development expenses (excluding
purchased in-process research and development) in fiscal 2001, 2000 and 1999
were $34.3 million, $27.8 million and $16.1 million respectively, and
represented 13.6%, 11.7% and 10.1%, respectively, of net sales.
Customers
End users of our products range from individuals to major corporate and
government entities, and to video production and broadcast facilities
worldwide. Broadcast customers include domestic and international television
and cable networks, local broadcasters and program creators. Professional
customers include corporations seeking to develop internal video
post-production capabilities, professional videographers including those who
cover special events, and small production houses serving cable and commercial
video markets. Consumer customers include consumer and prosumer users who edit
video and create professional looking "home movies", corporate presentations,
and other special events and productions using a standard personal computer and
camcorder.
Marketing, Sales and Service
Marketing
Our marketing efforts are targeted at users of broadcast and professional
post-production suites, and home video editing enthusiasts. In order to
increase awareness of our products, we attend a number of trade shows, the
major ones being the National Association of Broadcasters, or NAB, show in the
United States, and the International Broadcasters Convention, or IBC, show and
the Center For Office and Information Technology, or CEBIT, show in Europe. We
also use targeted direct mail campaigns and advertisements in trade and
computer publications for most of our product lines and also participate in
joint marketing activities with our OEM partners and other professional video
companies.
Sales
We maintain a sales organization consisting of regional sales managers in
the United States, Europe and other international territories. We currently
have sales offices in nine countries worldwide. The regional sales managers are
primarily responsible for supporting independent dealers and VARs and making
direct sales in geographic regions without dealer coverage. They also service
customers who prefer to transact directly with us.
We sell our broadcast and professional products to end users through an
established domestic and international network of independent video product
dealers and VARs in addition to direct sales. The independent dealers and VARs
are selected for their ability to provide effective field sales and technical
support to our customers. Dealers and VARs carry our broadcast and professional
products as demonstration units, advise customers on system configuration and
installation and perform ongoing post-sales customer support. We believe that
many end users depend on the technical support offered by these dealers in
making product purchase decisions. We continue to invest resources in
developing and supporting our network of independent dealers and VARs. These
groups eagerly promote our products and considerably expand our market coverage.
We also sell and distribute our professional products to OEMs that
incorporate our products into their video editing products and resell these
products to other resellers and end users. These OEMs generally purchase our
products and are responsible for conducting their own marketing, sales and
support activities. We attempt to identify, and align with, OEMs that are
market share and technology leaders in our target markets.
Our consumer products are sold primarily through the consumer retail channel
via large distributors, VARs and large computer and electronic retailers in
addition to direct telemarketing, mail order and over the Internet. The
consumer retail channel is characterized by long payment terms and sales
returns. There can be no assurance that any particular computer retailers will
continue to stock and sell our consumer products. If a significant number of
computer retailers were to discontinue selling those products or if sales
returns are higher than anticipated, our results of operations would be
adversely affected. Sales into the consumer retail channel entail a number of
risks including inventory obsolescence, product returns and potential price
protection obligations.
Sales outside of North America represented approximately 57.3%, 55.0% and
60.8% of our net sales for fiscal 2001, 2000 and 1999, respectively. We expect
that sales outside of the United States will continue to account for a
significant portion of our net sales. We make foreign currency denominated
sales in many countries, especially in Europe, exposing us to risks associated
with foreign currency fluctuations, though this risk is partially hedged since
all local selling and marketing expenses are also denominated in those same
currencies. International sales and operations may also be subject to risks
such as the imposition of governmental
10
controls, export license requirements, restrictions on the export of critical
technology, political instability, trade restrictions, changes in tariffs,
difficulties in staffing and managing international operations, potential
insolvency of international dealers and difficulty in collecting accounts
receivable. There can be no assurance that these factors will not have an
adverse effect on our future international sales and, consequently, on our
business, financial condition and results of operations.
Service and Support
We believe that our ability to provide customer service and support is an
important element in the marketing of our products. Our customer service and
support operation also provides us with a means of understanding customer
requirements for future product enhancements. We maintain an in-house repair
facility and also provide telephone access to our technical support staff. Our
technical support engineers not only provide assistance in diagnosing problems,
but also work closely with customers to address system integration issues and
to assist customers in increasing the efficiency and productivity of their
systems. We support our customers in Europe and Asia primarily through our
international sales offices, European logistic center and local dealers.
We typically warrant our products against defects in materials and
workmanship for varying periods depending on the product and the sales region.
We believe our warranties are similar to those offered by other video
production equipment suppliers. To date, we have not 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. We anticipate
increased competition in the video post-production equipment market from both
existing manufacturers and new market entrants. Increased competition could
result in price reductions, reduced margins and loss of market share, any of
which could materially and adversely affect our business, financial condition
and results of operations. There can be no assurance that we will be able to
compete successfully against current and future competitors.
Competition for our broadcast products is generally based on product
performance, breadth of product line, service and support, market presence and
price. Our principal competitors in this market include Chyron Corporation,
Leitch Technology Corporation, Matsushita Electric Industrial Co. Ltd., or
Matsushita, Quantel Ltd. (a division of Carlton Communications Plc), SeaChange
Corporation, Sony Corporation, or Sony, and Grass Valley Group, some of which
have greater financial, technical, marketing, sales and customer support
resources, greater name recognition and larger installed customer bases than
us. In addition, some of these companies have established relationships with
current and potential customers of ours. Some of our 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.
Our competition in the professional and consumer markets comes from a number
of groups of video companies such as traditional video equipment suppliers,
providers of desktop editing solutions, video software application companies
and others. Suppliers of traditional video equipment such as Matsushita 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 professional media products such as Avid, Matrox Electronics
Systems, Ltd., Media100, Inc., have established video distribution channels and
experience in marketing video products and significant financial resources.
We believe that the consumer video editing market is still emerging and as
well the sources of competition. There are several established video companies
that are currently offering products or solutions that compete directly or
indirectly with our consumer products by providing some or all of the same
features and video editing capabilities. In addition, we expect that existing
manufacturers and new market entrants will develop new, higher performance,
lower cost consumer video products that may compete directly with our consumer
products. We may also face competition from other computer companies that lack
experience in the video production industry but that have substantial resources
to acquire or develop technology and products for the video production market.
There can be no assurance that any of these companies will not enter into the
video production market or that we could successfully compete against them if
they did.
Manufacturing and Suppliers
Our manufacturing and logistics operations, located in Mountain View,
California and Braunschweig, Germany, consist primarily of testing printed
circuit assemblies, final product assembly, configuration and
11
testing, quality assurance and shipping for our broadcast and professional
products. Manufacturing of our consumer and professional products is performed
by independent subcontractors from where products are often shipped directly to
the distributor or retailer. Each of our products undergoes quality inspection
and testing at the board level and final assembly stage. We manage our
materials with a software system that integrates purchasing, inventory control
and cost accounting.
We rely on independent subcontractors who manufacture to our specifications
our consumer and certain professional products and major subassemblies used in
our broadcast and other professional products. This approach allows us to
concentrate our manufacturing resources on areas where we believe we can add
the most value, such as product testing and final assembly, and reduces the
fixed costs of owning and operating a full scale manufacturing facility. We
have manufacturing agreements with a number of U.S.-based subcontractors, which
include Pemstar, Flash Electronics and Sales Link (formerly PacLink), for the
manufacture of our consumer and professional products, and with Streiff &
Helmold GmbH, which is located in Braunschweig, Germany. Our reliance on
subcontractors to manufacture products and major subassemblies 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 was to become unable or
unwilling to continue to manufacture these products or subassemblies in
required volumes, our business, financial condition and results of operations
would be materially adversely affected.
To the extent possible, we and our manufacturing subcontractors use standard
parts and components available from multiple vendors. However, we and our
subcontractors are dependent upon single or limited source suppliers for a
number of key components and parts used in our products, including integrated
circuits manufactured by Altera Corporation, AuraVision Corporation, C-Cube
Microsystems, LSI Logic Corp., Maxim Integrated Products, Inc., National
Semiconductor Corporation, Philips Electronics, Inc., Raytheon Corporation and
Zoran Corporation, boards and modules manufactured by Adaptec, Inc., and Sony,
field programmable gate arrays manufactured by Altera Corporation, serial RAM
memory modules manufactured by Hitachi, Ltd. and software applications from
Adobe. Our 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 our
manufacturing subcontractors is dependent in part on our ability to provide its
manufacturers, and their ability to provide suppliers, with accurate forecasts
of its future requirements. We and our manufacturing subcontractors endeavor to
maintain ongoing communication with their suppliers to guard against
interruptions in supply. We and our subcontractors have in the past experienced
delays in receiving adequate supplies of single source components. Also,
because of the reliance on these single or limited source components, we may be
subject to increases in component costs that could have an adverse effect on
our results of operations. 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 our business, financial condition
and results of operations in any given period.
Our broadcast and professional customers generally order on an as-needed
basis. We typically ship our products within 30 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, we generally operate
with a limited backlog of orders. The absence of a significant historical
backlog means that quarterly results are 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, our
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, we believe that the backlog of orders as of any
particular date is not necessarily indicative of our actual sales for any
future period.
Proprietary Rights and Licenses
Our ability to compete successfully and achieve future revenue and profit
growth will depend, in part, on our ability to protect our proprietary
technology and operate without infringing the rights of others. We rely on a
combination of patent, copyright, trademark and trade secret laws and other
intellectual property protection methods to protect our proprietary technology.
In addition, we generally enter into confidentiality and nondisclosure
agreements with our employees and OEM customers and limit access to and
distribution of our proprietary technology. We currently hold a number of
United States patents covering certain aspects of our technologies. Although we
intend to pursue a policy of obtaining patents for appropriate inventions, we
believe that the success of our business will depend primarily on the
innovative skills, technical expertise and marketing
12
abilities of our personnel, rather than upon the ownership of patents. Certain
technology used in our 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 us nonexclusive,
worldwide rights with respect to the subject technology and terminate only upon
a material breach by us.
In the course of our business, we may receive and in the past have received
communications asserting that our products infringe patents or other
intellectual property rights of third parties.
Our 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 our products, or
relating to current or future technologies, there can be no assurance that we
will be able to do so on commercially reasonable terms or at all. There can be
no assurance that such communications can be settled on commercially reasonable
terms or that they will not result in protracted and costly 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 us, to
protect our trade secrets, trademarks and other intellectual property rights
owned by us, or to defend us against claimed infringement. Any such litigation
could be costly and a diversion of management's attention, either of which
could have material adverse effect on our business, financial condition and
results of operations. Adverse determinations in such litigation could result
in the loss of our proprietary rights, subject us to significant liabilities,
require us to seek licenses from third parties or prevent us from manufacturing
or selling its products, any of which could have a material adverse effect on
our business, financial condition and results of operations.
ITEM 2. PROPERTIES
Our principal administrative, marketing, manufacturing and product
development facility is located in Mountain View, California. This facility
occupies approximately 106,000 square feet pursuant to a lease which commenced
August 15, 1996 and which will terminate December 31, 2003.
We also lease space in Braunschweig, Germany which houses engineering,
administrative, logistics and marketing operations for our consumer products.
The Braunschweig lease expires in April 2004. We also house certain engineering
and support operations in Indianapolis, Indiana and Rochelle Park, New Jersey.
Additionally, we lease facilities in Lowell, Massachusetts and Orlando,
Florida, which house operations for our sports businesses.
We also maintain sales and marketing support offices in leased facilities in
various other locations throughout the world.
ITEM 3. LEGAL PROCEEDINGS
On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle Systems, Inc. et
al., No. 00-CV-2596 was filed in the United States District Court for the
Northern District of California against us and certain officer and director
defendants. The action is a putative class action and alleges that defendants
violated the federal securities laws by making false and misleading statements
concerning our business prospects during an alleged class period of April 18,
2000 through July 10, 2000. The complaint does not specify damages. We are
defending the case vigorously, and recently moved to dismiss the complaint. In
a written order dated May 7, 2001, the court dismissed the complaint and
allowed the plaintiffs to file an amended complaint. The plaintiffs filed a
second consolidated amended complaint on June 22, 2001. Our motion to dismiss
this complaint is scheduled to be heard on November 2, 2001.
On August 29, 2000, a lawsuit entitled Athle-Tech Computer Systems,
Incorporated v. Montage and Digital Editing Services, Inc., wholly owned
subsidiaries of ours, No. 00-005956-C1-021 was filed in the Sixth Judicial
Circuit Court for Pinellas County, Florida, or the Athle-Tech Claim. The
Athle-Tech Claim alleges that Montage breached a purported software development
agreement between Athle-Tech Computer Systems Incorporated, or Athle-Tech, and
Montage. The Athle-Tech Claim also alleges that DES intentionally interfered
with Athle-Tech's claimed rights with respect to the purported Athle-Tech
Agreement and was unjustly enriched as a result. Finally, the Athle-Tech Claim
requests that the court impose a constructive trust on at least 50% of the
proceeds of the purported Athle-Tech Agreement and render a declaratory
judgment in favor of Athle-Tech. We have engaged counsel to defend the
Athle-Tech Claim. We are vigorously defending the Athle-Tech Claim.
13
In March 2000, we acquired DES. Pursuant to the Agreement and Plan of Merger
dated as of March 29, 2000 between DES, 1117 Acquisition Corporation, the
former DES shareholders and us, the former DES shareholders were entitled to an
earnout payable in shares of our common stock if the DES operating profits
exceeded at least 10% of the DES revenues during the period from March 30, 2000
until March 30, 2001. In October 2000, we entered into an amendment to the DES
Agreement and Plan of Merger to provide for an earnout based on the combined
revenues, expenses and operating profits of DES and Avid Sports, Inc. due to
the combination of the DES and Avid Sports, Inc. divisions in July 2000. We are
currently engaged in arbitration with the former DES shareholders regarding the
earnout payment, as provided for pursuant to the DES Agreement and Plan of
Merger.
We are engaged in certain additional legal actions arising in the ordinary
course of business. We believe we have adequate legal defenses and that the
ultimate outcome of these actions will not have a material effect on our
financial position or results of operations, although there can be no assurance
as to the outcome of such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- ---- --- --------
Mark L. Sanders...... 58 President, Chief Executive Officer and Director
Ajay Chopra.......... 44 Chairman of the Board and President, Professional Media Division
Arthur D. Chadwick... 44 Vice President, Finance and Administration and Chief Financial Officer
Georg Blinn.......... 53 President, Personal Web Video Division
William Loesch....... 47 Vice President, Product Management and Engineering, Personal Web
Video Division
Robert Wilson........ 47 President, Broadcast Solutions Division
There is no family relationship between any of our directors or executive
officers.
Mr. Sanders has served as our President, Chief Executive Officer and one of
our directors since January 1990.
Mr. Chopra, one of our founders, has served as Chairman of our Board of
Directors since January 1990, and has served as one of our directors since our
inception in May 1986. Mr. Chopra has served as our President, Professional
Media Division since July 2000. Mr. Chopra served as our Vice President,
General Manager, Desktop Products from April 1997 to July 2000. He previously
served as our Chief Technology Officer from June 1996 to April 1997, our Vice
President of Engineering from January 1990 to June 1996, and our President and
Chief Executive Officer from our inception to January 1990.
Mr. Chadwick has served as our Vice President, Finance and Administration
and Chief Financial Officer since January 1989.
Mr. Blinn has served as President, Personal Web Video Division since July
2000. Mr. Blinn served as Vice President, General Manager, Pinnacle Systems
GmbH from August 1997 to July 2000. Prior to joining us, Mr. Blinn was the
Chief Financial Officer of Miro Computer Products AG, a provider of video
capture cards, from December 1996 to August 1997. From January 1993 to December
1996, Mr. Blinn was an independent business consultant.
Mr. Loesch has served as our Vice President, Product Management and
Engineering, Personal Web Video Division since July 2000. Mr. Loesch served as
our Vice President, General Manager, Consumer Products from April 1997 to July
2000. Prior to that Mr. Loesch served as our Vice President, New Business
Development from May 1994 to April 1997.
Mr. Wilson has served as our President, Broadcast Solutions Division since
July 2000. Mr. Wilson served as Vice President, Broadcast Products from April
1997 to July 2000. 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.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
PCLE. The following table sets forth for the fiscal periods indicated the range
of high and low sales prices per share of the common stock as reported on the
Nasdaq National Market.
High Low
------ ------
Fiscal Year Ended June 30, 2001
First Quarter............... 24.563 7.188
Second Quarter.............. 12.625 6.469
Third Quarter............... 10.875 5.188
Fourth Quarter.............. 12.950 4.580
Fiscal Year Ended June 30, 2000
First Quarter............... 21.190 13.000
Second Quarter.............. 23.000 12.940
Third Quarter............... 35.500 19.000
Fourth Quarter.............. 31.438 18.438
As of September 5, 2001, we had approximately 287 stockholders of record of
the common stock. We have never paid cash dividends on our capital stock. We
currently expect that we will retain our future earnings for use in the
operation and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future.
On September 30, 2000, we agreed to compensate the former shareholders and
option holders of Avid Sports, Inc. because of the drop in the market price of
our common stock immediately after the acquisition. If the closing price of our
common stock did not equal or exceed $23 per share for four consecutive trading
days prior to May 31, 2001, the value of the compensation to be paid was to
equal to the number of shares issued and options assumed in the acquisition
(944,213 and 138,158, respectively) multiplied by the difference between our
average closing stock price during the month of May, 2001 and $23 per share.
The former shareholders of Avid Sports, Inc. were to be compensated in shares
of our common stock while the former option holders were to be compensated in
cash. On September 30, 2000, we recorded a charge of $13.3 million, which
represented the fair value of the arrangement on September 30, 2000, including
$0.1 million in transaction fees. This charge included a liability of $1.7
million which represented the estimated cash payout to the option holders with
the remaining $11.5 million, determined using the Black-Scholes method,
recorded as an increase in common stock. Our share price did not reach the
target level and therefore, in June 2001, we issued 1,441,660 additional shares
of our common stock to the former shareholders of Avid Sports, Inc., and paid
an aggregate of $1.3 million in cash to the former option holders of Avid
Sports, Inc. The difference between the estimated cash payout to the former
option holders of Avid Sports, Inc. at September 30, 2000 of $1.7 million and
the actual payment in June 2001, was recorded as a reduction to lower the
initial charge to the final expense of $12.9 million.
In April 2001, we elected, in accordance with the Montage Stock Acquisition
Agreement, to buy out in their entirety the earnout payments otherwise payable
to the former Montage shareholders for the twelve-month earnout periods ending
in each of April 2001 and April 2002. In connection with this buyout,
2,325,218 shares of our common stock were issuable to the former Montage
shareholders. We issued an aggregate of 1,915,855 shares of our common stock to
the former Montage shareholders. The value of these shares was approximately
$16.5 million, which we recorded as goodwill associated with the acquisition of
Montage and which is being amortized using the straight-line method over a
five-year period. We held back the remaining 399,363 buyout shares in
accordance with our right to seek indemnification from the former Montage
shareholders pursuant to the Montage Stock Acquisition Agreement. These shares
will be issued into escrow to secure our indemnification rights.
