UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998, 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: 0-26620
ACCOM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3055907
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1490 O'Brien Drive
Menlo Park, CA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 328-3818
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
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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 than 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 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 was approximately $2,250,651 as of December 16, 1998, based
upon the closing sale price on the Over-the-Counter (OTC) Bulletin Board
reported for such date. Shares of Common Stock held by each officer and director
and by each person who owns 5% of 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.
There were 10,125,164 shares of Registrant's Common Stock issued and
outstanding as of December 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Information required under Part III will be filed as an amendment to
this Form 10-K not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
"Accom," "Abekas," "Axial," "DveousFX," "ELSET," "Digisphere,"
"Microsphere," "Stratasphere," "Videosphere" and "WSD" are some of the
registered trademarks of the Company, and all of the Company's other product
names are trademarks of the Company. "Onyx(TM)" is a trademark of Silicon
Graphics, Inc. This Report also includes trademarks of companies other than
Accom, Inc. and Silicon Graphics. Unless the context indicates otherwise,
reference in this Report to the "Company" and "Accom" refers to Accom, Inc. and
its consolidated subsidiaries.
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PART I
Item 1. Business
The company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that the factors set forth in the sections
entitled "Manufacturing and Supplies," "Competition" "Proprietary Rights and
Licenses" and "Additional Factors That May Affect Future Results," below, as
well as other factors, could in the future affect, and in the past have
affected, the Company's actual results and could cause the Company's results for
future years or quarters to differ materially from those expressed in any
forward looking statements made by or on behalf of the Company, including
without limitation those contained in this 10-K report. Forward looking
statements can be identified by forward looking words, such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
General
Accom, Inc. ("Accom" or the "Company") designs, manufactures, sells,
and supports a complete line of digital video signal processing, editing, and
disk recording, and virtual set tools, primarily for the professional worldwide
video production, post production and live broadcasting, and computer video
production and post-production, marketplaces. The Company's systems are designed
to be used by video professionals to create, edit and broadcast high quality
video content such as television shows, commercials, news, music videos and
video games.
The proliferation of distribution channels for video content, including
cable, satellite and direct view systems such as videos and DVDs, is increasing
the demand for broadcast content while diminishing the potential viewing
audience and revenue per channel. To compete more effectively, broadcasters and
other professional content creators require systems that reduce the cost of
developing and delivering video content and more flexibly distribute the same or
repurposed content over multiple channels. These systems must be capable of
performing mission-critical tasks reliably and in real time without detracting
from the final video quality. As video professionals transition from traditional
stand-alone analog systems to integrated digital systems, they also require
systems that can be easily integrated with existing equipment to leverage their
significant capital investments.
The Company provides innovative products that cost-effectively meet the
needs of professional content creators and broadcasters in real time video
production, post-production and distribution. The Company's current products
include the ELSET(R) virtual set system used in the production process by
replacing traditional physical studio sets with three-dimensional ("3D") virtual
sets, on-line video editing systems and digital video disk recorders used during
the content creation production and post production processes, and networked
still image and video clip storage systems used by broadcasters in the
distribution process.