15
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data for each
of the years in the five-year period ended June 30, 2001. The results for the
fiscal year ended June 30, 2001 are not necessarily indicative of the results
for any future period. The selected consolidated financial data set forth below
should be read in conjunction with our consolidated financial statements as of
June 30, 2001 and 2000 and for each of the years in the three year period ended
June 30, 2001 and notes thereto set forth on Pages F-1 to F-27 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales........................................................ $252,659 $237,967 $159,098 $105,296 $ 37,482
Cost of sales.................................................... 144,549 113,573 74,022 48,715 23,997
-------- -------- -------- -------- --------
Gross profit.............................................. 108,110 124,394 85,076 56,581 13,485
-------- -------- -------- -------- --------
Operating expenses:
Engineering and product development.......................... 34,305 27,767 16,137 11,652 7,579
Sales and marketing.......................................... 68,304 56,126 38,871 28,365 12,464
General and administrative................................... 14,686 10,554 6,840 5,342 3,702
Legal settlement............................................. -- 2,102 -- -- --
Amortization of goodwill and other intangibles............... 30,743 18,382 2,289 936 203
In process research and development.......................... -- 3,500 6,579 16,960 4,894
Acquisition settlement....................................... 12,880 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses.................................. 160,918 118,431 70,716 63,255 28,842
-------- -------- -------- -------- --------
Operating income (loss)................................... (52,808) 5,963 14,360 (6,674) (15,357)
Interest and other income, net................................... 1,890 3,403 4,742 3,139 2,867
Impairment of equity investments................................. (1,658) -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes and cumulative effect of
change in accounting principle.................................. (52,576) 9,366 19,102 (3,535) (12,490)
Income tax expense............................................... 7,616 1,779 666 2,685 2,445
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of change in accounting
principle....................................................... (60,192) 7,587 18,436 (6,220) (14,935)
Cumulative effect of change in accounting principle.............. (356) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)............................................ $(60,548) $ 7,587 $ 18,436 $ (6,220) $(14,935)
======== ======== ======== ======== ========
Net income (loss) per share before cumulative effect of change in
accounting principle:
Basic........................................................ $ (1.16) $ 0.16 $ 0.43 $ (0.17) $ (0.50)
======== ======== ======== ======== ========
Diluted...................................................... $ (1.16) $ 0.14 $ 0.39 $ (0.17) $ (0.50)
======== ======== ======== ======== ========
Cumulative effect per share of change in accounting principle:
Basic........................................................ $ (0.01) $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Diluted...................................................... $ (0.01) $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Net income (loss) per share:
Basic........................................................ $ (1.17) $ 0.16 $ 0.43 $ (0.17) $ (0.50)
======== ======== ======== ======== ========
Diluted...................................................... $ (1.17) $ 0.14 $ 0.39 $ (0.17) $ (0.50)
======== ======== ======== ======== ========
Shares used to compute net income (loss) per share:
Basic........................................................ 51,729 48,311 42,780 35,628 29,608
======== ======== ======== ======== ========
Diluted...................................................... 51,729 55,442 46,966 35,628 29,608
======== ======== ======== ======== ========
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................ $114,422 $138,330 $120,325 $100,496 $ 57,662
Total assets........................... 266,957 322,799 196,469 132,937 70,007
Long-term debt......................... -- -- -- 163 475
Retained earnings (accumulated deficit) (53,350) 7,198 (389) (18,825) (12,605)
Shareholders' equity................... $220,362 $259,620 $166,259 $114,392 $ 62,711
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Acquisitions
Minerva Networks, Inc.--DVD authoring technology
On December 29, 2000, we acquired DVD authoring technology from Minerva
Networks, Inc., or Minerva, a provider of professional and consumer video
networking solutions that enable the convergence of television and the
Internet. The technology acquired from Minerva includes the Impression family
of DVD application software, DVD formatting software and associated
intellectual property. We paid $2.3 million in cash in December 2000, and an
additional $0.4 million in March 2001, pursuant to a purchase agreement
amendment in January 2001. The amendment was entered into as a result of both
parties agreeing that an error had been made in the original calculation of the
value of the acquired technology. We also incurred approximately $0.1 million
in transaction costs. The technology is being amortized using the straight-line
method over a three-year period.
Other Acquisitions
During fiscal year ended June 30, 2001, we acquired three companies, which
were not material individually or in the aggregate. We paid a total of $1.2
million in cash for these acquisitions. We also incurred approximately $0.2
million in transaction costs. The acquisitions were accounted for under the
purchase method of accounting. We allocated $0.5 million to goodwill and
allocated $0.9 million to identifiable intangibles. Goodwill and identifiable
intangibles are being amortized using the straight-line method over five-year
and three-year periods, respectively. The results of the acquired companies'
operations have been included in the consolidated financial statements since
their respective acquisition dates.
Avid Sports, Inc.
On June 30, 2000, we acquired all the outstanding common stock of Avid
Sports, Inc., a provider of sports editing and online sports media management
solutions. In connection with the acquisition of Avid Sports, Inc., we issued
944,213 shares of its common stock valued at $22.7 million and assumed 138,158
options valued at $1.9 million. We also incurred approximately $0.4 million in
transaction costs.
The acquisition was accounted for under the purchase method of accounting.
On June 30, 2000, we recorded $5.8 million in tangible assets, $13.4 million in
identifiable intangibles including core/developed technology, customer base and
other intangibles, assumed $15.5 million in liabilities, including $5.4 million
in deferred taxes, and allocated $21.2 million to goodwill. Goodwill and
identifiable intangibles are being amortized using the straight-line method
over five-year and three-year periods, respectively. The results of operations
of Avid Sports, Inc. have been included in our consolidated financial
statements since June 30, 2000.
On September 30, 2000, we agreed to compensate the former shareholders and
option holders of Avid Sports, Inc. because of the drop in the market price of
our common stock immediately after the acquisition. If the closing price of our
common stock did not equal or exceed $23 per share for four consecutive trading
days prior to May 31, 2001, the value of the compensation to be paid was to
equal to the number of shares issued and options assumed in the acquisition
(944,213 and 138,158, respectively) multiplied by the difference between our
average closing stock price during the month of May, 2001 and $23 per share.
The former shareholders of Avid Sports, Inc. were to be compensated in shares
of our common stock while the former option holders were to be compensated in
cash. On September 30, 2000, we recorded a charge of $13.3 million, which
represented the fair value of the arrangement on September 30, 2000, including
$0.1 million in transaction fees. This charge included a liability of $1.7
million which represented the estimated cash payout to the option holders with
the remaining $11.5 million, determined using the Black-Scholes method,
recorded as an increase in common stock. Our share price did not reach the
target level and therefore, in June 2001, we issued 1,441,660 additional shares
of our common stock to the former shareholders of Avid Sports, Inc., and paid
an aggregate of $1.3 million in cash to the former option holders of Avid
Sports, Inc. The difference between the estimated cash payout to the former
option holders of Avid Sports, Inc. at September 30, 2000 of $1.7 million and
the actual payment in June 2001, was recorded as a reduction to lower the
initial charge to the final expense of $12.9 million.
Propel Ahead, Inc.
On June 30, 2000, we acquired all the outstanding common stock of Propel
Ahead, Inc., or Propel. In connection with this acquisition, we agreed to pay
the former shareholder of Propel $3.2 million. We also
17
incurred approximately $0.1 million in transaction costs. The acquisition was
accounted for under the purchase method of accounting. On June 30, 2000, we
recorded $0.1 million in tangible assets and $3.0 million in identifiable
intangibles including core/developed technology, assumed $1.3 million in
liabilities including $1.2 million in deferred taxes, and allocated $1.5
million to goodwill. Goodwill and identifiable intangibles are being amortized
using the straight-line method over five-year and three-year periods
respectively. The results of operations of Propel have been included in our
consolidated financial statements since June 30, 2000.
The Montage Group, Ltd.
In April 2000, we acquired all the outstanding common stock of Montage, a
provider of networked non-linear editing solutions. In connection with this
acquisition, we issued 125,224 shares of our common stock valued at $3.7
million and incurred approximately $0.3 million in transaction costs. The terms
of the acquisition also included an earnout provision, payable in shares of our
common stock, wherein the former shareholders of Montage could receive
additional consideration, net of the initial payment, upon achieving certain
gross margin levels for each year of a two-year period beginning April 2000.
The Montage acquisition was accounted for under the purchase method of
accounting. In April 2000, we recorded $2.8 million in tangible assets, $0.4
million in in-process research and development, $1.6 million in identifiable
intangibles including core/developed technology assumed $4.2 million in
liabilities and allocated $3.5 million to goodwill. Goodwill and identifiable
intangibles are being amortized using the straight-line method over five-year
and three-year periods, respectively. The results of operations of Montage have
been included in our consolidated financial statements since April 2000.
In April 2001, we elected, in accordance with the Montage Stock Acquisition
Agreement, to buy out in their entirety the earnout payments otherwise payable
to the former Montage shareholders for the twelve-month earnout periods ending
in each of April 2001 and April 2002. In connection with this buyout,
2,325,218 shares of our common stock were issuable to the former Montage
shareholders. We issued an aggregate of 1,915,855 shares of our common stock to
the former Montage shareholders. The value of these shares was approximately
$16.5 million, which we recorded as goodwill associated with the acquisition of
Montage and which is being amortized using the straight-line method over a
five-year period. We held back the remaining 399,363 buyout shares in
accordance with our right to seek indemnification from the former Montage
shareholders pursuant to the Montage Stock Acquisition Agreement. These shares
will be issued into escrow to secure our indemnification rights.
Digital Editing Services, Inc.
On March 29, 2000, we acquired DES, a provider of real-time video analysis
and database solutions. In connection with this acquisition, we paid $0.3
million in cash and issued 287,752 shares of our common stock valued at $9.1
million and incurred $0.3 million in transaction costs. The terms of the
acquisition included an earnout provision wherein the former shareholders of
DES could receive additional consideration, net of the initial payment, upon
achieving certain profitability levels for the one-year period ending March 30,
2001. Operating profits from DES ranging between 10% to 20% of revenues would
result in an additional payout of between 100% to 175% of those associated
revenues respectively. In October 2000, we and the former DES shareholders
amended the earnout provisions of the acquisition agreement to correspond with
the combination of the DES and Avid Sports, Inc. businesses into one division
in June 2000. The amendment provides that any earnout payable would be based
upon the combined revenues, expenses and operating profit of DES and Avid
Sports, Inc. Combined operating profits from DES and Avid Sports, Inc. ranging
from between 10% to 20% of combined revenues would result in an additional
payment of between 55% to 96% of those associated revenues respectively. No
earnout payment would be made if operating profit did not exceed 10% of
revenues during the earnout period. Any earnout would be paid in shares of our
common stock. We are currently engaged in arbitration with the former
shareholders regarding the earnout payment, as provided for pursuant to the DES
Agreement and Plan of Merger.
The DES acquisition was accounted for under the purchase method of
accounting. As of March 30, 2000, we recorded $1.8 million in tangible assets,
$0.5 million in in-process research and development, $8.2 million in
identifiable intangibles including core/developed technology, assumed $4.6
million in liabilities, including $3.3 million in deferred taxes, and allocated
$3.8 million to goodwill. Goodwill and identifiable intangibles are being
amortized using the straight-line method over five-year and three-year periods,
respectively. The results of operations of DES have been included in our
consolidated financial statements since March 30, 2000.
Puffin Designs, Inc.
On March 24, 2000, we acquired Puffin, a provider of content creation
solutions. In connection with this acquisition, we issued 360,352 shares of our
common stock valued at $11.2 million. In addition, we assumed
18
outstanding stock options covering 51,884 shares of stock valued at $0.3
million. We also incurred approximately $0.3 million in transaction costs.
The Puffin acquisition was accounted for under the purchase method of
accounting. As of March 24, 2000, we have recorded $0.5 million in tangible
assets, $0.6 million in-process research and development, $1.2 million in
identifiable intangibles including core/developed technology, assumed $1.7
million in liabilities and allocated $11.2 million to goodwill. Goodwill and
identifiable intangibles are being amortized using the straight-line method
over five-year and three-year periods, respectively. The results of operations
of Puffin have been included in our consolidated financial statements since
March 24, 2000.
Video Communications Division of Hewlett-Packard
On August 2, 1999, we acquired substantially all of the assets of the Video
Communications Division of HP, including key technologies and intellectual
property, the Media Stream family of products and selected additional assets,
as well as most managers and employees. In consideration, we paid HP $12.6
million in cash and issued 1,546,344 shares of our common stock valued at $20.6
million. We incurred acquisition costs of approximately $0.5 million for a
total purchase price of $33.6 million and assumed liabilities totaling
$10.1 million.
The acquisition of HP's Video Communications Division was accounted for
under the purchase method of accounting. As of June 30, 2000, we recorded $7.3
million in tangible assets, $2.0 million in in-process research and
development, $19.1 million in other identifiable intangibles including
core/developed technology, customer base, trademarks, favorable contracts and
assembled workforce, assumed $10.1 million in liabilities and allocated $15.4
million to goodwill. Goodwill and other intangibles are being amortized using
the straight-line method over periods ranging from nine months to five years.
The results of operations of HP's Video Communications Division have been
included in our consolidated financial statements since August 2, 1999.
Truevision, Inc.
On March 12, 1999, we acquired the outstanding common stock of Truevision,
Inc., a supplier of digital video products, or Truevision. In connection with
the acquisition, we issued 1,648,412 shares of common stock valued at $11.5
million. In addition, we assumed 279,356 stock options, valued at $0.7 million.
We also assumed 107,672 warrants valued at $0.1 million. We incurred
acquisition costs of approximately $0.5 million, resulting in a total purchase
price of $12.8 million, and assumed liabilities totaling $13.0 million.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Truevision and the fair value of the
acquired assets and assumed liabilities have been included in our financial
statements since March 12, 1999. We recorded $3.7 million in tangible assets,
$6.2 million in in-process research and development, $2.7 million in other
identifiable intangibles including patents, trademarks and assembled workforce,
assumed $13.0 million in liabilities and allocated $13.2 million to goodwill.
Goodwill and other intangibles are being amortized using the straight-line
method over periods ranging from three to seven years.
Shoreline Studios, Inc.
In March 1999, we acquired Shoreline Studios, Inc., or "Shoreline", a
provider of real-time 3D graphics software for use in live broadcasts, for $0.8
million in cash. The transaction was accounted for under the purchase method of
accounting and resulted in $0.4 million in goodwill and $0.4 million in
in-process research and development. The results of operations of Shoreline did
not have a material effect on our results of operations.
19
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 Years Ended June 30,
--------------------------
2001 2000 1999
----- ----- -----
Net sales...................................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................................. 57.2 47.7 46.5
----- ----- -----
Gross profit............................................................ 42.8 52.3 53.5
Operating expenses:
Engineering and product development......................................... 13.6 11.7 10.1
Sales and marketing......................................................... 27.0 23.6 24.4
General and administrative.................................................. 5.8 4.4 4.3
Legal settlement............................................................ -- 0.9 --
Amortization of goodwill and other intangibles.............................. 12.2 7.7 1.5
In-process research and development......................................... -- 1.5 4.1
Acquisition settlement...................................................... 5.1 -- --
----- ----- -----
Total operating expenses................................................ 63.7 49.8 44.4
----- ----- -----
Operating income (loss)................................................. (20.9) 2.5 9.1
Interest and other income, net................................................. 0.7 1.4 3.0
Impairment of equity investments............................................... (0.6) -- --
----- ----- -----
Income (loss) before income taxes and cumulative effect of change in accounting
principle.................................................................... (20.8) 3.9 12.1
Income tax expense............................................................. 3.0 0.7 0.4
----- ----- -----
Income (loss) before cumulative effect of change in accounting principle....... (23.8) 3.2 11.7
Cumulative effect of change in accounting principle............................ (0.2) -- --
----- ----- -----
Net income (loss)....................................................... (24.0)% 3.2% 11.7%
===== ===== =====
The tables below present sales data by division:
Net Sales
Fiscal Years Ended June 30,
--------------------------- '01-'00 '00-'99
Division 2001 2000 1999 % Change % Change
- -------- -------- -------- -------- -------- --------
Broadcast Solutions.................... $ 88,925 $ 85,618 $ 26,917 3.9% 218.1%
Professional Media..................... 51,751 43,815 36,283 18.1% 20.8%
Personal Web Video..................... 111,983 108,534 95,898 3.2% 13.2%
-------- -------- -------- ----- ------
$252,659 $237,967 $159,098 6.2% 49.6%
======== ======== ======== ===== ======
Sales Percentages
Division 2001 2000 1999
- -------- ------ ------ ------
Broadcast Solutions.................... 35.2% 36.0% 16.9%
Professional Media..................... 20.5% 18.4% 22.8%
Personal Web Video..................... 44.3% 45.6% 60.3%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Comparison of the Years Ended June 30, 2001 and 2000
Net Sales. Net sales increased in all three divisions in the fiscal year
ended June 30, 2001, compared to fiscal 2000. In the Broadcast Solutions
division, sales increased 3.9% during the year ended June 30, 2001 as compared
to the prior year. The increase in Broadcast Solutions sales was primarily due
to the sale of sports products obtained through the acquisition of Avid Sports,
Inc. and DES, and increases in sales of the Deko line, which more than offset
declines in sales of existing products including a decline in sales of Media
Stream servers. In the Professional Media division, sales increased 18.1% in
the fiscal year ended June 30, 2001, compared to the fiscal year ended June 30,
2000. This increase was due mostly to sales of Media's recent product releases
that include the TARGA line, StreamGenie, and StreamFactory. In the Personal
Web Video division, sales increased 3.2% in the fiscal year ended June 30, 2001
compared to the fiscal year ended June 30, 2000. Sales in the Personal Web
Video Division increased due to the introduction and sale of Studio DV, DV500
and DV500plus, which more than offset declines in older products such as DC10,
DC30 and DC30 Pro.
20
International sales (sales outside of North America) increased 10.7% in the
fiscal year ended June 30, 2001 and accounted for approximately 57.3% and 55.0%
of our net sales in fiscal 2001 and 2000, respectively. As a percentage of our
total net sales, international sales increased primarily due to increased sales
in the Asia Pacific region. We expect that international sales will continue to
represent a significant portion of our total net sales.
Gross Profit. We distribute and sell our products to end users through the
combination of independent domestic and international dealers and VARs, retail
distributors, OEMs and, to a lesser extent, a direct sales force. Sales to
dealers, VARs, distributors and OEMs are generally at a discount to the
published list prices. The amount of discount, and consequently, our gross
profit, varies depending on the product, the channel of distribution, the
volume of product purchased and other factors. In addition to direct material
costs, cost of sales consists primarily of costs related to the procurement of
components and subassemblies, labor and overhead associated with procurement,
assembly and testing of finished products, inventory management, warehousing,
shipping, warranty costs, royalties and provisions for excess or obsolescence
and shrinkage. In the fiscal year ended June 30, 2001, total gross profit
decreased to 42.8% from 52.3% in the fiscal year ended June 30, 2000.
Included in the cost of sales for the fiscal year ended June 30, 2001 was a
$10.2 million inventory charge, consisting of a $2.5 million charge and a $7.7
million charge in the first and fourth quarters, respectively, of 2001. The
charges related to discontinued products and accessories primarily in the
Broadcast Solutions and Professional Media divisions. These inventory charges
were part of reorganizations we implemented in each of the first and fourth
quarters of fiscal 2001, as described in more detail below and in General and
Administrative.
In the first quarter of fiscal 2001, we reorganized our internal reporting
structure to facilitate better and more efficient reporting and to increase
accountability. In conjunction with this reorganization, we streamlined our
product line offerings by discontinuing certain products, including primarily
Alladin and the 18G and 50G versions of the Media Stream servers, and by
writing down excess Targa 2000 and DVD 1000 inventory to its net realizable
value. This resulted in an inventory charge of $2.5 million to reduce the
inventory carrying value to its estimated net realizable value on the secondary
parts market. This inventory was subsequently sold on the secondary parts
market for approximately its revised carrying amount. As a result of this
reorganization, we increased the effectiveness of our internal processes and
streamlined our product offerings, which we expect will indirectly improve our
operating results over time. We do not expect the direct effect on future
earnings to be significant.
During the fourth quarter of fiscal 2001, we reorganized further and
streamlined our operations into three distinct divisions: the Broadcast
Solutions division, the Professional . Media division and the Personal Web
Video division. Each of these divisions was given full profit and loss
responsibility. As part of this reorganization, which was implemented to reduce
operating losses in response to decreased sales, we reevaluated our product
offerings and better aligned them within our distribution channels. This
reevaluation led to the discontinuance of certain products in an effort to
simplify our manufacturing, sales and marketing processes and to more rapidly
transition to newer product designs. As a result, we recorded a $7.7 million
inventory charge to write down inventory to its estimated net realizable value.
The discontinued products primarily consisted of certain versions of our PCTV,
Thunder, DC30, DC50, DV300, DV200 and MP10 products. To the extent any of the
inventory is not scrapped or sold on the secondary parts market, we intend to
disclose the estimated impact on gross margin if significant. It is difficult
to assess how the discontinuation of these products will impact future sales
and profitability. However, we believe that the resulting simplified product
lines will result in improved efficiencies in marketing, sales, and
manufacturing.
Excluding these inventory charges, gross profit would have been 46.8% in the
fiscal year ended June 30, 2001. This decrease in our margin was primarily due
to a decrease in margins in the Broadcast Solutions and Personal Web Video
divisions. Excluding the $4.4 million portion of the inventory charge that
related to Broadcast Solutions products, Broadcast Solutions margins dropped to
51.2% from 60.5% in the fiscal year ended June 30, 2001 and 2000, respectively.
The decrease in Broadcast Solutions margins was primarily due to lower selling
prices in the Media Stream product family. Excluding the $3.5 million portion
of the inventory charge that related to Professional Media products,
Professional Media margins were relatively unchanged in the fiscal year ended
June 30, 2001 compared to the prior year. Excluding the $2.3 million portion of
the inventory charge that related to Personal Web Video products, Personal Web
Video margins dropped to 40.8% from 45.5% in the fiscal years ended June 30,
2001 and 2000, respectively. This decrease in Personal Web Video margins was
primarily due to reduced pricing on products aimed at the consumer market. We
have experienced, and expect to continue to experience, pricing pressures on
all of our products as the industry matures and competition increases.
21
Engineering and Product Development. Engineering and product development
expenses include costs associated with the development of new products and
enhancements of existing products and consist primarily of employee salaries
and benefits, prototype and development expenses, depreciation and facility
costs. Engineering and product development expenses increased 23.5% to $34.3
million in the fiscal year ended June 30, 2001 from $27.8 million in the fiscal
year ended June 30, 2000. This increase was due primarily to higher engineering
and product development expenses as a result of acquiring Puffin, DES, Montage,
and Avid Sports, Inc. As a percentage of sales, engineering and product
development expenses were 13.6% in the fiscal year ended June 30, 2001 compared
to 11.7% in the fiscal year ended June 30, 2000, as a result of our efforts to
focus more resources on developing new products. We believe that investment in
research and development is crucial to our future growth and position in the
industry and expect to continue to allocate significant resources to all of our
engineering and product development locations throughout the world.
Sales and Marketing. Sales and marketing expenses include compensation and
benefits for sales and marketing personnel, commissions, travel, advertising
and promotional expenses including channel marketing funds and trade shows, and
professional fees for marketing services. Sales and marketing expenses
increased 21.7% to $68.3 million in the fiscal year ended June 30, 2001 from
$56.1 million in the fiscal year ended June 30, 2000. This increase was due to
the addition of sales and marketing expenses as a result of the acquisitions of
Puffin, DES, Montage, and Avid Sports, Inc., along with increases in Europe and
the U.S. These increases reflect expenditures to achieve our goal of increased
sales and market share and expanded product awareness in new and existing
markets throughout the world. As a percentage of net sales, sales and marketing
expenditures increased to 27.0% in the fiscal year ended June 30, 2001 from
23.6% in the fiscal year ended June 30, 2000.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits for administrative, executive, finance and
management information systems personnel, legal and accounting costs, IT
infrastructure costs, bad debt expense, and other corporate administrative
expenses. General and administrative expenses increased 39.2% to $14.7 million
in the fiscal year ended June 30, 2001 from $10.6 million in the fiscal year
ended June 30, 2000. This increase in general and administrative expenses was
primarily due to the increased investment necessary to manage and support our
increased scale of operations and the infrastructure related to our new
business units. Other contributing factors were an increase in the bad debt
provision and higher legal fees associated with the class action lawsuit filed
against us in July 2000 (See Item 3--Legal Proceedings). This increase also
includes reorganization costs of approximately $1.4 million. As discussed in
Gross Profit, we completed reorganizations in the first and fourth quarters of
fiscal 2001.
In the first quarter of fiscal 2001, we reorganized our internal reporting
structure by changing the organizational structure in order to facilitate
better and more efficient internal reporting of the results of its business
units. This reorganization required a modest reduction in headcount due to the
more efficient organizational structure, resulting in involuntary termination
expenses of $342,000, consisting primarily of severance for employees that were
terminated during the first quarter of 2001. We believe this reorganization
improved internal accountability.
During the fourth quarter of fiscal 2001, we reorganized further and
streamlined our operations into three distinct divisions: the Broadcast
Solutions division, the Professional .Media division and the Personal Web Video
division. Each of these divisions was given full profit and loss
responsibility. As part of this reorganization, which was implemented to reduce
operating losses in response to decreased sales, we eliminated certain
redundant positions, resulting in involuntary termination expenses of
approximately $1.1 million related to severance and associated costs related to
employees that were terminated during the quarter. As a result of this
reorganization and a reduction in discretionary spending, we expect to
significantly decrease total operating expenses by approximately $4 million in
the first quarter of fiscal 2002; however, we expect operating expenses to
increase as its business stabilizes and returns to growth.
As a percentage of total revenue, general and administrative expenses were
5.8% and 4.4% in the fiscal years ended June 30, 2001 and 2000, respectively.
Legal Settlement. During the third quarter of 2000, we recorded a $2.1
million charge for a legal settlement related to a lawsuit filed against us by
Hot Key Pty Ltd, one of our former distributors, located in Australia. The
complaint entitled Hot Key Pty Ltd. vs. Pinnacle Systems, Inc., No. C-99-20487
(RMW) was filed in the United States District Court for the Northern District
of California on May 28, 1999, and alleged causes of action for breach of
contract, fraud and deceit, breach of the implied covenant of good faith and
fair dealing, and breach of express warranty. Both parties agreed to use
non-binding mediation in an attempt to resolve the issue and reached an
out-of-court settlement in March 2000. Prior to the settlement, we did not
believe any potential loss was estimable and therefore did not accrue or record
any loss in our financial statements prior to that time.
22
Amortization of Acquisition--Related Intangible Assets. Amortization of
acquisition related intangibles consists of amortization of goodwill and
identifiable intangibles including, among others, core/developed technology,
customer base, trademarks, favorable contracts and assembled workforce. These
assets are being amortized using the straight-line method over periods ranging
from three to nine years. The amortization increased from $18.4 million in the
fiscal year ended June 30, 2000 to $30.7 million in the year ended June 30,
2001. The increase was primarily related to amortization of additional goodwill
and other intangibles resulting from the six acquisitions we made during fiscal
2000 and the acquisition of DVD authoring technology from Minerva during fiscal
2001.
Acquisition Settlement. On September 30, 2000, we agreed to compensate the
former shareholders and option holders of Avid Sports, Inc. because of the drop
in the market price of our common stock immediately after the acquisition. If
the closing price of our common stock did not equal or exceed $23 per share for
four consecutive trading days prior to May 31, 2001, the value of the
compensation to be paid was to equal to the number of shares issued and options
assumed in the acquisition (944,213 and 138,158, respectively) multiplied by
the difference between our average closing stock price during the month of May,
2001 and $23 per share. The former shareholders of Avid Sports, Inc. were to be
compensated in shares of our common stock while the former option holders were
to be compensated in cash. On September 30, 2000, we recorded a charge of
$13.3 million, which represented the fair value of the arrangement on September
30, 2000, including $0.1 million in transaction fees. This charge included a
liability of $1.7 million which represented the estimated cash payout to the
option holders with the remaining $11.5 million, determined using the
Black-Scholes method, recorded as an increase in common stock. Our share price
did not reach the target level and therefore, in June 2001, we issued 1,441,660
additional shares of our common stock to the former shareholders of Avid
Sports, Inc., and paid an aggregate of $1.3 million in cash to the former
option holders of Avid Sports, Inc. The difference between the estimated cash
payout to the former option holders of Avid Sports, Inc. at September 30, 2000
of $1.7 million and the actual payment in June 2001, was recorded as a
reduction to lower the initial charge to the final expense of $12.9 million.
In-Process Research and Development. During the fiscal year ended June 30,
2001, we did not incur in-process research and development charges. During the
year ended June 30, 2000, we recorded in-process research and development costs
of approximately $3.5 million, mostly related to the acquisitions of the Video
Communications Division from HP, and of Puffin, DES and Montage. The value
assigned to purchased in-process research and development was determined by
estimating the cost to develop the purchased in-process research and
development into commercially viable products; estimating the resulting net
cash flows from such projects; discounting the net cash flows back to the time
of acquisition using a risk-adjusted discount rate and then applying an
attribution rate based on the estimated percent complete considering the
approximate stage of completion of the in-process technology at the date of
acquisition.
Impairment of Equity Investments. We recorded impairment losses on two
equity investments of $1.7 million during the fiscal year ended June 30, 2001.
Impairment losses are recognized on equity investments when we determine that
there has been a decline in the carrying amount of the investment that is other
than temporary. The impairment charge relates to non-marketable equity
securities.
Interest and Other Income, net. Net interest and other income consists
primarily of interest income generated from our investments in money market
funds, government securities and high-grade commercial paper. In the fiscal
year ended June 30, 2001, interest income decreased approximately 44.5% to $1.9
million from $3.4 million in the fiscal year ended June 30, 2000. This decrease
reflects both a reduction in interest rates and a reduction in our cash and
marketable securities balances.
Income Tax Expense. Income taxes are comprised of federal, state and
foreign income taxes. We recorded provisions for income taxes of $7.6 million
and $1.8 million for the fiscal years ended 2001 and 2000, respectively. We
incurred a tax expense in the fiscal year ended 2001 primarily because of the
increase in our valuation allowance on deferred tax assets. The tax expense
incurred in the fiscal year ended June 30, 2001 was offset by nondeductible
in-process research and development and goodwill amortization as a result of
various acquisitions during the fiscal year ended June 30, 2000. The total
valuation allowance was $32.5 million and $9.3 million as of June 30, 2001 and
2000, respectively.
As of June 30, 2001, we had federal and state net operating loss
carryforwards of approximately $43.8 million and $19.7 million, respectively.
Our federal net operating loss carryforwards expire in the years 2013 through
2021, if not utilized. Our state net operating loss expires in the years 2003
through 2011, if not utilized. In addition, we had federal research and
experimentation credit carryforwards of $3.1 million, which expire in the years
2002 through 2021, and state research and experimentation credit carryforwards
of $1.9 million, which have no expiration provision.
23
Comparison of the Years Ended June 30, 2000 and 1999
Net Sales. Net sales increased in all three product groups in the fiscal
year ended June 30, 2000, compared to fiscal 1999. Broadcast sales increased
218.1% primarily due to the sale of products obtained through acquisitions.
These included the sale of MediaStream products acquired from HP and from the
sports and news solutions acquired from DES, Avid Sports, Inc., and Montage. In
the professional group, sales increased 20.8% in the fiscal year ended June 30,
2000, over fiscal 1999. Sales of new generation products such as the TARGA
products acquired from Truevision, Inc. in March 1999 more than compensated for
a decrease in sales of Reel-time. In the consumer group, sales increased 13.2%
in the fiscal year ended June 30, 2000 over fiscal 1999. Decreased sales of
Studio 400, DC30, DV300, and DC50 were offset by sales of newer products such
as Studio DV, Studio USB1, Studio MP10, DV500, and DC1000.
International sales (sales outside of North America) increased 35.4% in the
fiscal year ended June 30, 2000 and accounted for approximately 56.0% and 60.8%
of our net sales in fiscal 2000 and 1999, respectively. The increase in
international sales in fiscal 2000 was due primarily to increased sales in
United Kingdom and the Asia Pacific regions. Sales into continental Europe also
increased. As a percentage of our total net sales, international sales
decreased primarily due to an increase in domestic sales from the broadcast
group.
Gross Profit. We distribute and sell our products to end users through the
combination of independent domestic and international dealers and VARs, retail
distributors, OEMs and, to a lesser extent, a direct sales force. Sales to
dealers, VARs, distributors and OEMs are generally at a discount to the
published list prices. The amount of discount, and consequently, our gross
profit, varies depending on the product, the channel of distribution, the
volume of product purchased, and other factors. Cost of sales consists
primarily of costs related to the procurement of components and subassemblies,
labor and overhead associated with procurement, assembly and testing of
finished products, inventory management, warehousing, shipping, warranty costs,
royalties, provisions for obsolescence and shrinkage. In the fiscal year ended
June 30, 2000, total gross profit decreased to 52.3% from 53.5% in the fiscal
year ended June 30, 1999. While broadcast margins increased slightly from year
to year, professional margins dropped to 53.1% from 56.6% in the fiscal years
ended June 30, 2000 and 1999, respectively. This drop in the professional
margin was primarily due to a change in product mix. Broadcast margins
increased slightly in the fiscal year ended June 30, 2000 due to a favorable
product mix, which included sales of Media Stream products. Consumer margins
for the fiscal year ended June 30, 2000 dropped to 45.5% from 51.1% in fiscal
1999.
Engineering and Product Development. Engineering and product development
expenses include costs associated with the development of new products and
enhancements of existing products and consist primarily of employee salaries
and benefits, prototype and development expenses, depreciation and facility
costs. Engineering and product development expenses increased 72.1% to $27.8
million in the fiscal year ended June 30, 2000 from $16.1 million in the fiscal
year ended June 30, 1999. As a percentage of sales, engineering and product
development expenses were 11.7% in the fiscal year ended June 30, 2000 compared
to 10.1% in the fiscal year ended June 30, 1999. This increase was due
primarily to the personnel hired in connection with the HP and Truevision
acquisitions, which occurred in August 1999 and March 1999, respectively. We
believe that investment in research and development is crucial to our future
growth and position in the industry.
Sales and Marketing. Sales and marketing expenses include compensation and
benefits for sales and marketing personnel, commissions, travel, advertising
and promotional expenses including channel marketing funds and trade shows, and
professional fees for marketing services. Sales and marketing expenses
increased 44.4% to $56.1 million in the fiscal year ended June 30, 2000 from
$38.9 million in the fiscal year ended June 30, 1999. These increases reflect
expenditures to achieve our goal of increased sales and market share and
expanded product awareness. Sales and marketing expenses also increased due to
acquisitions, notably the Video Communications Division of HP, expanded
operations in Japan and new expenditures in connection with product releases.
Although sales and marketing expenditures increased significantly from fiscal
1999 to fiscal 2000, as a percentage of net sales, expenditures dropped to
23.6% in fiscal 2000 from 24.4% in fiscal 1999. This decrease reflects a growth
in sales exceeding incremental sales and marketing expenditures.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits for administrative, executive, finance and
MIS personnel, occupancy costs and other corporate administrative expenses.
General and administrative expenses increased 54.3% to $10.6 million in the
fiscal year ended June 30, 2000 from $6.8 million in the fiscal year ended June
30, 1999. As a percentage of total revenue, general and administrative expenses
were 4.4% and 4.3% in the fiscal years ended June 30, 2000 and 1999,
respectively. This increase in the absolute dollar amount of general and
administrative expenses was primarily due to increased investment necessary to
manage and support our increased scale of operations. These included staffing
and associated benefits, non-capitalized expenses related to our new SAP
information system, and legal and professional fees.
24
In-Process Research and Development. During the year ended June 30, 2000,
we recorded an in-process research and development charge of approximately $3.5
million, mostly related to the acquisitions of the Video Communications
Division from HP, and of Puffin, DES and Montage. During the year ended June
30, 1999, we recorded an in-process research and development charge of
approximately $6.6 million, mostly related to the Truevision acquisition.
The amounts charged to in-process research and development were based on
established valuation techniques in the high-technology industry. The portion
of the purchase price allocated to in-process research and development
represents development projects that have not yet reached technological
feasibility and have no alternative future use. Technological feasibility was
determined based on: (i) an evaluation of the product's status in the
development process with respect to utilization and contribution of the
individual products as of the date of valuation and (ii) the expected dates in
which the products would be commercialized. We determined that technological
feasibility was achieved when a product reached beta stage. The values assigned
to purchased in-process research and development were determined by estimating
the costs to develop the purchased in-process research and development into
commercially viable products; estimating the resulting net cash flows from such
projects; discounting the net cash flows back to the time of acquisition using
a risk-adjusted discount rate and then applying an attribution rate based on
the estimated percent complete considering the approximate stage of completion
of the in-process technology at the date of acquisition. A discount and
attribution rate of 35% was used in the Video Communications Division valuation
and a 30% rate was used in the valuations of Puffin, DES and Montage.
Of the $6.6 million in-process research and development charges in fiscal
1999, a majority, $6.2 million, related to the acquisition of Truevision and
$0.4 million to the acquisition of Shoreline Studios. Of the $3.5 million
in-process research and development charge in fiscal 2000, $2.0 million related
to the acquisition of HP's Video Communications Division, $0.4 million to the
acquisition of Montage, $0.5 million to the acquisition of DES and $0.6 million
to the acquisition of Puffin Designs.
We have successfully completed the development of the in-process technology
for each of those six acquisitions and have successfully commercialized each of
those technologies. For example, the in-process research and development
acquired from Truevision related to the "3000 Series TARGA" technology, which
was completed in the fourth quarter of fiscal 2000. This in-process research
and development accounted for over 60% of our acquired in-process research and
development during fiscal 1999 and 2000 combined.
There has been no material variation between the projected and actual
results of the development projects we acquired in the six acquisitions we
completed during fiscal 1999 and 2000, with the exception of an approximate 9
month delay in the development of the 3000 Series TARGA technology and at least
an eighteen month delay in the development of the Vortex technology. The 3000
Series TARGA technology has been successfully integrated as a key video
processing component of many of our broadcast and professional products,
including the Vortex news systems, the Deko Graphics systems and our sports
systems. The Vortex technology is nearing completion, and we have several
installations in process and are generating significant orders. In addition, we
have not experienced any unexpected, materially adverse financial results due
to any delays associated with the development or implementation of any of these
acquired in-process technologies.
Amortization of Acquisition--Related Intangible Assets. Amortization of
acquisition related intangibles consists of amortization of goodwill and
identifiable intangibles including core/developed technology, customer base,
trademarks, favorable contracts and assembled workforce. These assets are being
amortized using the straight-line method over periods ranging from nine-months
to nine years. The amortization increased from $2.3 million in the fiscal year
ended June 30, 1999 to $18.4 million in the fiscal year ended June 30, 2000.
This increase was primarily due to the amortization of goodwill and other
intangibles acquired in the Truevision and Video Communications Division
acquisitions in March and August 1999, respectively.
Interest Income, net. Net interest income and other consists primarily of
interest income generated from our low risk investments in money market funds,
government securities and high-grade commercial paper. Interest income
decreased approximately 28.2% to $3.4 million in the fiscal year ended June 30,
2000 from $4.7 million in the fiscal year ended June 30, 1999. This decrease
reflects a reduction in our cash and marketable securities due to an
acquisition payment of $12.6 million paid to HP in August 1999.
Income Tax Expense. Income taxes are comprised of federal, state and
foreign income taxes. We recorded provisions for income taxes of $1.8 million
and $0.7 million for the fiscal years ended 2000 and 1999, respectively. The
provision for income taxes as a percentage of pretax income was 19% and 3.5%,
respectively. The tax rates in both fiscal years ended 2000 and 1999 are lower
than the statutory tax rate mainly due to the
25
reduction of our valuation allowance. The tax rate in the fiscal year ended
June 30, 1999 was significantly lower than the rate in the fiscal year ended
June 30, 2000 as a larger portion of valuation allowance was written down
during the fiscal year ended June 30, 1999. The tax rate in the fiscal year
ended June 30, 2000 was also increased by nondeductible in-process R&D and
goodwill amortization as a result of various acquisitions during the year. The
total valuation allowance was $9.3 million and $6.2 million as of June 30, 2000
and 1999, respectively.
As of June 30, 2000, we had federal and state net operating loss
carryforwards of approximately $13.9 million and $5.7 million, respectively.
Our federal net operating loss carryforwards expire in the years 2012 through
2020, if not utilized. Our state net operating loss expires in the years 2002
through 2005, if not utilized. In addition, we had federal research and
experimentation credit carryforwards of $3.1 million, which expire in the years
2001 through 2020, and state research and experimentation credit carryforwards
of $2.3 million, which have no expiration provision.
Liquidity and Capital Resources
We have funded our operations to date through the sale of equity securities
as well as through cash flows from operations. As of June 30, 2001, our
principal sources of liquidity were cash and cash equivalents totaling
approximately $47.8 million, which represents a decrease of $10.6 million from
approximately $58.4 million in the fiscal year ended June 30, 2000. We believe
that existing cash and cash equivalent balances as well as the anticipated cash
flow from operations will be sufficient to support our current operations and
growth for the foreseeable future.
Our operating activities consumed $22.0 million in cash in the fiscal year
ended June 30, 2001 versus generating $4.6 million in cash in the fiscal year
ended June 30, 2000. This increase in cash consumption was primarily
attributable to our net loss of $1.8 million after adjusting for the
acquisition settlement, depreciation and amortization, impairment of equity
investments, provision for doubtful accounts, and deferred taxes. In addition,
there was an increase in inventories and a decrease in accounts receivable and
accounts payable. Inventory management is an area of focus as we balance the
need to maintain strategic inventory levels to ensure competitive lead times
and provide timely customer service versus the risk of inventory obsolescence
because of rapidly changing technology and customer requirements.
Our investing activities generated approximately $11.3 million in cash in
the fiscal year ended June 30, 2001 versus consuming approximately $5.6 million
in the fiscal year ended June 30, 2000. During the fiscal year ended June 30,
2001, cash flows from investing activities included net payments of $7.5
million related to acquisitions versus net payments of $12.3 million in the
fiscal year ended June 30, 2000. During the year ended June 30, 2001, we paid
$3.4 million in July 2000 for the acquisition of Propel in June 2000, and $2.3
million in December 2000 for the acquisition of DVD authoring technology from
Minerva. We paid an additional $0.4 million in March 2001 for the acquisition
of DVD authoring technology from Minerva. The majority of the payment in the
fiscal year ended June 30, 2000 related to the acquisition of Video
Communications Division from HP. Amounts invested in property and equipment in
the fiscal year ended June 30, 2001 were $4.6 million compared to $8.6 million
in the fiscal year ended June 30, 2000. The high level of expenditures in
fiscal 2000 primarily reflects payments for leasehold improvements, furniture
and equipment purchased for our Mountain View facility expansion in August 1999
to accommodate increased headcount related to the Video Communications Division
acquisition and to fund our SAP implementation. Such capital expenditures were
financed from working capital. We received proceeds from the sale and maturity
of marketable securities of $43.1 million in fiscal 2001 compared to $99.7
million. We purchased marketable securities for $19.4 million in fiscal 2001
compared to $83.0 million.
Cash flows from financing activities consist mostly of proceeds from the
purchase of our common stock through the employee stock purchase plan, or ESPP,
and the exercise of employee stock options. Our financing activities generated
approximately $0.3 million in the fiscal year ended June 30, 2001 versus $13.3
million in the fiscal year ended June 30, 2000. Cash generated from the
issuance of common stock was $6.8 million in the fiscal year ended June 30,
2001 versus $13.5 million in the fiscal year ended June 30, 2000. This decrease
is due mainly to the drop in the market price of our common stock. We may
continue to experience a decrease in the cash proceeds from stock option
exercises, and in employee stock purchases pursuant to the plan, if the stock
maintains a moderately low price level. In July 2000, our Board of Directors
authorized the repurchase of up to 3.0 million shares of our common stock. As
of June 30, 2001, we had repurchased a total of 0.8 million shares of our
common stock at a cost of $6.5 million. Approximately 2.2 million shares remain
authorized for repurchase.
26
FACTORS AFFECTING OPERATING RESULTS
[X] There are various factors which may cause our net revenues and
operating results to fluctuate.
Our quarterly and annual operating results have varied significantly in the
past and may continue to fluctuate because of a number of factors, many of
which are outside our control. These factors include:
. Increased competition and pricing pressure
. Timing of significant orders from and shipments to major customers,
including OEM's and our large broadcast accounts
. Timing and market acceptance of new products
. Success in developing, introducing and shipping new products
. Dependence on distribution channels through which our products are sold
. Accuracy of our and our resellers' forecasts of end-user demand
. Accuracy of inventory forecasts
. Ability to obtain sufficient supplies from our subcontractors
. Timing and level of consumer product returns
. Foreign currency fluctuations
. Costs of integrating acquired operations
. General domestic and international economic conditions
We also experience significant fluctuations in orders and sales due to
seasonal fluctuations, the timing of major trade shows and the sale of consumer
products in anticipation of the holiday season. Sales usually slow down during
the summer months of July and August, especially in Europe. Also, we attend a
number of annual trade shows, which can influence the order pattern of
products, including CEBIT in March, the NAB convention in April and the IBC
convention in September. Our operating expense levels are based, in part, on
our expectations of future revenue and, as a result, net income would be
disproportionately affected by a shortfall in net sales. Due to these factors,
we believe that quarter-to-quarter comparisons of our results of operations are
not necessarily meaningful and should not be relied upon as indicators of
future performance.
[X] Deteriorating market conditions and continued economic uncertainty
could materially adversely impact our revenues and growth rate.
As a result of recent unfavorable economic conditions and reduced capital
spending, individuals and companies have delayed or reduced expenditures, as we
experienced during the fourth fiscal quarter of 2001. The revenue growth and
profitability of our business depends primarily on the overall demand for our
products. Softening demand for these products resulting from ongoing economic
uncertainty may result in decreased revenues or earnings levels or growth
rates. If the economic conditions in the United States worsen or if a wider
global economic slowdown occurs, demand for our products may weaken, and our
business, operating results, financial condition and stock price may be
materially adversely affected as a result.
[X] Our revenues, particularly in the Broadcast Solutions Division, are
increasingly becoming dependent on large broadcast system sales to a few
significant customers. Our business and financial condition may be materially
adversely affected if sales are delayed or not completed within a given quarter
or if any of our significant customers terminate their relationship, or
contracts, with us, modify their requirements which may delay installation and
revenue recognition, or significantly reduce the amount of business they do
with us.
We expect sales of large broadcast systems to a few significant customers to
continue to constitute a material portion of our net revenues. Our quarterly
and annual revenues could fluctuate significantly if:
. Sales to one or more of our significant customers are delayed or are not
completed within a given quarter.
. The contract terms preclude us from recognizing revenue during that
quarter.
. We are unable to provide any of our major customers with products in a
timely manner and on competitive pricing terms.
. Any of our major customers experience competitive, operational or
financial difficulties.
27
. Any of our major customers terminate their relationship with us or
significantly reduce the amount of business they do with us.
. Any of our major customers reduce their capital investments in our
products in response to slowing economic growth.
If we are unable to complete anticipated transactions within a given quarter,
our revenues may fall below the expectations of market analysts, and our stock
price could drop.
[X] We incurred losses in fiscal 2001 and expect to continue to incur
losses in fiscal 2002.
In fiscal 2001, we recorded net losses of approximately $60.5 million. In
light of the current economic downturn, we expect revenues in fiscal 2002 to be
lower than revenues in fiscal 2001 and, as a result, we expect to incur net
losses in fiscal 2002.
[X] Quarter-end discounting, resulting from customers delaying negotiations
until quarter-end in an effort to improve their ability to obtain more
favorable pricing terms, may delay sales transactions.
We recognize a substantial portion of our revenues in the last month or
weeks of a given quarter, and our revenues in a given quarter depend
substantially on orders booked during the last month or weeks of a quarter. Due
to the prevalence of end-of-month sales activity, if certain sales cannot be
closed during those last weeks, sales may be deferred until the following
quarter. This may cause our quarterly revenues to fall below analysts'
expectations.
[X] We are dependent on contract manufacturers and single or limited source
suppliers for our components. If these manufacturers and suppliers do not meet
our demand either in volume or quality, our business and financial condition
could be materially harmed.
We rely on subcontractors to manufacture our desktop and consumer products
and the major subassemblies of our broadcast products. We and our manufacturing
subcontractors are dependent upon single or limited source suppliers for a
number of components and parts used in our products, including certain key
integrated circuits. Our strategy to rely on subcontractors and single or
limited source suppliers involves a number of significant risks, including:
. Loss of control over the manufacturing process
. Potential absence of adequate capacity
. Potential delays in lead times
. Unavailability of certain process technologies
. Reduced control over delivery schedules, manufacturing yields, quality and
cost
. Unexpected increases in component costs
If any significant subcontractor or single or limited source supplier
becomes unable or unwilling to continue to manufacture these subassemblies or
provide critical components in required volumes, we will have to identify and
qualify acceptable replacements or redesign our products with different
components. Additional sources may not be available and product redesign may
not be feasible on a timely basis. This could materially harm our business. Any
extended interruption in the supply of or increase in the cost of the products,
subassemblies or components manufactured by third party subcontractors or
suppliers could materially harm our business.
[X] We must retain key employees to remain competitive.
If certain of our key employees leave or are no longer able to perform
services for us, this could materially and adversely affect our business. We
may not be able to attract and retain a sufficient number of managerial
personnel and technical employees to compete successfully. We believe that the
efforts and abilities of our senior management and key technical personnel are
very important to our continued success. Our success is dependent upon our
ability to attract and retain qualified technical and managerial personnel. We
may not be able to retain our key technical and managerial employees or
attract, assimilate and retain such other highly qualified technical and
managerial personnel as are required in the future. Also, employees may leave
our employ and subsequently compete against us, or contractors may perform
services for competitors of ours. If we are unable to retain key personnel, our
business could be materially harmed.
28
[X] We incurred negative cash flow in fiscal 2001 and expect to continue to
incur negative cash flow in fiscal 2002, and our financial condition and
results of operations may be adversely affected as a result.
In the fiscal year ended June 30, 2001, we had negative cash flow from
operations of approximately $22.0 million. In light of the recent economic
downturn, our losses in the fourth quarter of fiscal 2001 and our projected
losses for fiscal 2002, we believe that we will continue to incur negative cash
flow in fiscal 2002. If we continue to incur negative cash flow, we may be at a
competitive disadvantage due to several factors, including:
. Insufficient working capital;
. Insufficient capital for acquisitions; and
. Limited access to additional capital.
If we are competitively disadvantaged due to these or other factors, our
revenues may decrease, intensifying our cash flow deficiency, and our financial
condition and results of operations may be adversely affected as a result.
[X] If we experience difficulty in developing and installing our Vortex
News systems, our financial position and results of operations could be harmed.
In March 2000, we acquired all of the outstanding stock of Montage. The
Montage product line includes Vortex News, a networked news solution for
broadcasters. Since the Montage acquisition, we have invested significant
resources and capital to further develop the Vortex News products, and to
integrate those products into our existing products. We have received a limited
number of significant orders for our Vortex News products from a few important
customers, and have experienced delays in the installation of some of those
systems. To date, we have not completed the installation nor assured the proper
functioning of any large Vortex News installations. If we continue to
experience delays and difficulty in installing our Vortex News systems or in
adapting these systems to our customers' needs, or if our customers are
dissatisfied with the functionality or performance of our Vortex News systems
once they are installed, these systems may not obtain broad market acceptance
or contribute meaningfully to our revenues or profitability. In addition, if we
do not successfully install, market and sell these systems, we will consume
significant resources without obtaining commensurate revenue, and our financial
position and results of operations will be harmed.
[X] Any failure to successfully integrate the businesses we have acquired
could negatively impact us.
In December 2000, we acquired DVD authoring technology from Minerva. In June
2000, we acquired Avid Sports, Inc. and Propel. In April 2000, we acquired
Montage. In March 2000, we acquired DES and Puffin. In August 1999, we acquired
the Video Communications Division of HP, and Truevision, Inc. We may in the
near or long-term pursue additional acquisitions of complementary businesses,
products or technologies. Integrating acquired operations is a complex,
time-consuming and potentially expensive process. All acquisitions involve
risks that could materially and adversely affect our business and operating
results. These risks include:
. Distracting management from the day-to-day operations of our business
. Costs, delays and inefficiencies associated with integrating acquired
operations, products and personnel
. Potentially dilutive issuances of our equity securities
. Incurring debt and amortization expenses related to goodwill and other
intangible assets
[X] Our stock price may be volatile.
The trading price of our common stock has in the past and could in the
future fluctuate significantly. These fluctuations have been or could be in
response to numerous factors, including:
. Quarterly variations in results of operations
. Announcements of technological innovations or new products by us, our
customers or competitors
. Changes in securities analysts' recommendations
. Announcements of acquisitions
. Changes in earnings estimates made by independent analysts
. General fluctuations in the stock market
Our revenues and results of operations may be below the expectations of
public market securities analysts or investors. This could result in a sharp
decline in the market price of our common stock. In July 2000, we
29
announced that financial results for the fourth quarter of fiscal 2000, which
ended June 30, 2000, would be lower than the then current analyst consensus
estimates regarding our quarterly results. In the day following this
announcement, our share price lost more than 59% of its value. Our shares
continue to trade in a price range significantly lower than the range held by
our shares before this announcement.
With the advent of the Internet, new avenues have been created for the
dissemination of information. We do not have control over the information that
is distributed and discussed on electronic bulletin boards and investment chat
rooms. The motives of the people or organizations that distribute such
information may not be in our best interest or in the interest of our
shareholders. This, in addition to other forms of investment information
including newsletters and research publications, could result in a sharp
decline in the market price of our common stock.
In addition, stock markets have from time to time experienced extreme price
and volume fluctuations. The market prices for high technology companies have
been particularly affected by these market fluctuations and such effects have
often been unrelated to the operating performance of such companies. These
broad market fluctuations may cause a decline in the market price of our common
stock.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against
the issuing company. On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle
Systems, Inc., et al., No. 00-CV-2596 was filed in the United States District
Court for the Northern District of California against us and certain of our
officers and directors. We are defending the case vigorously, and recently
moved to dismiss the complaint. In a written order dated May 7, 2001, the court
dismissed the complaint and allowed the plaintiffs to file an amended
complaint. The plaintiffs filed a second consolidated amended complaint on June
22, 2001. Our motion to dismiss this complaint is scheduled to be heard on
November 2, 2001.
It is possible that additional similar litigation could be brought against
us in the future. The securities class action lawsuit described above and any
similar litigation which may be brought against us could result in substantial
costs and will likely divert management's attention and resources. Any adverse
determination in such litigation could also subject us to significant
liabilities.
[X] If our products do not keep pace with the technological developments in
the rapidly changing video post-production equipment industry, our business may
be materially adversely affected.
The video post-production equipment industry is characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions. The introduction of products embodying new technologies or the
emergence of new industry standards can render existing products obsolete or
unmarketable. Delays in the introduction or shipment of new or enhanced
products, our inability to timely develop and introduce such new products, the
failure of such products to gain significant market acceptance or problems
associated with new product transitions could materially harm our business,
particularly on a quarterly basis.
We are critically dependent on the successful introduction, market
acceptance, manufacture and sale of new products that offer our customers
additional features and enhanced performance at competitive prices. Once a new
product is developed, we must rapidly commence volume production. This process
requires accurate forecasting of customer requirements and attainment of
acceptable manufacturing costs. The introduction of new or enhanced products
also requires us to manage the transition from older, displaced products in
order to minimize disruption in customer ordering patterns, avoid excessive
levels of older product inventories and ensure that adequate supplies of new
products can be delivered to meet customer demand. In addition, as is typical
with any new product introduction, quality and reliability problems may arise.
Any such problems could result in reduced bookings, manufacturing rework costs,
delays in collecting accounts receivable, additional service warranty costs and
a limitation on market acceptance of the product.
[X] If we do not compete effectively, our business will be harmed.
The market for our products is highly competitive. We compete in the
broadcast, professional and consumer video production markets. We anticipate
increased competition in each of the broadcast, professional and consumer video
production markets, particularly since the industry is undergoing a period of
rapid technological change and consolidation. Competition for our broadcast,
professional, and consumer video products is generally based on:
. Product performance
. Breadth of product line
. Quality of service and support
30
. Market presence
. Price
. Ability of competitors to develop new, higher performance, lower cost
consumer video products
Certain competitors in the broadcast, professional and consumer video
markets have larger financial, technical, marketing, sales and customer support
resources, greater name recognition and larger installed customer bases than we
do. In addition, some competitors have established relationships with current
and potential customers of ours and offer a wide variety of video equipment
that can be bundled in certain large system sales.
Our principal competitors in the broadcast market include:
Accom, Inc.
Avid Technology
Chyron Corporation
Grass Valley Group
Leitch Technology Corporation
Matsushita Electric Industrial Co. Ltd.
Quantel Ltd. (a division of Carlton Communications Plc)
SeaChange Corporation
Sony Corporation
Our principal competitors in the professional and consumer markets are:
Adobe Systems, Inc.
Apple Computer
Avid Technology, Inc.
Dazzle Multimedia (a division of SCM Microsystems, Inc.)
Fast Multimedia
Hauppauge Digital, Inc.
Matrox Electronics Systems, Ltd.
Media 100, Inc.
Sony Corporation
These lists are not all-inclusive.
The consumer market in which certain of our products compete is highly
competitive. There are several established video companies that currently offer
products or solutions that compete directly or indirectly with our consumer
products by providing some or all of the same features and video editing
capabilities. In addition, we expect that existing manufacturers and new market
entrants will develop new, higher performance, lower cost consumer video
products that may compete directly with our consumer products. We expect that
potential competition in this market is likely to come from existing video
editing companies, software application companies or new entrants into the
market, many of which have the financial resources, marketing and technical
ability to develop products for the consumer video market. Increased
competition in any of these markets could result in price reductions, reduced
margins and loss of market share. Any of these effects could materially harm
our business.
[X] We rely heavily on dealers and OEMs to market, sell and distribute our
products. In turn, we depend heavily on the success of these resellers. If
these resellers do not succeed in effectively distributing our products, our
financial performance will be negatively affected.
These resellers may not effectively promote or market our products or may
experience financial difficulties and even close operations. Our dealers and
retailers are not contractually obligated to sell our products. Therefore, they
may, at any time:
. Refuse to promote or pay for our products
. Discontinue our products in favor of a competitor's product
Also, with these distribution channels standing between us and the actual
market, we may not be able to accurately gauge current demand for products and
anticipate demand for newly introduced products. For example, dealers may place
large initial orders for a new product just to keep their stores stocked with
the newest products, not because there is a significant demand for them.
31
With respect to consumer products offerings, we have expanded our
distribution network to include several consumer channels, including large
distributors of products to computer software and hardware retailers, which in
turn sell products to end users. We also sell our consumer products directly to
certain retailers. Rapid change and financial difficulties of distributors have
characterized distribution channels for consumer retail products. These
arrangements have exposed us to the following risks, some of which are out of
our control:
. We are obligated to provide price protection to such retailers and
distributors and, while the agreements limit the conditions under which
product can be returned to us, we may be faced with product returns or
price protection obligations
. The distributors or retailers may not continue to stock and sell our
consumer products
. Retailers and retail distributors often carry competing products
[X] We may be adversely affected if we are sued by a third party or if we
decide to sue a third party regarding intellectual property rights.
There has been substantial litigation regarding patent, trademark and other
intellectual property rights involving technology companies. In the future,
litigation may be necessary to enforce any patents issued to us, to protect our
trade secrets, trademarks and other intellectual property rights owned by us,
or to defend us against claimed infringement. We are also exposed to litigation
arising from disputes in the ordinary course of business. This litigation may:
. Divert management's attention away from the operation of our business
. Result in the loss of our proprietary rights
. Subject us to significant liabilities
. Force us to seek licenses from third parties
. Prevent us from manufacturing or selling products
Any of these results could materially harm our business.
In the course of business, we have in the past received communications
asserting that our products infringe patents or other intellectual property
rights of third parties. We investigated the factual basis of such
communications and negotiated licenses where appropriate. It is likely that, in
the course of our business, we will receive similar communications in the
future. While it may be necessary or desirable in the future to obtain licenses
relating to one or more of our products, or relating to current or future
technologies, we may not be able to do so on commercially reasonable terms, or
at all. These disputes may not be settled on commercially reasonable terms and
may result in long and costly litigation.
[X] Excess or obsolete inventory, and overdue or uncollectible accounts
receivables, could weaken our cash flow, harm our financial condition and
results of operations and cause our stock price to fall.
The recent downturn in the United States economy has contributed to a
reduced demand for some of our consumer products. As a result, we are
experiencing increased exposure to excess and obsolete inventories and higher
overdue and uncollectible accounts receivables. If we fail to properly manage
these inventory and accounts receivables risks, our cash flow may be weakened,
and our financial position and results of operations could be harmed as a
result. This, in turn, may cause our stock price to fall. If the economic or
market conditions in the United States continue or expand to foreign markets,
our financial position may be further weakened.
[X] We may be unable to protect our proprietary information and procedures
effectively.
We must protect our proprietary technology and operate without infringing
the intellectual property rights of others. We rely on a combination of patent,
copyright, trademark and trade secret laws and other intellectual property
protection methods to protect our proprietary technology. In addition, we
generally enter into confidentiality and nondisclosure agreements with our
employees and OEM customers and limit access to, and distribution of, our
proprietary technology. These steps may not adequately protect our proprietary
information nor give us any competitive advantage. Others may independently
develop substantially equivalent intellectual property or otherwise gain access
to our trade secrets or intellectual property, or disclose such intellectual
property or trade secrets. If we are unable to protect our intellectual
property, our business could be materially harmed.
32
[X] Because we sell products internationally, we are subject to additional
risks.
Sales of our products outside of North America represented approximately 57%
of net sales in the period ended June 30, 2001 and 55% of net sales in the year
ended June 30, 2000. We expect that international sales will continue to
represent a significant portion of our net sales. We make foreign currency
denominated sales in many, primarily European, countries. This exposes us to
risks associated with currency exchange fluctuations. In fiscal 2002 and
beyond, we expect that a majority of our European sales will continue to be
denominated in local foreign currency, including the Euro. We have developed
natural hedges for some of this risk since most of the European operating
expenses are also denominated in local currency. However, where we sell our
products in local currencies, we may be competitively unable to change our
prices to reflect exchange rate fluctuations. For example, in recent periods,
our revenues have been adversely affected by the decline in value of the Yen
and Euro and our component currencies relative to the U.S. dollar.
In addition to foreign currency risks, international sales and operations
may also be subject to the following risks:
. Unexpected changes in regulatory requirements
. Export license requirements
. Restrictions on the export of critical technology
. Political instability
. Trade restrictions
. Changes in tariffs
. Difficulties in staffing and managing international operations
. Potential insolvency of international dealers and difficulty in collecting
accounts
We are also subject to the risks of generally poor economic conditions in
certain areas of the world, most notably Asia. These risks may harm our future
international sales and, consequently, our business.
[X] We rely on a continuous power supply to conduct our operations, and
California's current energy crisis could disrupt our operations and increase
our expenses.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently do not have
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for and any damages we or our
customers may suffer as a result of any interruption in our power supply. If
blackouts interrupt our power supply, we would be temporarily unable to
continue operations at our facilities. Any such interruption in our ability to
continue operations at our facilities could damage our reputation, harm our
ability to retain existing customers and to obtain new customers, and could
result in lost revenue, any of which could substantially harm our business and
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currencies
We transact business in various foreign currencies, primarily the Euro and
those of the U.K. and Japan. Accordingly, we are subject to exposure from
adverse fluctuations in foreign currency exchange rates. We currently do not
use financial instruments to hedge local currency activity at any of our
foreign locations. Instead, we believe that a natural hedge exists, since local
currency revenues substantially offset the local currency denominated operating
expenses. We continually assess the need to use financial instruments to hedge
foreign currency exposure.
Fixed Income Investments
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio of marketable securities. We do not use derivative
financial instruments for speculative or trading purposes. We invest primarily
in United States Treasury Notes and high-grade commercial paper and generally
hold them to maturity. Consequently, we do not expect any material loss with
respect to our investment portfolio.
33
We do not use derivative financial instruments in our investment portfolio
to manage interest rate risk. We do, however, limit our exposure to interest
rate and credit risk by establishing and strictly monitoring clear policies and
guidelines for our fixed income portfolios. At the present time, the maximum
duration of all portfolios is two years. Our guidelines also establish credit
quality standards, limits on exposure to any one issue as well as the type of
instruments. Due to the limited duration and credit risk criteria established
in our guidelines, we do not expect that our exposure to market and credit risk
will be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the independent auditors' report
appear on pages F-1 through F-26 of this Report.
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 our directors is
incorporated by reference from the section captioned "Election of Directors"
contained in our Proxy Statement related to the Annual Meeting of Shareholders
to be held October 26, 2001, to be filed by us with the Securities and Exchange
Commission within 120 days of the end of our fiscal year pursuant to General
Instruction G(3) of Form 10-K. The information required by this item concerning
executive officers is set forth in Part I of this Report on Form 10-K. 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.
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
section captioned "Compensation Committee Interlocks and Insider Participation"
contained in the Proxy Statement.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements are incorporated by reference in Item 8
of this Report:
Page
----
Independent Auditors' Report.......................................................................... F-2
Consolidated Balance Sheets, June 30, 2001 and 2000................................................... F-3
Consolidated Statements of Operations for years ended June 30, 2001, 2000 and 1999.................... F-4
Consolidated Statements of Comprehensive Income (Loss) for years ended June 30, 2001, 2000 and 1999... F-5
Consolidated Statements of Shareholders' Equity for the years ended June 30, 2001, 2000 and 1999...... F-6
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999................ F-7
Notes to Consolidated Financial Statements............................................................ F-8
(a)(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules, other than those listed above, have been omitted since the
required information is not present, or not present in amounts sufficient to
require submission of the schedule, is inapplicable, or because the information
required is included in our consolidated financial statements or the notes
thereto.
(a)(3) Exhibits
Number Description of Document
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 ChaseMellon
Shareholder Services, L.L.C.
4.1.1(2) Amendment No. 1 to Preferred Shares Right Agreement dated as of April 30, 1998 by and between
the Registrant and ChaseMellon Shareholder Services, L.L.C.
4.2(3) Stock Restriction and Registration Rights Agreement dated August 2, 1999 by and between the
Registrant and the Hewlett-Packard Company.
4.3(4) Declaration of Registration Rights dated March 29, 2000 by the Registrant.
4.4(5) Registration Rights Agreement dated March 29, 2000 by and between the Registrant and each of
David Engelke and Bryan Engelke.
4.5(6) Registration Rights Agreement dated April 6, 2000 by and between the Registrant and each of
David Engelke, Seth Haberman and Simon Haberman.
4.6(7) Stock Acquisition and Exchange Agreement dated as of June 29, 2000 by and among the Registrant,
Avid Sports, Inc., the Stockholders of Avid Sports, Inc. and David Grandin, as Stockholders'
Representative.
4.7(8) Settlement Agreement dated September 19, 2000 by and between the Registrant and the stockholders
of Avid Sports, Inc.
10.21(5) 1996 Stock Option Plan, as amended, and form of agreements thereto.
10.22(5) 1996 Supplemental Stock Option Plan, as amended, and form of agreements thereto.
10.23(12) Amendment No. 1 to the Agreement and Plan of Merger dated as of March 29, 2000 by and between
Pinnacle Systems, Inc., Digital Editing Services, 1117 Acquisition Corporation and each of
David Engelke and Bryan Engelke.
10.31(9) 1987 Stock Option Plan, as amended, and form of agreement thereto.
10.43(10) 1994 Employee Stock Purchase Plan, as amended, and form of agreement thereto.
10.51(11) 1994 Director Stock Option Plan, and form of agreement thereto.
10.61(1) Form of Indemnification Agreement between the Registrant and its officers and directors.
22.1(12) List of subsidiaries of the Registrant.
35
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (See Page 37).
- --------
* 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. 333-83812) 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 and as amended by Amendment No. 1 thereto
on Form 8-A/A filed on May 19, 1998.
(3) Incorporated by reference to the exhibits to the Registration Statement on
Form S-3 (File No. 333-84739) filed by the Registrant with the Securities
and Exchange Commission.
(4) Incorporated by reference to the exhibits to the Registration Statement on
Form S-3 (File No. 333-35498) filed by the Registrant on April 24, 2000.
(5) Incorporated by reference to the exhibits to the Registration Statement on
Form S-3 (File No. 333-40218) filed by the Registrant on July 27, 2000.
(6) Incorporated by reference to the exhibits to the Registration Statement on
Form 8-K (File No. 000-24784) filed by the Registrant on July 14, 2000.
(7) Incorporated by reference from the Registrant's Report on Form 8-K (File
No. 000-24784) as filed on July 14, 2000.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Report on Form 10-Q (File No. 000-24784) as filed on November 14, 2000.
(9) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 333-02816) as filed on March
27, 1996.
(10) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 333-51110) as filed on
December 1, 2000.
(11) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 033-89706) as filed on
February 23, 1995.
(12) Previously filed.
(b) Reports on Form 8-K.
On July 14, 2000 we filed a report on Form 8-K announcing our acquisition of
Avid Sports, Inc.
On July 27, 2000 we filed a report on Form 8-K announcing (i) preliminary
sales and earnings for the fourth quarter of fiscal 2000; and (ii) that we were
aware of the filing of a securities class action lawsuit against us and certain
of our officers and directors and that we intended to defend this claim.
On April 27, 2001 we filed a report on Form 8-K announcing (i) financial
results for the third quarter of fiscal 2001 and (ii) the issuance of an
aggregate of 2,315,218 shares of common stock to the former shareholders of The
Montage Group, Ltd pursuant to our election to buy out in their entirety the
earnout payments otherwise payable to such shareholders annually over a
two-year period.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedule. See Item 14(a)(2) above.
36
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.
/S/ MARK L. SANDERS
By: _______________________________
Mark L. Sanders
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 7, 2002
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 re-substitution, 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
--------- ----- ----
MARK L. SANDERS* President, Chief Executive Officer May 7, 2002
----------------------------- and Director (Principal
Mark L. Sanders Executive Officer)
/S/ ARTHUR D. CHADWICK Vice President, Finance and May 7, 2002
----------------------------- Administration and Chief
Arthur D. Chadwick Financial Officer (Principal
Financial and Accounting
Officer)
AJAY CHOPRA* Chairman of the Board, President, May 7, 2002
----------------------------- Professional Media Division
Ajay Chopra
L. GREGORY BALLARD* Director May 7, 2002
-----------------------------
L. Gregory Ballard
L. WILLIAM KRAUSE* Director May 7, 2002
-----------------------------
L. William Krause
JOHN C. LEWIS* Director May 7, 2002
-----------------------------
John C. Lewis
GLENN E. PENISTEN* Director May 7, 2002
-----------------------------
Glenn E. Penisten
CHARLES J. VAUGHAN* Director May 7, 2002
-----------------------------
Charles J. Vaughan
*By: /S/ ARTHUR D. CHADWICK Director May 7, 2002
-----------------------------
Arthur D. Chadwick
Attorney-in-Fact
37
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.......................... F-2
Consolidated Balance Sheets........................... F-3
Consolidated Statements of Operations................. F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Statements of Shareholders' Equity....... F-6
Consolidated Statements of Cash Flows................. F-7
Notes to Consolidated Financial Statements............ F-8
F-1
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, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/S/ KPMG LLP
Mountain View, California
July 27, 2001, except as to Note 12, which is as of September 19, 2001
F-2
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------
2001 2000
---------- ----------
(In thousands)
ASSETS
------
Current assets:
Cash and cash equivalents........................................................... $ 47,751 $ 58,433
Marketable securities............................................................... -- 19,366
Accounts receivable, less allowance for doubtful accounts and returns of $3,781 and
$3,727 as of June 30, 2001, and $2,528 and $3,255 as of June 30, 2000,
respectively...................................................................... 50,414 55,072
Inventories......................................................................... 43,149 36,824
Deferred income taxes............................................................... 7,103 17,103
Prepaid expenses and other assets................................................... 5,497 4,100
---------- ----------
Total current assets............................................................ 153,914 190,898
Marketable securities.................................................................. -- 4,346
Property and equipment, net............................................................ 14,516 16,143
Goodwill and other intangibles......................................................... 97,880 109,810
Other assets........................................................................... 647 1,602
---------- ----------
$266,957 $322,799
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................................................... $ 14,088 $ 22,422
Accrued expenses.................................................................... 21,998 26,268
Deferred revenue.................................................................... 3,406 3,878
---------- ----------
Total current liabilities....................................................... 39,492 52,568
---------- ----------
Deferred income taxes.................................................................. 7,103 10,611
---------- ----------
Total liabilities............................................................... 46,595 63,179
---------- ----------
Shareholders' equity:
Preferred stock, no par value; authorized 5,000 shares;
none issued and outstanding....................................................... -- --
Common stock, no par value; authorized 120,000 shares; 55,671 and 51,293 issued
and outstanding as of June 30, 2001 and 2000, respectively........................ 292,321 257,496
Treasury shares at cost; 793 and -0- shares at June 30, 2001 and 2000,
respectively...................................................................... (6,508) --
Retained earnings (accumulated deficit)............................................. (53,350) 7,198
Accumulated other comprehensive loss................................................ (12,101) (5,074)
---------- ----------
Total shareholders' equity.......................................................... 220,362 259,620
---------- ----------
$266,957 $322,799
========== ==========
See accompanying notes to consolidated financial statements.
F-3
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
-------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands, except per share data)
Net sales........................................................... $252,659 $237,967 $159,098
Cost of sales....................................................... 144,549 113,573 74,022
-------- -------- --------
Gross profit..................................................... 108,110 124,394 85,076
-------- -------- --------
Operating expenses:
Engineering and product development.............................. 34,305 27,767 16,137
Sales and marketing.............................................. 68,304 56,126 38,871
General and administrative....................................... 14,686 10,554 6,840
Legal settlement................................................. -- 2,102 --
Amortization of goodwill and other intangibles................... 30,743 18,382 2,289
In-process research and development.............................. -- 3,500 6,579
Acquisition settlement........................................... 12,880 -- --
-------- -------- --------
Total operating expenses..................................... 160,918 118,431 70,716
-------- -------- --------
Operating income (loss)...................................... (52,808) 5,963 14,360
Interest and other income, net...................................... 1,890 3,403 4,742
Impairment of equity investments.................................... (1,658) -- --
-------- -------- --------
Income (loss) before income taxes and cumulative effect of change in
accounting principle.............................................. (52,576) 9,366 19,102
Income tax expense.................................................. 7,616 1,779 666
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle.............................................. (60,192) 7,587 18,436
Cumulative effect of change in accounting principle................. (356) -- --
-------- -------- --------
Net income (loss)................................................... $(60,548) $ 7,587 $ 18,436
======== ======== ========
Net income (loss) per share before cumulative effect of change in
accounting principle:
Basic............................................................ $ (1.16) $ 0.16 $ 0.43
======== ======== ========
Diluted.......................................................... $ (1.16) $ 0.14 $ 0.39
======== ======== ========
Cumulative effect per share of change in accounting principle:
Basic............................................................ $ (0.01) $ -- $ --
======== ======== ========
Diluted.......................................................... $ (0.01) $ -- $ --
======== ======== ========
Net income (loss) per share:
Basic............................................................ $ (1.17) $ 0.16 $ 0.43
======== ======== ========
Diluted.......................................................... $ (1.17) $ 0.14 $ 0.39
======== ======== ========
Shares used to compute net income (loss) per share:
Basic............................................................ 51,729 48,311 42,780
======== ======== ========
Diluted.......................................................... 51,729 55,442 46,966
======== ======== ========
Pro forma amounts assuming change is applied retroactively:
Net income....................................................... $ 7,231 $ 18,436
======== ========
Net income per share:
Basic........................................................ $ 0.15 $ 0.43
======== ========
Diluted...................................................... $ 0.13 $ 0.39
======== ========
See accompanying notes to consolidated financial statements.
F-4
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended June 30,
--------------------------
2001 2000 1999
-------- ------- -------
(In thousands)
Net income (loss)...................... $(60,548) $ 7,587 $18,436
Foreign currency translation adjustment (7,027) (2,644) (2,315)
-------- ------- -------
Comprehensive income (loss)............ $(67,575) $ 4,943 $16,121
======== ======= =======
See accompanying notes to consolidated financial statements.
F-5
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained Accumulated
Common stock Treasury stock earnings other Total
--------------- -------------- (accumulated comprehensive shareholders'
Shares Amount Shares Amount (deficit) loss equity
------ -------- ------ ------- ------------ ------------- -------------
(In thousands)
Balances as of June 30, 1998............. 40,292 $133,332 -- $ -- $(18,825) $ (115) $114,392
Issuance of common stock related to Miro
acquisition............................. 1,230 7,834 -- -- -- -- 7,834
Issuance of common stock related to stock
option and stock purchase plans......... 2,354 8,831 -- -- -- -- 8,831
Issuance of common stock related to
Truevision acquisition.................. 1,650 12,089 -- -- -- -- 12,089
Tax benefit from common stock option
exercise................................ -- 6,992 -- -- -- -- 6,992
Net income............................... -- -- -- -- 18,436 -- 18,436
Foreign currency translation adjustment.. -- -- -- -- -- (2,315) (2,315)
------ -------- ---- ------- -------- -------- --------
Balances as of June 30, 1999............. 45,526 $169,078 -- $ -- $ (389) $ (2,430) $166,259
Issuance of common stock related to stock
option and stock purchase plans......... 2,458 13,231 -- -- -- -- 13,231
Issuance of common stock related to the
Hewlett Packard Video Communications
Division acquisition.................... 1,546 20,570 -- -- -- -- 20,570
Issuance of common stock related to the
Puffin acquisition...................... 361 11,529 -- -- -- -- 11,529
Issuance of common stock related to the
Digital Editing Services acquisition.... 288 9,375 -- -- -- -- 9,375
Issuance of common stock related to the
Montage acquisition..................... 125 3,743 -- -- -- -- 3,743
Issuance of common stock related to the
Avid Sports acquisition................. 944 24,554 -- -- -- -- 24,554
Warrants exercised....................... 45 270 -- -- -- -- 270
Tax benefit from common stock option
exercise................................ -- 5,146 -- -- -- -- 5,146
Net income............................... -- -- -- -- 7,587 -- 7,587
Foreign currency translation adjustment.. -- -- -- -- -- (2,644) (2,644)
------ -------- ---- ------- -------- -------- --------
Balances as of June 30, 2000............. 51,293 $257,496 -- $ -- $ 7,198 $ (5,074) $259,620
Issuance of common stock related to......
stock option and stock purchase plans.... 1,020 6,820 -- -- -- -- 6,820
Issuance of common stock related to the
Avid Sports acquisition................. 1,442 11,481 -- -- -- -- 11,481
Issuance of common stock related to the
Montage acquisition..................... 1,916 16,524 -- -- -- -- 16,524
Stock repurchase......................... -- -- (793) (6,508) -- -- (6,508)
Net income............................... -- -- -- -- (60,548) -- (60,548)
Foreign currency translation adjustment.. -- -- -- -- -- (7,027) (7,027)
------ -------- ---- ------- -------- -------- --------
Balances as of June 30, 2001............. 55,671 $292,321 (793) $(6,508) $(53,350) $(12,101) $220,362
====== ======== ==== ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
-----------------------------
2001 2000 1999
-------- -------- ---------
(In thousands)
Cash flows from operating activities:
Net income (loss)........................................................... $(60,548) $ 7,587 $ 18,436
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Acquisition settlement................................................ 11,481 -- --
Impairment of equity investments...................................... 1,658 -- --
In-process research and development................................... -- 3,500 6,579
Depreciation and amortization......................................... 36,713 22,616 4,773
Provision for doubtful accounts....................................... 2,060 1,335 906
Deferred taxes........................................................ 6,868 (3,408) (10,070)
Tax benefit from exercise of common stock options..................... -- 5,146 6,992
Changes in operating assets and liabilities, net of effects of
acquisitions:.......................................................
Accounts receivable................................................ 420 (17,360) (18,677)
Inventories........................................................ (8,202) (8,012) (8,281)
Accounts payable................................................... (8,380) (2,073) 900
Accrued expenses................................................... 1,390 (4,428) (1,431)
Accrued income taxes............................................... (1,182) (127) 1,313
Deferred revenue................................................... (1,517) 1,307 --
Other.............................................................. (2,775) (1,453) (1,655)
-------- -------- ---------
Net cash provided by (used in) operating activities............ (22,014) 4,630 (215)
-------- -------- ---------
Cash flows from investing activities:
Net cash received (paid) on acquisitions.................................... (7,477) (12,325) 433
Purchases of property and equipment......................................... (4,601) (8,642) (7,681)
Purchases of marketable securities.......................................... (19,353) (83,041) (128,831)
Proceeds from maturity of marketable securities............................. 34,392 99,653 132,335
Proceeds from sale of marketable securities................................. 8,673 -- --
Payments for equity investments............................................. (300) (1,200) --
-------- -------- ---------
Net cash provided by (used in) investing activities............ 11,334 (5,555) (3,744)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock...................................... 6,820 13,501 8,831
Purchase of treasury stock.................................................. (6,508) -- --
Repayment of long-term obligations.......................................... -- (162) (2,319)
-------- -------- ---------
Net cash provided by financing activities...................... 312 13,339 6,512
-------- -------- ---------
Effects of exchange rate changes on cash..................................... (314) (2,635) (1,377)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents......................... (10,682) 9,779 1,176
Cash and cash equivalents at beginning of year............................... 58,433 48,654 47,478
-------- -------- ---------
Cash and cash equivalents at end of year..................................... $ 47,751 $ 58,433 $ 48,654
======== ======== =========
Supplemental disclosures of cash paid during the year for:
Interest.................................................................... $ 9 $ 19 $ 5
======== ======== =========
Income taxes................................................................ $ 3,006 $ 561 $ 1,062
======== ======== =========
Non-cash transactions:
Common stock issued and options and warrants assumed in the acquisition
of certain net assets..................................................... $ 28,005 $ 69,771 $ 19,923
======== ======== =========
See accompanying notes to consolidated financial statements.
F-7
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of the Company and Significant Accounting Policies
Organization and Operations. Pinnacle Systems Inc. (the "Company") is a
supplier of video authoring, storage, distribution and Internet streaming
solutions for broadcasters, business and professional users, and consumers. The
Company's products are used to create, store, and distribute video content from
television programs, TV commercials, pay-per-view, sports videos, and corporate
films to home movies. Pinnacle's products are also used to stream video over
the Internet.
The Company's products use real time video processing and editing
technologies to apply a variety of video post-production and on-air functions
to multiple streams of live or recorded video material. These editing
applications include the addition of special effects, graphics and titles. To
address the broadcast market, the Company offers high performance, specialized
computer based solutions for high-end, production, post-production, team sports
analysis, broadcast on-air, and Internet streaming applications. For the
professional market, the Company provides computer based video editing and
media creation products and products used to create video content and solutions
used to stream live and recorded video over the Internet. To address the
consumer market, the Company offers low cost, easy to use video editing and
viewing solutions that allow consumers to view TV on their computer and to edit
their home videos using a personal computer, camcorder and VCR. Many of the
Company's consumer products enable content to be created that is suitable for
the Internet.
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.
Reclassifications. Certain reclassifications have been made to the 2000
financial statements to conform to the classifications used in 2001.
Use of Estimates. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Translation of Foreign Currencies. The Company considers the functional
currency of its foreign subsidiaries to be the local currency. These functional
currencies are translated into U.S. dollars using exchange rates in effect at
period end for assets and liabilities and average exchange rates during each
reporting period for the results of operations. Adjustments resulting from
translation of foreign subsidiary financial statements are reported within
accumulated other comprehensive income (loss), which is reflected as a separate
component of shareholders' equity. Foreign currency transaction gains and
losses are included in results of operations.
Revenue Recognition. Revenue from product sales is recognized upon shipment
provided title and risk of loss has passed to the customer, there is evidence
of an arrangement, fees are fixed or determinable and collectibility is
reasonably assured. Installation and training revenue is deferred and
recognized as these services are performed. Certain products include technical
support and maintenance services for a specified time period of up to one year.
Revenue from technical support and maintenance is deferred and recognized
ratably over the period of the related agreements. When telephone support is
provided at no additional charge during the product's initial warranty period,
and no other product enhancements or upgrades are provided, the revenue
allocated to the telephone support is recognized at the time of product
shipment, and the costs of providing the support are accrued.
The Company's transactions frequently involve the sales of systems and
services under multiple element arrangements. Revenue under multiple element
arrangements is allocated to all elements based upon the fair value of those
elements. The amounts allocated to training and installation are based upon
objective evidence of fair value and are recognized as the services are
delivered. The amounts allocated to technical support and maintenance are based
upon the price charged when maintenance is sold separately, typically as an
optional maintenance period renewal, and are recognized ratably over the
maintenance period. For systems with complex installation processes that are
performed only by the Company, product revenue recognition is deferred until
completion of the installation.
The Company recognizes revenue from sales of software in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended.
Under SOP 97-2, revenue is recognized when
F-8
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed and determinable, and collectibility is probable. Revenue from sales of
software was not material during all periods presented.
Included in accounts receivable allowances are sales allowances provided for
expected returns and credits and an allowance for doubtful accounts. The
Company estimates these allowances based on analysis and historical experience.
Actual returns and losses from uncollectible accounts have not differed
materially from management's estimates. The allowance for doubtful accounts was
$3.8 million and $2.5 million as of June 30, 2001 and 2000, respectively. The
allowance for sales returns was $3.7 million and $3.3 million as of June 30,
2001 and 2000, respectively. Bad debt expense for the year ended June 30, 2001,
2000 and 1999 was $2.1 million, $1.3 million, and $0.9 million, respectively.
During the fourth quarter of 2001, the Company adopted SEC Staff Accounting
Bulleting No. 101, Revenue Recognition in Financial Statements. SAB No. 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition. The Company adopted SAB No. 101 effective as
of the beginning of fiscal year ended June 30, 2001. Prior to the adoption of
SAB 101, the Company recognized revenue related to the hardware component upon
shipment for all systems sales. Upon adoption, the company began deferring
revenue recognition for hardware sales on systems with complex installation
processes that are performed only by the Company. As a result of the adoption
of SAB 101, the Company reported a change in accounting principle in accordance
with APB Opinion No. 20, "Accounting Changes," by a cumulative effect
adjustment. APB 20 requires that the change be made as of the beginning of the
year, July 1, 2000, and that financial information for pre-change interim
periods, in this case the first three quarters of fiscal 2001, be restated by
applying SAB 101 to those periods. The Company implemented SAB 101 during the
fourth quarter of fiscal 2001, retroactive to the beginning of fiscal 2001. The
cumulative effect of the change in accounting principle for fiscal 2001
resulted in an increase in net loss of $4.1 million, and a decrease in earnings
per share of $0.08, during the first three quarters of fiscal 2001. The
cumulative effect of the change in accounting principle on all prior years
resulted in a $0.4 million increase in net loss for the year ended June 30,
2001, and is reflected as the cumulative effect of change in accounting
principle. Revenue for the year ended June 30, 2000 includes $0.9 million that
was included in the cumulative effect adjustment.
Also during the fourth quarter of 2001, the Company adopted EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. EITF 00-10 requires that
shipping and handling costs associated with amounts billed to customers be
included in revenues and cost of revenues and not offset against each other.
The shipping and handling costs were not material in all periods presented.
Financial Instruments. 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. Cash equivalents are high-grade commercial papers with a
remaining term to maturity of less than three months. The Company maintains its
cash balances in various currencies but primarily in U.S. Dollars, Euro,
British Pounds, and the Japanese Yen. Marketable securities are instruments
that mature within three to eighteen months and consist principally of U.S.
Treasury bills, government agency notes and high-grade commercial paper. 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 was substantially equal to their carrying value as of June 30, 2000.
The Company sold held-to-maturity securities prior to their maturity during
fiscal year ended June 30, 2001. See Note 2--Financial Instruments.
Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market. Raw materials inventory represents purchased materials,
components and assemblies, including fully assembled circuit boards purchased
from outside vendors.
As a result of restructuring and decline in forecasted revenue, the Company
recorded an additional excess inventory charge of $10.2 million classified as
cost of sales during the fiscal year ended June 30, 2001. The Company
restructured its business to prioritize its initiatives around high-growth
areas of its business, focus on profit contribution, reduce expenses, and
improve efficiency due to macro-economic and capital spending issues affecting
the industry. This restructuring program includes a worldwide workforce
reduction, and restructuring of certain business functions.
F-9
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment. Purchased property and equipment are recorded at
cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets, generally three to five years.
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the assets or the remaining lease term.
Acquisition-related Intangible Assets. Acquisition-related intangible
assets result from the Company's acquisitions of businesses accounted for under
the purchase method and consist of the values of identifiable intangible assets
including completed technology, work force and trade name as well as goodwill.
Goodwill is the amount by which the cost of acquired net assets exceeded the
fair values of those net assets on the date of purchase. Acquisition-related
intangible assets are reported at cost, net of accumulated amortization, and
are amortized on a straight-line basis over their estimated useful lives
ranging from three to nine years.
Impairment of Long-Lived Assets. The Company evaluates long-lived assets,
including goodwill and identifiable intangible assets, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future expected
undiscounted cash flows attributable to that asset. The amount of any
impairment is measured as the difference between the carrying value and the
fair value of the impaired asset. Fair value is determined generally based on
discounted cash flows. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. The Company does not have
any long-lived assets it considers to be impaired. Goodwill associated with
assets acquired in a purchase business combination is included in impairment
evaluations when events or circumstances indicate that the carrying amount of
those assets may not be recoverable.
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. Basic net income (loss) per share is computed
using the weighted-average number of common shares outstanding. Diluted net
income (loss) per share is computed using the weighted-average number of common
shares outstanding and dilutive potential common shares from the assumed
exercise of warrants and options outstanding during the period, if any, using
the treasury stock method.
The following table sets forth the computation of basic and diluted net
income (loss) per common share (in thousands):
Years ended June 30,
-------------------------
2001 2000 1999
-------- ------- -------
Numerator: Net income (loss)................................... $(60,548) $ 7,587 $18,436
======== ======= =======
Denominator:
Basic:
Weighted-average shares outstanding..................... 51,729 48,311 42,780
Diluted:
Employee stock options and restricted stock............. -- 7,131 4,186
-------- ------- -------
Denominator for diluted net income (loss) per
share.............................................. 51,729 55,442 46,966
======== ======= =======
Basic net income (loss) per share.............................. $ (1.17) $ 0.16 $ 0.43
======== ======= =======
Diluted net income (loss) per share............................ $ (1.17) $ 0.14 $ 0.39
======== ======= =======
F-10
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company excluded potentially dilutive securities for each period
presented from its diluted net income (loss) per share computation because
either the exercise price of the securities exceeded the average fair value of
the Company's common stock or the Company had net losses, and therefore, these
securities were anti-dilutive. A summary of the excluded potentially dilutive
securities and the range of related exercise prices follow:
Years ended June 30,
------------------------
2001 2000 1999
--------- ------- ------
Potentially dilutive securities:
Stock options................ 9,125,600 113,534 22,000
The excluded stock options have per share exercise prices ranging from $6.05
to $33.79, $22.48 to $33.79, $16.81 to $17.22, for the years ended June 30,
2001, 2000, and 1999, respectively.
Comprehensive Income (Loss). The Company's comprehensive income (loss)
includes net income (loss) and foreign currency translation adjustments.
Stock-Based Compensation. The Company accounts for its employee stock-based
compensation plans using the intrinsic value method.
Advertising. Advertising costs are expensed as incurred. Advertising
expenses are included in sales and marketing expense and amounted to
approximately $5.7 million, $10.1 million, and $7.8 million in the fiscal years
ended June 30, 2001, 2000 and 1999, respectively.
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
allowances for potential credit losses, but historically has not experienced
significant losses related to any one business group or geographic area. No
single customer accounted for more than 10% of the Company's total revenues or
receivables in fiscal 2001 and fiscal 2000. In the fiscal year ended June 30,
1999, one customer accounted for more than 10% of revenues. The Company
maintains cash and cash equivalents and short- and long-term investments with
various financial institutions. The Company's investment 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.
Recent Accounting Pronouncements.
In May 2000, the EITF reached a consensus on Issue No. 00-14, "Accounting
for Certain Sales Incentives." Issue No. 00-14 addresses the recognition,
measurement, and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or
that are exercisable by a customer as a result of a single exchange
transaction. From time to time, the Company offers end-user rebates on certain
consumer products, which in the aggregate have not been material to date. The
Company adopted Issue No. 00-14 in the fourth quarter of fiscal 2001. The
adoption of Issue No. 00-14 did not have a material effect on the Company's
financial position or results of operations.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." Issue No. 00-25 addresses whether consideration from a
vendor to a reseller of the vendor's products is (a) an adjustment of the
selling prices of the vendor's products and, therefore, should be deducted from
revenue when recognized in the vendor's income statement or (b) a cost incurred
by the vendor for assets or services received from the reseller and, therefore,
should be included as a cost or an expense when recognized in the vendor's
income statement. The Company provides marketing development funds to certain
retail customers; these costs have historically been recorded as marketing
expenses, but have not been material to date. Issue No. 00-25 is required to be
implemented no later than the first quarter of fiscal 2002. The Company does
not expect the adoption of Issue No. 00-25 to have a material impact on its
financial statements.
In late July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 "Business Combinations" and
Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations be
accounted for using the purchase method of accounting; therefore, the
pooling-of-interests method of accounting is prohibited. SFAS No. 141 also
requires that an intangible asset acquired in a business combination be
recognized apart from goodwill if: (i) the intangible asset arises from
contractual or other legal rights or (ii) the acquired intangible asset is
capable of being separated from the acquired enterprise, as defined in SFAS
F-11
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No. 141. SFAS No. 141 is effective for all business combinations completed
after June 30, 2001 and accounted for as a purchase and for all business
combinations "initiated" after June 30, 2001, as defined by Accounting
Principles Board Opinion No. 16 "Business Combinations."
SFAS No. 142 requires that goodwill not be amortized but be tested for
impairment at the "reporting unit level" ("Reporting Unit") at least annually
and more frequently upon the occurrence of certain events, as defined by SFAS
No. 142. A Reporting Unit is the same level as or one level below an "operating
segment," as defined by SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." Identifiable intangible assets with an
indefinite life, as defined in SFAS No. 142, will not be amortized until their
life is determined to be finite. All other identifiable intangible assets are
required to be amortized over their useful life and reviewed for impairment in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Goodwill is not tested for
impairment under SFAS No. 121, but instead is tested for impairment as
prescribed in SFAS No. 142.
For goodwill and intangible assets acquired in business combinations
completed prior to July 1, 2001, SFAS No. 142 is effective beginning on July 1,
2002, the date the Company is required to adopt SFAS No. 142. Goodwill and
intangible assets acquired in a business combination completed after June 30,
2001 are required to be accounted for in accordance with the "amortization and
nonamortization" provisions of SFAS No. 142.
The Company is currently evaluating the impact the adoption of these
pronouncements may have on its financial position and results of operations;
however, due to these pronouncements being issued in late July 2001 and due to
the Company's expectations that the FASB will issue further guidance with
respect to adoption of both SFAS Nos. 141 and 142, the Company is currently
unable to determine the impact the adoption of these pronouncements may have on
its financial position or results of operations.
As of July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. The adoption of SFAS No. 133
did not have a material effect on the Company's financial position or results
of operations.
Note 2 Financial Instruments
Marketable Securities. The Company's policy is to diversify its investment
portfolio to reduce risk to principal that could arise from credit, geographic
and investment sector risk. At June 30, 2001, there were no investments in
marketable securities. The Company sold held-to-maturity securities prior to
their maturity during the fiscal year ended June 30, 2001 in order to
consolidate investment accounts. The amortized cost of these securities was
$8.7 million and the realized gains and losses from the sale of these
securities were $0.004 million and $0.022 million, respectively. At June 30,
2000, investments were placed with a variety of different financial
institutions or other issuers and no individual security or obligation from a
direct issuer exceeded ten percent of total investments. The fair values of
investments are based on quoted market prices at the reporting date. At
June 30, cash, cash equivalents and short-term and long-term investments
consisted of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In thousands)
2001
Cash and cash equivalents
Cash.................. $47,751 $-- $ -- $47,751
------- --- ---- -------
$47,751 $-- $ -- $47,751
======= === ==== =======
F-12
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In thousands)
2000
Cash and cash equivalents
Cash..................... $50,077 $-- $ -- $50,077
Commercial paper......... 8,356 2 (30) 8,328
------- --- ---- -------
$58,433 $ 2 $(30) $58,405
======= === ==== =======
Short-term investments
Governmental agencies.... $ 5,024 $-- $ -- $ 5,024
Commercial paper......... 14,342 -- (27) 14,315
------- --- ---- -------
Total short-term investments $19,366 $-- $(27) $19,339
======= === ==== =======
Long-term investments
Governmental agencies.... 4,346 20 -- 4,366
------- --- ---- -------
Total long-term investments. $ 4,346 $20 $ -- $ 4,366
======= === ==== =======
Note 3 Balance Sheet Components
June 30,
------------------
2001 2000
-------- --------
(In thousands)
Inventories, net:
Raw materials............................. $ 16,642 $ 14,342
Work in process........................... 14,290 11,772
Finished goods............................ 12,217 10,710
-------- --------
$ 43,149 $ 36,824
======== ========
Property and Equipment:
Computers and equipment................... $ 13,812 $ 12,142
Leasehold improvements.................... 6,379 5,153
Office furniture and fixtures............. 4,350 4,683
Internal use software..................... 4,281 3,968
Construction in progress.................. -- 249
-------- --------
28,822 26,195
Accumulated depreciation and amortization. (14,306) (10,052)
-------- --------
$ 14,516 $ 16,143
======== ========
Goodwill and other tangibles:
Goodwill.................................. $ 89,559 $ 74,263
Core technology........................... 34,691 31,589
Other identifiable intangibles............ 25,811 25,396
-------- --------
150,061 131,248
Accumulated amortization.................. (52,181) (21,438)
-------- --------
$ 97,880 $109,810
======== ========
Accrued expenses:
Payroll and commission related............ $ 4,617 $ 4,497
Income taxes payable...................... 813 2,845
Accrued acquisition costs................. 442 3,325
Warranty accrual.......................... 2,782 1,364
Other..................................... 13,344 14,237
-------- --------
$ 21,998 $ 26,268
======== ========
F-13
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4 Acquisitions
(a) Minerva Networks, Inc.--DVD authoring technology
On December 29, 2000, the Company acquired DVD authoring technology from
Minerva Networks, Inc., or Minerva, a provider of professional and consumer
video networking solutions that enable the convergence of television and the
Internet. The technology acquired from Minerva includes the Impression family
of DVD application software, DVD formatting software and associated
intellectual property. The Company paid $2.3 million in cash in December 2000,
and an additional $0.4 million in March 2001, pursuant to a purchase agreement
amendment in January 2001. The amendment was entered into as a result of both
parties agreeing that an error had been make in the original calculation of the
value of the acquired technology. Pinnacle also incurred approximately $0.1
million in transaction costs. The technology is being amortized using the
straight-line method over a three-year period.
(b) Other Acquisitions
During fiscal year ended June 30, 2001, the Company acquired three
companies, which were not material individually or in the aggregate. The
Company paid a total of $1.2 million in cash for these acquisitions. Pinnacle
also incurred approximately $0.2 million in transaction costs. The acquisitions
were accounted for under the purchase method of accounting. The Company
allocated $0.5 million to goodwill and allocated $0.9 million to identifiable
intangibles. Goodwill and identifiable intangibles are being amortized using
the straight-line method over five-year and three-year periods, respectively.
The results of the acquired companies' operations have been included in the
consolidated financial statements since their respective acquisition dates.
(c) Avid Sports, Inc.
On June 30, 2000, the Company acquired all the outstanding common stock of
Avid Sports, Inc., a provider of sports editing and online sports media
management solutions. The purchase price of approximately $25.0 million
consisted of 944,213 shares of the Company's common stock valued at $22.7
million, 138,158 assumed stock options valued at $1.9 million and approximately
$0.4 million in transaction costs. The assumed stock options consisted of both
vested and unvested stock options. The fair value of the common stock exchanged
in the transaction was determined using the average market price of the
Company's common stock over a few days before and after the terms of the
transaction were agreed to and announced. The value of the options assumed was
determined using a Black-Scholes pricing model.
The acquisition was accounted for under the purchase method of accounting.
On June 30, 2000, the Company recorded $5.8 million in tangible assets and
$13.4 million in identifiable intangibles including $9.5 million for
core/developed technology, $1.9 million for customer-related intangibles and
$1.4 for other intangibles. The Company also recorded $15.5 million in
liabilities, including $3.6 million in accounts payable, $2.0 million in
accrued expenses, $2.0 in outstanding bank loans, $2.5 million in deferred
revenue, and $5.4 million in deferred taxes. $21.2 million of the purchase
price was allocated to goodwill. Goodwill and identifiable intangibles are
being amortized using the straight-line method over five-year and three-year
periods, respectively. The results of operations of Avid Sports, Inc. have been
included in the consolidated financial statements of the Company since June 30,
2000.
On September 30, 2000, the Company agreed to compensate certain former
shareholders and option holders of Avid Sports, Inc. because of the drop in the
market price of the Company's common stock immediately after the acquisition.
If the closing price of Pinnacle's common stock did not equal or exceed $23 per
share for four consecutive trading days prior to May 31, 2001, the value of the
compensation to be paid was to equal to the number of shares issued and options
assumed in the acquisition (944,213 and 138,158, respectively) multiplied by
the difference between Pinnacle's average closing stock price during the month
of May, 2001 and $23 per share. The former shareholders of Avid Sports, Inc.
were to be compensated in shares of the Company's common stock while the former
option holders were to be compensated in cash. On September 30, 2000, the
Company recorded a charge of $13.3 million, which represented the fair value of
the arrangement on September 30, 2000, including $0.1 million in transaction
fees. This charge included a liability of $1.7 million which represented the
estimated cash payout to the option holders with the remaining $11.5 million,
determined using the Black-Scholes method, recorded as an increase in common
stock. Pinnacle's share price did not reach the target level and therefore, in
June 2001, Pinnacle issued 1,441,660 additional shares of its common stock to
the former shareholders of Avid Sports, Inc., and paid an aggregate of $1.3
million in cash to the former option holders of
F-14
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Avid Sports, Inc. The difference between the estimated cash payout to the
former option holders of Avid Sports, Inc. at September 30, 2000 of $1.7
million and the actual payment in June 2001, was recorded as a reduction to
lower the initial charge to the final expense of $12.9 million.
(d) Propel Ahead, Inc.
On June 30, 2000, the Company acquired all the outstanding common stock of
Propel Ahead, Inc., or Propel. In connection with this acquisition, Pinnacle
agreed to pay the former shareholder of Propel $3.2 million. Pinnacle also
incurred approximately $0.1 million in transaction costs. The acquisition was
accounted for under the purchase method of accounting. On June 30, 2000, the
Company recorded $0.1 million in tangible assets and $3.0 million in
identifiable intangibles including core/developed technology assumed $1.3
million in liabilities including $1.2 million in deferred taxes, and allocated
$1.5 million to goodwill. Goodwill and identifiable intangibles are being
amortized using the straight-line method over five-year and three-year periods
respectively. The results of operations of Propel have been included in the
consolidated financial statements of the Company since June 30, 2000.
(e) The Montage Group, Ltd.
In April 2000, the Company acquired all the outstanding common stock of The
Montage Group, Ltd., a provider of networked non-linear editing solutions. In
connection with this acquisition, Pinnacle issued 125,224 shares of its common
stock valued at $3.7 million and incurred approximately $0.3 million in
transaction costs. The fair value of the common stock exchanged in the
transaction was determined using the average market price of the Company's
common stock over a few days before and after the terms of the transaction were
agreed to and announced. The terms of the acquisition also included an earnout
provision, payable in shares of the Company's common stock, wherein the former
shareholders of Montage could receive additional consideration, net of the
initial payment, upon achieving certain gross margin levels for each year of a
two-year period beginning April 2000.
The acquisition was accounted for under the purchase method of accounting.
In April 2000, the Company recorded $2.8 million in tangible assets, $0.4
million in in-process research and development, $1.6 million in identifiable
intangibles including core/developed technology assumed $4.2 million in
liabilities and allocated $3.5 million to goodwill. Goodwill and identifiable
intangibles are being amortized using the straight-line method over five-year
and three-year periods, respectively. The results of operations of Montage have
been included in the consolidated financial statements of the Company since
April 2000.
In April 2001, the Company elected, in accordance with the Montage Stock
Acquisition Agreement, to buy out in their entirety the earnout payments
otherwise payable to the former Montage shareholders for the twelve-month
earnout periods ending in each of April 2001 and April 2002. In connection with
this buyout, 2,315,218 shares of the Company's common stock were issuable to
the former Montage shareholders. Pinnacle issued an aggregate of 1,915,855
shares of its common stock to the former Montage shareholders. The value of
these shares was approximately $16.5 million, which the Company recorded as
goodwill associated with the acquisition of Montage and which is being
amortized using the straight-line method over the remaining four-year estimated
life. The fair value of these shares was determined based on the market price
of the Company's stock on the date of the buy-out. The Company held back the
remaining 399,363 buyout shares in accordance with its right to seek
indemnification from the former Montage shareholders pursuant to the Montage
Stock Acquisition Agreement. These shares will be issued into escrow to secure
the Company's indemnification rights. These shares have not been accounted for
in the purchase price as their issuance is uncertain. Whether any or all of the
shares will be issued to former Montage shareholders is dependent on the
outcome of litigation against Montage (see Note 5). The Company is unable to
estimate the timing or outcome of resolution.
(f) Digital Editing Services, Inc.
On March 29, 2000 the Company acquired DES, a provider of real-time video
analysis and database solutions, or DES. In connection with this acquisition,
Pinnacle paid $0.3 million in cash and issued 287,752 shares of its common
stock valued at $9.1 million and incurred $0.3 million in transaction costs.
The fair value of the common stock exchanged in the transaction was determined
using the average market price of the Company's common stock over a few days
before and after the terms of the transaction were agreed to and announced. The
terms of the acquisition included an earnout provision wherein the former
shareholders of DES
F-15
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
could receive additional consideration, net of the initial payment, upon
achieving certain profitability levels for the one-year period ending March 30,
2001. Operating profits from DES ranging between 10% to 20% of revenues would
result in an additional payout of between 100% to 175% of those associated
revenues respectively. In October 2000, Pinnacle and the former DES
shareholders amended the earnout provisions of the acquisition agreement to
correspond with the combination of the DES and Avid Sports, Inc. businesses
into one division in June 2000. The amendment provides that any earnout payable
would be based upon the combined revenues, expenses and operating profit of DES
and Avid Sports, Inc. Combined operating profits from DES and Avid Sports, Inc.
ranging from between 10% to 20% of combined revenues would result in an
additional payment of between 55% to 96% of those associated revenues
respectively. No earnout payment would be made if operating profit did not
exceed 10% of revenues during the earnout period. Any earnout would be paid in
shares of the Company's common stock. The Company is currently engaged in
arbitration with the former shareholders regarding the earnout payment, as
provided for pursuant to the DES Agreement Plan of Merger.
The DES acquisition was accounted for under the purchase method of
accounting. As of March 30, 2000, the Company recorded $1.8 million in tangible
assets, and $8.7 million in identifiable intangibles including $6.7 million of
core/developed technology, $0.5 million in in-process research and development,
$1.1 million in customer contracts and $0.4 million of other intangibles. The
Company assumed $4.6 million in liabilities, including $3.3 million in deferred
taxes, and allocated $3.8 million to goodwill. Goodwill and identifiable
intangibles are being amortized using the straight-line method over five-year
and three-year periods, respectively. The results of operations of DES have
been included in the consolidated financial statements of the Company since
March 30, 2000.
(g) Puffin Designs, Inc.
On March 24, 2000, the Company acquired Puffin, a provider of content
creation solutions. The purchase price consisted of 360,352 shares of the
Company's common stock valued at $11.2 million, assumed outstanding stock
options valued at $0.3 million, and approximately $0.3 million in transaction
costs. The fair value of the common stock exchanged in the transaction was
determined using the average market price of the Company's common stock over a
few days before and after the terms of the transaction were agreed to and
announced. The value of the options assumed was determined using a
Black-Scholes pricing model.
The acquisition has been accounted for under the purchase method of
accounting. As of March 24, 2000, the Company recorded $0.5 million in tangible
assets, $0.6 million in-process research and development, $1.2 million in
identifiable intangibles including core/developed technology, assumed $1.7
million in liabilities and allocated $11.2 million to goodwill. Goodwill and
identifiable intangibles are being amortized using the straight-line method
over five-year and three-year periods, respectively. The results of operations
of Puffin have been included in the consolidated financial statements of the
Company since March 24, 2000.
(h) Video Communications Division of Hewlett-Packard
On August 2, 1999, the Company acquired substantially all of the assets of
the Video Communications Division ("Video Communications Division") of
Hewlett-Packard ("HP"), including key technologies and intellectual property,
the Media Stream family of products and selected additional assets, as well as
most managers and employees. In consideration, Pinnacle paid HP $12.6 million
in cash and issued 1,546,344 shares of its common stock valued at $20.6
million. The fair value of the one-half of the common stock issued in the
transaction was determined using the average market price of the Company's
common stock over a few days before the acquisition date. One-half of the
shares issued to HP were non-transferable for 24 months and therefore were
valued at a ten percent discount to the average market price of the Company's
common stock over a few days before the acquisition date. The Company incurred
acquisition costs of approximately $0.5 million for a total purchase price of
$33.6 million and assumed liabilities totaling $10.1 million.
The acquisition of HP's Video Communications Division was accounted for
under the purchase method of accounting. The Company recorded $7.3 million in
tangible assets, $2.0 million in in-process research and development, and $19.1
million in other identifiable intangibles including $9.8 million in
core/developed technology, $2.1 million in customer base, $2.4 million in
trademarks and patents, $1.1 million in favorable contracts, $1.1 million in
assembled workforce, $1.2 million in licensing agreements, $1.4 million in
other intangibles and allocated $15.4 million to goodwill. The Company assumed
$10.1 million in liabilities which included $5.5 million in accounts payable,
$2.6 million in warranty obligations, $1.2 million in customer advances and
$0.8 million in other liabilities. Goodwill and other intangibles are being
amortized using the
F-16
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
straight-line method over periods ranging from nine months to five years. The
results of operations of HP's Video Communications Division have been included
in the consolidated financial statements of the Company since August 2, 1999.
(i) Truevision, Inc.
On March 12, 1999, the Company acquired the outstanding common stock of
Truevision, Inc., a supplier of digital video products (Truevision). In
connection with the acquisition, Pinnacle issued 1,648,412 shares of common
stock valued at $11.5 million. In addition, Pinnacle assumed 279,356 stock
options, valued at $0.7 million. The Company also assumed 107,672 warrants
valued at $0.1 million. The fair value of the common stock exchanged in the
transaction was determined using the average market price of the Company's
common stock over a few days before and after the terms of the transaction were
agreed to and announced. The value of the assumed options and assumed warrants
was determined using a Black-Scholes pricing model. The Company incurred
acquisition costs of approximately $0.5 million, resulting in a total purchase
price of $12.8 million, and assumed liabilities totaling $13.0 million.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Truevision and the fair value of the
acquired assets and assumed liabilities have been included in the financial
statements of the Company since March 12, 1999. The Company recorded $3.8
million in tangible assets, $6.2 million in in-process research and
development, $2.7 million in other identifiable intangibles including patents,
trademarks and assembled workforce, assumed $13.0 million in liabilities and
allocated $13.2 million to goodwill. Goodwill and other intangibles are being
amortized using the straight-line method over periods ranging from three to
seven years.
(j) Shoreline Studios, Inc.
In March 1999, the Company acquired Shoreline Studios, Inc. ("Shoreline"), a
provider of real-time 3D graphics software for use in live broadcasts, for $0.8
million in cash. The transaction was accounted for by the purchase method of
accounting and resulted in $0.4 million in goodwill and $0.4 million in
in-process research and development. The results of operations of Shoreline did
not have a material effect on the Company's results of operations.
(k) Pro-forma results of operations related to the acquisitions that
occurred in fiscal 2001 have not been presented, as they would not be
materially different from the consolidated financial statements.
The following unaudited pro forma results of operations for fiscal 2000 and
1999 are as if the acquisitions of Montage, DES, Avid Sports Inc., Puffin, and
Propel occurred at the beginning of fiscal 2000 and 1999, after giving effect
to certain adjustments, including amortization of goodwill and related income
tax effects. The pro forma information excludes charges for acquired in-process
research and development. The pro forma information has been prepared for
comparative purposes only and is not indicative of what operating results would
have been if the acquisitions had taken place at the beginning of fiscal 2000
or 1999 or of future operating results. Separate, historical statements of
operations of Video Communications Division were never prepared by HP due to
the de minimus nature of the Video Communications Division business in
proportion to HP as a whole. Therefore, such pro-forma condensed statements of
operations have not been included in this pro-forma information.
Year ended June 30,
------------------------
2000 1999
-------- --------
(In thousands, except pe
share data, unaudited)
Net sales.............................. $258,463 $187,620
======== ========
Net loss............................... $ (7,287) $ (5,404)
======== ========
Basic net loss per share............... $ (0.15) $ (0.12)
======== ========
Diluted net loss per share............. $ (0.13) $ (0.11)
======== ========
(l) In-Process Research and Development
The amounts allocated to identifiable intangible assets and acquired
in-process research and development were based on established valuation
techniques. The portion of the purchase price allocated to in-process
F-17
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
research and development represents development projects that have not yet
reached technological feasibility and have no alternative future use. The
in-process technology evaluation gives explicit consideration to the value
created by the research and development efforts of the acquired business prior
to the acquisition and to be created by Pinnacle after the acquisition. These
value creation efforts were estimated by considering the following major
factors: (i) time-based data, (ii) cost-based data, and (iii) complexity-based
data. Technological feasibility was determined based on: (i) an evaluation of
the product's status in the development process with respect to utilization and
contribution of the individual products as of the date of valuation and (ii)
the expected dates in which the products would be commercialized. It was
determined that technological feasibility was achieved when a product is at
beta stage. The values assigned to purchased in-process research and
development were determined by estimating the cost to develop the purchased
in-process research and development into commercially viable products;
estimating the resulting net cash flows from such projects; discounting the net
cash flows back to the time of acquisition using a risk-adjusted discount rate
and then applying an attribution rate based on the estimated percent complete
considering the approximate stage of completion of the in-process technology at
the date of acquisition. The estimated net cash flows from each project were
determined using a discounted cash flow model similar to the income approach,
focusing on the income-producing capabilities of the in-process technologies.
Under this approach, the value is determined by estimating the revenue
contribution generated by each of the identified products classified within the
classification segments. Revenue estimates were based on (i) individual product
revenues, (ii) anticipated growth rates (iii) anticipated product development
and introduction schedules (iv) product sales cycles, and (v) the estimated
life of a product's underlying technology. From the revenue estimates,
operating expenses estimates, including costs of sales, general and
administrative, selling and marketing, income taxes and a use charge for
contributory assets, were deducted to arrive at operating income. Revenue
growth rates were estimated by management for each product and gave
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by the
Company and its competitors, individual product sales cycles, and the estimated
life of each product's underlying technology. Operating expense estimates
reflect Pinnacle's historical expense ratios. Additionally, these projects will
require continued research and development after they have reached a state of
technological and commercial feasibility. A discount and attribution rate of
35% was used in the Video Communications Division valuation and a 30% rate was
used on the valuations of Puffin, DES and Montage.
Of the $6.6 million in-process research and development charges in fiscal
1999, a majority, $6.2 million, related to the acquisition of Truevision and
$0.4 million to the acquisition of Shoreline Studios. Of the $3.5 million
in-process research and development charge in fiscal 2000, $2.0 million related
to the acquisition of HP's Video Communications Division, $0.4 million to the
acquisition of Montage, $0.5 million to the acquisition of DES and $0.6 million
to the acquisition of Puffin Designs.
The Company has successfully completed the development of the in-process
technology for each of those six acquisitions and has successfully
commercialized each of those technologies. For example, the in-process research
and development acquired from Truevision related to the "3000 Series TARGA"
technology, which was completed in the fourth quarter of fiscal 2000. This
in-process research and development accounted for over 60% of the acquired
in-process research and development during fiscal 1999 and 2000 combined.
There has been no material variation between the projected and actual
results of the development projects the Company acquired in the six
acquisitions it completed during fiscal 1999 and 2000, with the exception of an
approximate 9 month delay in the development of the 3000 Series TARGA
technology and at least an eighteen month delay in the development of the
Vortex technology. The 3000 Series TARGA technology has been successfully
integrated as a key video processing component of many of the Company's
broadcast and professional products, including the Vortex news systems, the
Deko Graphics systems and the Company's sports systems. The Vortex technology
is nearing completion and the Company has several installations in process and
is generating significant orders. In addition, the Company has not experienced
any unexpected, materially adverse financial results due to any delays
associated with the development or implementation of any of these acquired
in-process technologies.
F-18
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Note 5 Commitments and Contingencies
Lease Obligations
As of June 30, 2001, the Company leased facilities and vehicles under
non-cancelable operating leases. Future minimum lease payments are as follows
(in thousands):
Years Ending June 30,
2002................. $ 4,030
2003................. 3,733
2004................. 2,930
2005................. 1,401
2006................. 1,026
Thereafter........... 1,336
-------
Total......... $14,456
=======
Rent expense for the years ended June 30, 2001, 2000 and 1999, was $3.1
million, $2.3 million and $1.8 million, respectively.
Legal Actions
On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle Systems, Inc. et
al., No. 00-CV-2596 was filed in the United States District Court for the
Northern District of California against the Company and certain officer and
director defendants. The action is a putative class action and alleges that
defendants violated the federal securities laws by making false and misleading
statements concerning the Company's business prospects during an alleged class
period of April 18, 2000 through July 10, 2000. The complaint does not specify
damages. The Company is defending the case vigorously, and recently moved to
dismiss the complaint. In a written order dated May 7, 2001, the court
dismissed the complaint and allowed the plaintiffs to file an amended
complaint. The plaintiffs filed a second consolidated amended complaint on June
22, 2001. The Company's motion to dismiss this complaint is scheduled to be
heard on November 2, 2001.
On August 29, 2000, a lawsuit entitled Athle-Tech Computer Systems,
Incorporated v. Montage Group, Ltd. and Digital Editing Services, Inc., wholly
owned subsidiaries, No. 00-005956-C1-021 was filed in the Sixth Judicial
Circuit Court for Pinellas County, Florida (the "AT Claim"). The AT Claim
alleges that Montage breached a purported software development agreement
between Athle-Tech Computer Systems, Incorporated ("AT") and Montage (the "AT
Agreement"). The AT Claim also alleges that DES intentionally interfered with
AT's claimed rights with respect to the purported AT Agreement and was unjustly
enriched as a result. Finally, the AT Claim requests that the court impose a
constructive trust on at least 50% of the proceeds of the purported AT
Agreement and render a declaratory judgment in favor of AT. The Company has
engaged counsel to defend the AT Claim. Pinnacle is vigorously defending AT's
claim.
The Company is engaged in certain other legal actions arising in the
ordinary course of business. The Company believes it has adequate legal
defenses and that the ultimate outcome of these actions will not have a
material effect on the Company's financial position or results of operations,
although there can be no assurance as to the outcome of such litigation.
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 non-statutory 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 400,000 shares of common stock for issuance.
The Plan provides for the granting of non-statutory 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 20,000 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 5,000 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
F-19
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ten-year term. There were 165,000 and 190,000 shares available for grant under
the Director Plan at June 30, 2001 and 2000, respectively.
In October 1996, the shareholders approved the 1996 Stock Option Plan (the
"1996 Plan"). The 1996 Plan provides for grants of both incentive and
non-statutory 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 granted pursuant to the 1996 Plan are generally
granted for a ten-year term and generally vest over a four-year period. The
shareholders approved an increase in the number of shares available for grant
by 800,000 shares at the 2000 annual meeting of shareholders. At June 30, 2001
and 2000, respectively, there were 663,295 and 287,692 shares available for
grant under the 1996 Plan.
In November 1996, the Board of Directors approved the 1996 Supplemental
Stock Option Plan (the "1996 Supplemental Plan"). The 1996 Supplemental Plan
provides for grants of non-statutory common stock options to employees and
consultants other than officers and directors at a price determined by the
Board of Directors. Options granted pursuant to the 1996 Supplemental Plan are
generally granted for a ten-year term and generally vest over a four-year
period. In July 2000, the Board of Directors increased the number of shares
available for grant by 2,200,000. At June 30, 2001 and 2000, respectively,
there were 1,068,791 and 168,692 shares available for grant under the 1996
Supplemental Plan.
In addition to the above-mentioned plans, an officer of the Company holds
345,172 options at an exercise price of $0.56, all of which are outside of the
plans and were exercisable as of June 30, 2001.
Stock option activity under these employee and director option plans was as
follows:
Available Options Weighted Average
For Grant Outstanding Exercise Price
--------- ----------- ----------------
(shares in thousands)
Balance at June 30, 1998.......... 1,372 8,388 $ 4.22
Additional shares reserved........ 3,200 -- --
Exercised......................... -- (1,906) $ 3.62
Granted........................... (3,896) 3,896 $ 7.49
Assumed in Truevision acquisition. -- 280 $ 5.99
Canceled.......................... 568 (652) $ 5.64
------ ------ ------
Balance at June 30, 1999.......... 1,244 10,006 $ 5.57
Additional shares reserved........ 5,000 -- --
Exercised......................... -- (2,117) $ 4.87
Granted........................... (6,214) 6,214 $15.10
Assumed in Puffin acquisition..... -- 52 $24.65
Assumed in Avid Sports acquisition -- 138 $ 5.82
Canceled.......................... 617 (634) 7.55
------ ------ ------
Balance at June 30, 2000.......... 647 13,659 $10.00
Additional shares reserved........ 3,000 -- --
Exercised......................... -- (586) $ 4.97
Granted........................... (3,145) 3,145 8.03
Canceled.......................... 1,395 (1,457) $12.73
------ ------ ------
Balance at June 30, 2001.......... 1,897 14,761 9.50
====== ====== ======
The following table summarizes stock options outstanding and exercisable at
June 30, 2001.
Outstanding Exercisable
---------------------------------------------- -----------------------------
Weighted Average Weighted Weighted
Exercise Shares Remaining Aveage Shares Average
Price Range (In thousands) Life in years Exercise Price (In thousands) Exercise Price
- ----------- -------------- ---------------- -------------- -------------- --------------
$ 0.25 to 5.16.. 3,331 5.40 $ 3.81 2,762 $ 3.69
$ 5.19 to 8.16.. 3,063 7.80 $ 6.45 1,615 $ 6.80
$ 8.44 to 12.63.. 2,972 8.73 $ 9.09 600 $ 9.09
$13.00 to 13.00.. 3,159 8.10 $13.00 1,485 $13.00
$13.19 to 33.79.. 2,236 8.58 $17.77 888 $17.69
------ -----
Total..... 14,761 7.63 $ 9.50 7,350 $ 8.39
====== =====
F-20
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL CONSOLIDATED STATEMENTS--(Continued)
The weighted average fair value of options granted for the fiscal years
ended June 30, 2001, 2000 and 1999 was $4.83, $8.35, and $3.32 respectively.
Assumptions used in determining the fair value of stock options granted using
the Black-Scholes option-pricing model were as follows: for fiscal 2001,
volatility of 87.2%, no expected dividends, an average risk-free interest rate
of 5.29% and an average expected option term of 3.4 years; for fiscal 2000,
volatility of 75.2%, no expected dividends, an average risk-free interest rate
of 6.15% and an average expected option term of 3.4 years; and for fiscal 1999,
volatility of 57.0%, no expected dividends, an average risk-free interest rate
of 4.93% and an average expected option term of 3.4 years.
Had compensation expense for the Company's stock based compensation plans
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) and net income (loss) per share
would have been as follows (in thousands except per share data):
Years ended June 30,
---------------------------
2001 2000 1999
-------- -------- -------
Net income (loss):
As reported.............. $(60,548) $ 7,587 $18,436
Pro forma................ $(78,451) $(11,332) $10,922
Net income (loss) per share:
Basic--As reported....... $ (1.17) $ 0.16 $ 0.43
Pro forma.......... $ (1.52) $ (0.23) $ 0.26
Diluted--As reported..... $ (1.17) $ 0.14 $ 0.39
Pro forma......... $ (1.52) $ (0.23) $ 0.24
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 October 1999, the shareholders increased the number of
shares authorized to be issued under the Purchase Plan to 4,566,000 shares, of
which 2,450,000 were available for issuance at June 30, 2001. Annual increases
to the Purchase Plan are calculated at the lesser of 1,200,000 shares or 2% of
the Company's outstanding shares of common stock. Employees purchased 434,000,
341,000, and 448,000 shares in the years ended June 30, 2001, 2000 and 1999,
respectively.
The fair value of employees' stock purchase rights under the Purchase Plan
was estimated using the Black-Scholes model with the following weighted average
assumptions used for purchases in each of the following fiscal years ended June
30:
2001 2000 1999
------ ---- ----
Risk-free interest rate. 5.14% 5.97% 4.8%
Expected life (in years) 0.5 0.5 0.5
Expected volatility..... 87.2% 75.2% 57.0%
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 contributions to the plan to date.
Note 7 Shareholders' Equity
Stock Repurchase Plan. In July 2000, the Board of Directors authorized the
repurchase of up to 3.0 million shares of the Company's common stock. As of
June 30, 2001, the Company had repurchased a total of 0.8 million shares of its
common stock at a cost of $6.5 million. Approximately 2.2 million shares remain
authorized for repurchase.
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.
F-21
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 8 Income Taxes
A summary of the components of income tax expense follow:
Years ended June 30,
------------------------
2001 2000 1999
------ ------- --------
(in thousands)
Current:
Federal................................................. $ -- $(2,683) $ 2,260
State................................................... 90 365 2
Foreign................................................. 1,034 2,328 1,482
------ ------- --------
Total current....................................... 1,124 10 3,744
Deferred:
U.S. Federal............................................ 3,651 (1,248) (8,427)
State................................................... 2,841 (2,129) (2,031)
Foreign................................................. -- -- 388
------ ------- --------
Total deferred...................................... 6,492 (3,377) (10,070)
Charge in lieu of taxes attributed to employee stock option
plans.................................................... -- 5,146 6,992
------ ------- --------
Total tax expense................................... $7,616 $ 1,779 $ 666
====== ======= ========
Total income tax expense differs from expected income tax expense computed
by applying the U.S. federal corporate income tax rate of 35% for the years
ended June 30, 2001, 2000, and 1999 to profit (loss) before taxes as follows:
Years ended June 30,
--------------------------
2001 2000 1999
-------- ------- -------
(in thousands)
Income tax expense (benefit) at federal statutory rate $(18,402) $ 3,278 $ 6,685
State income taxes, net of federal income tax benefits 1,905 332 505
In-process research and development................... -- 525 --
Non deductible goodwill and intangible amortization... 2,964 340 --
Non-deductible merger and acquisition costs........... 4,553 -- --
Foreign tax rate differentials........................ (1,456) 391 288
Research tax credit................................... -- (155) (333)
Change in beginning of the year valuation allowance... 18,259 (3,100) (6,400)
Other, net............................................ (207) 168 (79)
-------- ------- -------
$ 7,616 $ 1,779 $ 666
======== ======= =======
F-22
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of June 30,
2001, and 2000 are as follows:
June 30,
------------------
2001 2000
-------- --------
(in thousands)
Deferred tax assets:
Accrued expense and allowances.............................. $ 9,983 $ 7,165
Acquired intangibles........................................ 11,973 7,554
Net operating loss carry forwards........................... 11,025 5,244
Tax credit carry forwards................................... 5,636 6,116
Property and equipment...................................... 861 243
Other....................................................... 103 127
-------- --------
Total gross deferred tax assets......................... 39,581 26,449
Less: valuation allowance............................... (32,478) (9,346)
-------- --------
Net deferred tax assets................................. 7,103 17,103
-------- --------
Deferred tax liabilities:
Acquired intangibles........................................ (6,456) (9,899)
Accumulated domestic international sales corporation income. (259) (324)
Unrealized foreign exchange gain............................ (388) (388)
-------- --------
Total gross deferred tax liabilities.................... (7,103) (10,611)
-------- --------
Net deferred tax assets................................. $ -- $ 6,492
======== ========
The Company is presently unable to conclude that all of the deferred tax
assets are more likely than not to be realized from the results of operations.
Accordingly, a valuation allowance was provided for the net deferred tax
assets. During the fiscal year ended June 30, 2001, the Company increased the
valuation allowance by $23.1 million. $6.6 million of the valuation allowance
relating to tax benefits arising from the exercise of stock options will be
credited to stockholders' equity when recognized in the form of a reduction of
the valuation allowance. During the fiscal year ended June 30, 2000, the
Company increased the valuation allowance by a net $3.1 million of which $6.2
million was a debit relating to the tax benefit arising from the exercise of
stock options and $3.1 million was credit attributable to change of beginning
of the year valuation allowance. During the fiscal year ended June 30, 1999,
the valuation allowance decreased by $8.2 million of which approximately $6.9
million was credited to additional paid-in capital for tax benefits related to
disqualifying dispositions of stock options.
As of June 30, 2001, the Company had federal and state net operating loss
carryforwards of approximately $43.8 million and $19.7 million respectively.
The Company's federal net operating loss carryforwards expire in the years 2013
through 2021, if not utilized. The Company's state net operating loss expires
in the years 2003 through 2011, if not utilized. In addition, the Company had
federal research and experimentation credit carryforwards of $3.1 million,
which expire in the years 2002 through 2021, and state research and
experimentation credit carryforwards of $1.9 million, which have no expiration
provision.
Federal and state tax impose substantial restrictions on the utilization of
net operating loss and tax credit carryforwards in the event of an "ownership
change" as defined in Internal Revenue Code Section 382. If the Company has
such an ownership change, the Company's ability to utilize the above mentioned
carryforwards could be significantly reduced.
Note 9 Segment Information
Prior to July 1, 2000, the Company's organizational structure was based on
three strategic business groups that sold various products into the Company's
principle markets. These business groups equated to three reportable segments:
Broadcast, Desktop, and Consumer. Beginning on July 1, 2000, the Company
reorganized and implemented a plan to divide the operations of the Company into
three distinct divisions: Broadcast Solutions, Professional Media and Personal
Web Video. The reorganization was performed to provide a structure that would
meet the growing demands of the Company and to provide divisional managers the
ability to focus and manage their own operations and resources. Prior to this,
resources for sales, marketing, operations and logistics were managed
independently outside of the business groups. The reorganization also provided
the Company an opportunity to re-evaluate its product offerings and better
align them within its distribution channels.
F-23
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's chief operating decision maker evaluates the performance of
these divisions based on revenues, gross profit, and operating income before
income taxes, interest income, interest expenses, and other income, excluding
the effects of nonrecurring charges. Nonrecurring charges include in-process
research and development, acquisition settlement, legal settlement, other
special items, and amortization of goodwill and other intangibles related to
the Company's acquisitions. Operating results also include allocations of
certain corporate expenses.
The following is a summary of the Company's operations by operating segment
for the years ended June 30, 2001, 2000, and 1999 based on the Company's
organizational structure since July 1, 2000. Only revenue and gross profit
information are provided on a comparative basis. Due to the reorganization of
the Company and the addition and realignment of operational departments and
personnel, restatement of prior years' operating segment results is
impracticable.
2001 2000 1999
-------- -------- --------
(In thousands)
Broadcast Solutions:
Revenues........................................... $ 88,925 $ 85,618 $ 26,917
Gross profit....................................... 41,148 51,790 15,483
Operating loss before amortization of goodwill and
other intangibles................................ (10,228)
Amortization of goodwill and other intangibles..... 23,340
Operating loss after amortization of goodwill and
other intangibles................................ $(33,568)
Professional Media:
Revenues........................................... $ 51,751 $ 43,815 $ 36,283
Gross profit....................................... 23,536 23,270 20,551
Operating loss before amortization of goodwill and
other intangibles................................ (1,926)
Amortization of goodwill and other intangibles..... 5,449
Operating loss after amortization of goodwill and
other intangibles................................ $ (7,375)
Personal Web Video:
Revenues........................................... $111,983 $108,534 $ 95,898
Gross profit....................................... 43,426 49,334 49,042
Operating income before amortization of goodwill
and other intangibles............................ 2,969
Amortization of goodwill and other intangibles..... 1,954
Operating loss after amortization of goodwill and
other intangibles................................ $ 1,015
Consolidated:
Revenues........................................... $252,659 $237,967 $159,098
Gross profit....................................... 108,110 124,394 85,076
Operating loss before amortization of goodwill and
other intangibles................................ (9,185)
Amortization of goodwill and other intangibles..... 30,743
Operating loss after amortization of goodwill and
other intangibles................................ $(39,928)
The following table reconciles combined operating loss to total consolidated
operating loss for the year ended June 30:
2001
--------------
(In thousands)
Combined operating loss for reportable segments $(39,928)
Unallocated amounts:
Acquisition settlement...................... (12,880)
--------
Consolidated operating loss................. $(52,808)
========
F-24
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the Company's operations by operating segment
for the years ended June 30, 2000 and 1999 based on the Company's
organizational structure prior to July 1, 2000, as previously reported:
2000 1999
-------- --------
(In thousands)
Broadcast Solutions:
Revenues................ $ 85,618 $ 26,917
Gross profit............ 51,790 15,483
Operating income (loss). $ 3,424 $ (2,398)
Desktop:
Revenues................ $101,698 $ 89,798
Gross profit............ 53,368 53,430
Operating income........ $ 7,340 $ 20,352
Consumer:
Revenues................ $ 50,651 $ 42,383
Gross profit............ 19,236 15,803
Operating income........ $ 801 $ 1,985
Combined:
Revenues................ $237,967 $159,098
Gross profit............ 124,394 85,076
Operating income........ $ 11,565 $ 20,939
The following table reconciles combined operating income to total
consolidated operating income for the years ended June 30:
2000 1999
------- -------
(In thousands)
Combined operating income for reportable segments $11,565 $20,939
Unallocated amounts:
Legal settlement.............................. (2,102) --
In process research and development........... (3,500) (6,579)
------- -------
Consolidated operating income.................... $ 5,963 $14,360
======= =======
The Company markets its products globally through its network of sales
personnel, dealers, distributors and subsidiaries. Export sales account for a
significant portion of the Company's net sales. The following table presents a
summary of revenue and long-lived assets by geographic region as of and for
years ended June 30:
2001 2000 1999
-------- -------- --------
(In thousands)
Revenues
North America (US and Canada)....................... $107,762 $107,019 $ 62,393
United Kingdom, Ireland............................. 20,388 21,307 11,636
Germany............................................. 16,445 18,230 20,430
France.............................................. 16,716 16,373 12,501
Spain, Italy, Benelux............................... 24,652 23,500 18,070
Japan, China, Hong Kong, Singapore, Korea, Australia 35,200 27,060 14,869
Other foreign countries............................. 31,496 24,478 19,199
-------- -------- --------
Total........................................ $252,659 $237,967 $159,098
======== ======== ========
Long-lived assets
North America (US and Canada)....................... $ 12,319 $ 13,851 $ 9,055
Germany............................................. 1,414 1,598 1,361
Other foreign countries............................. 783 694 392
-------- -------- --------
$ 14,516 $ 16,143 $ 10,808
======== ======== ========
Foreign revenue is reported based on where the sale originates.
F-25
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
One customer accounted for approximately 3.9%, 5.9%, and 10.5% of the
Company's net sales for the years ended June 30, 2001, 2000 and 1999
respectively. Sales to this customer are included in the Company's Personal Web
Video business division. In addition, this one customer accounted for 3.7% and
9.3% of net accounts receivable at June 30, 2001 and 2000, respectively. No
other customer accounted for greater than 10% of net sales or accounts
receivable.
Note 10 Supplemental Cash Flow Information
The following table reflects supplemental cash flow from investing
activities related to acquisitions for the fiscal years ended June 30:
Fair value of: 2001 2000 1999
-------------- ------ -------- --------
(In thousands)
Assets acquired and goodwill................... $7,477 $124,654 $ 25,735
Liabilities assumed............................ -- (42,558) (13,312)
Common stock, stock options and warrants issued -- (69,771) (12,856)
------ -------- --------
Net cash (received) paid on acquisitions....... $7,477 $ 12,325 $ (433)
====== ======== ========
Note 11 Quarterly Financial Data (Unaudited)
Summarized quarterly financial information for fiscal 2001 and 2000 is as
follows (in thousands except for per share data amounts):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- - ----------- ----------- ----------- -----------
Fiscal 2001:
Financial data prior to effect of change
in accounting principle:
Net sales............................... $ 62,775 $75,033 $71,419 $ 50,078
Gross profit............................ 26,533 35,365 35,882 14,414
Operating loss.......................... (22,269) (1,460) (1,270) (25,364)
Net loss................................ $(21,755) $ (998) $ (832) $(32,504)
Net loss per share:
-- basic............................. $ (0.43) $ (0.02) $ (0.02) $ (0.61)
-- diluted........................... $ (0.43) $ (0.02) $ (0.02) $ (0.61)
Effect of change in accounting
principle:
Net sales............................... $ (260) $(3,683) $(2,703) $ --
Gross profit............................ (116) (2,135) (1,833) --
Operating loss.......................... (116) (2,135) (1,852) --
Net loss................................ $ (116) $(2,135) $(1,852) $ --
Net loss per share:
-- basic............................. $ -- $ (0.04) $ (0.03) $ --
-- diluted........................... $ -- $ (0.04) $ (0.03) $ --
F-26
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Fiscal 2001:
Financial data after effect of change in
accounting principle:
Net sales................................. $ 62,515 $71,350 $68,716 $ 50,078
Gross profit.............................. 26,417 33,230 34,049 14,414
Operating loss............................ (22,385) (3,595) (3,122) (25,364)
Loss before cumulative effect of change
in accounting principle................. (21,871) (3,133) (2,684) (32,504)
Cumulative effect of change in
accounting principle from prior year.... (356) -- -- --
Net loss.................................. $(22,227) $(3,133) $(2,684) $(32,504)
Net loss per share before cumulative
effect of change in accounting
principle:
-- basic............................... $ (0.43) $ (0.06) $ (0.05) $ (0.61)
-- diluted............................. $ (0.43) $ (0.06) $ (0.05) $ (0.61)
Cumulative effect per share of change in
accounting principle:
-- basic............................... $ (0.01) $ -- $ -- $ --
-- diluted............................. $ (0.01) $ -- $ -- $ --
Net loss per share:
-- basic............................... $ (0.44) $ (0.06) $ (0.05) $ (0.61)
-- diluted............................. $ (0.44) $ (0.06) $ (0.05) $ (0.61)
Shares used to compute net loss per share:
-- basic............................... 50,962 50,951 51,079 53,437
-- diluted............................. 50,962 50,951 51,079 53,437
Fiscal 2000:
Net sales................................. $ 50,447 $62,562 $61,246 $ 63,712
Gross Profit.............................. 28,147 32,147 33,286 30,814
In-process research and development....... 2,000 -- 1,100 400
Operating income (loss)................... 2,680 5,806 1,071 (3,593)
Net income (loss)......................... $ 2,790 $ 5,389 $ 1,669 $ (2,261)
Net income (loss) per share:
-- basic............................... $ 0.06 $ 0.11 $ 0.03 $ (0.05)
-- diluted............................. $ 0.05 $ 0.10 $ 0.03 $ (0.05)
Shares used to compute net income (loss)
per share:
-- basic............................... 46,600 47,844 48,655 50,129
-- diluted............................. 52,984 54,454 56,424 50,129
Quarterly results for the fiscal year ended June 30, 2001 include the effect
of adopting Staff Accounting Bulletin No. 101 ''Revenue Recognition in
Financial Statements."
Note 12 Subsequent Event
On September 13, 2001, the Company entered into a definitive agreement to
acquire the assets and certain liabilities of FAST Multimedia, a developer of
video editing solutions, headquartered in Munich, Germany. The purchase price
will be approximately $15 million, which will be paid in a combination of cash
and the Company's common stock. The transaction will be accounted for as a
purchase, and is expected to close in October 2001.
F-27
Schedule II--Valuation and Qualifying Accounts (in thousands)
Balance at Charged to Balance at
Beginning of Expenses or End of
Period other Accounts Deductions Period
------------ -------------- ---------- ----------
Year ended June 30, 2001
Allowance for doubtful accounts 2,528 2,060 807 3,781
Sales return allowances........ 3,255 1,410 938 3,727
Year ended June 30, 2000
Allowance for doubtful accounts 1,899 1,335 706 2,528
Sales return allowances........ 3,158 792 695 3,255
Year ended June 30, 1999
Allowance for doubtful accounts 1,469 906 476 1,899
Sales return allowances........ 2,954 1,366 1,162 3,158
EXHIBIT INDEX
Number Document
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 ChaseMellon
Shareholder Services, L.L.C.
4.1.1(2) Amendment No. 1 to Preferred Shares Right Agreement dated as of April 30, 1998 by and between
the Registrant and ChaseMellon Shareholder Services, L.L.C.
4.2(3) Stock Restriction and Registration Rights Agreement dated August 2, 1999 by and between the
Registrant and the Hewlett-Packard Company.
4.3(4) Declaration of Registration Rights dated March 29, 2000 by the Registrant.
4.4(5) Registration Rights Agreement dated March 29, 2000 by and between the Registrant and each of
David Engelke and Bryan Engelke.
4.5(6) Registration Rights Agreement dated April 6, 2000 by and between the Registrant and each of
David Engelke, Seth Haberman and Simon Haberman.
4.6(7) Stock Acquisition and Exchange Agreement dated as of June 29, 2000 by and among the Registrant,
Avid Sports, Inc., the Stockholders of Avid Sports, Inc. and David Grandin, as Stockholders'
Representative.
4.7(8) Settlement Agreement dated September 19, 2000 by and between the Registrant and the stockholders
of Avid Sports, Inc.
10.21(5) 1996 Stock Option Plan, as amended, and form of agreements thereto.
10.22(5) 1996 Supplemental Stock Option Plan, as amended, and form of agreements thereto.
10.23(12) Amendment No. 1 to the Agreement and Plan of Merger dated as of March 29, 2000 by and between
Pinnacle Systems, Inc., Digital Editing Services, 1117 Acquisition Corporation and each of
David Engelke and Bryan Engelke.
10.31(9) 1987 Stock Option Plan, as amended, and form of agreement thereto.
10.43(10) 1994 Employee Stock Purchase Plan, as amended, and form of agreement thereto.
10.51(11) 1994 Director Stock Option Plan, and form of agreement thereto.
10.61(1) Form of Indemnification Agreement between the Registrant and its officers and directors.
22.1(12) List of subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (See Page 37).
- --------
* 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. 333-83812) 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 and as amended by Amendment No. 1 thereto
on Form 8-A/A filed on May 19, 1998.
(3) Incorporated by reference to the exhibits to the Registration Statement on
Form S-3 (File No. 333-84739) filed by the Registrant with the Securities
and Exchange Commission.
(4) Incorporated by reference to the exhibits to the Registration Statement on
Form S-3 (File No. 333-35498) filed by the Registrant on April 24, 2000.
(5) Incorporated by reference to the exhibits to the Registration Statement on
Form S-3 (File No. 333-40218) filed by the Registrant on July 27, 2000.
(6) Incorporated by reference to the exhibits to the Registration Statement on
Form 8-K (File No. 000-24784) filed by the Registrant on July 14, 2000.
(7) Incorporated by reference from the Registrant's Report on Form 8-K (File
No. 000-24784) as filed on July 14, 2000.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Report on Form 10-Q (File No. 000-24784) as filed on November 14, 2000.
(9) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 333-02816) as filed on March
27, 1996.
(10) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 333-51110) as filed on
December 1, 2000.
(11) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 033-89706) as filed on
February 23, 1995.
(12) Previously filed.