<TABLE>
The following table summarizes the Company's key products:
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<CAPTION>
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Product Primary Applications
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Virtual Set Production Tools
- ------------------------------------------------------------------------------------------------------------------------------------
ELSET(R) Virtual Set Virtual sets for high-end video content creation
production in real time
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Graphics and Animation Digital Disk Recorders
- ------------------------------------------------------------------------------------------------------------------------------------
WSD(R)/2Xtreme Desktop computer graphics and animation production
- ------------------------------------------------------------------------------------------------------------------------------------
Digital Signal Processors
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Dveous(TM) and Brutus Digital Video Effects systems for news and sports
- ------------------------------------------------------------------------------------------------------------------------------------
8150 Switcher On-line post production editing for commercials and
long form television programs
- ------------------------------------------------------------------------------------------------------------------------------------
Digital Editors
- ------------------------------------------------------------------------------------------------------------------------------------
Axial(R) 3000 On-line post production editing for commercials and
long form television programs
Sphere(TM) Non-linear editing for long and short form programs
and commercials
- ------------------------------------------------------------------------------------------------------------------------------------
Video Digital Disk Recorders
- ------------------------------------------------------------------------------------------------------------------------------------
APR(TM)/Attache On-line post production editing and effects and on-air
playback of graphics for broadcast
- ------------------------------------------------------------------------------------------------------------------------------------
Digital News Graphics and Clip Servers
- ------------------------------------------------------------------------------------------------------------------------------------
Axess(TM) Creation and broadcast distribution of news graphics
and short video segments
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's strategy is to maintain its leadership position in the
professional segment of the video post-production market by enhancing its
existing product lines and developing new products that establish higher
standards of performance in video editing and digital recording. The Company
also plans to build upon its established reputation in the post-production
segment to market the ELSET(R) Virtual Set and its Axess(TM) news graphics and
clip server to the production and distribution markets, respectively.
Additionally, the Company continues to pursue its strategy of first developing
and marketing full-featured systems to prove technological feasibility and
market acceptance and then designing lower-priced products with reduced feature
sets to appeal to a broader base of customers.
The Company sells its products through a combination of its direct
sales force and indirect distribution channels.
On December 10, 1998, the Company acquired substantially all of the
assets and certain liabilities of Scitex Digital Video, Inc. and certain of its
affiliates, as part of the Company's strategy to broaden its product line and to
grow the Company. The acquired assets include Scitex Digital Video's business of
developing, manufacturing, marketing and selling digital video manipulation
equipment and non-linear video workstations for the video industry. The products
that were acquired in such transaction are described in the Section entitled
"Products" below.
Industry Overview
The creation and distribution of video content consists of four
distinct stages: pre-production, production, post-production and distribution.
o Pre-production involves creation of the script and storyboard.
o Production (content creation) involves shooting video or film, as well as
creation of computer-generated graphics and sound recording.
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o Post-production consists of editing and manipulating diverse images and
audio elements into a final program, including off-line and on-line
editing.
o Distribution is the delivery of the finished video content to the viewer
through traditional channels such as broadcast, satellite and cable
channels or through direct distribution of video rentals, DVDs and video
games.
The market for systems used in the video content creation, editing and
distribution process ranges from high-end professional users such as television
networks, cable television companies and independent production and
post-production houses, to professionals and non-professionals that create video
content for less demanding applications such as corporate communications.
High-end professional users typically drive the performance standards for
innovation, quality, speed and features for the video production and broadcast
markets.
The channels available for distribution of video content are
proliferating as new cable, satellite and direct view alternatives supplement
traditional delivery systems. This proliferation is increasing the demand for
broadcast content. Concurrently, the viewing audience per channel and,
therefore, the potential revenue per channel is being reduced. To more
effectively compete in this environment, broadcasters and other video
professionals must reduce the cost of developing and delivering content and find
more flexible means to distribute the same or repurposed content over multiple
channels. These requirements span the production, post-production, and
distribution segments of marketplace.
Production
A large portion of the cost of creating content is attributable to the
actual shooting of video, which is performed on location or on studio stages. A
typical video studio consists of a soundproofed stage, a specially designed set,
high-intensity lighting, sophisticated video equipment and, often, a
fully-equipped control room. Studios are often dedicated to a single type of
production due to the time and cost necessary to change, or strike, sets. Actual
set costs vary widely depending on the nature of the content being shot on the
set and production budget constraints. Physical sets are inflexible and require
significant manual effort to assemble and disassemble. With the proliferation of
distribution channels, producers of video content need flexible production
techniques that will enable them to quickly and efficiently create content for
distribution through multiple channels. Content creators are therefore searching
for innovative solutions to lower set costs, increase flexibility in the
production of video and create more interesting content.
Post-Production
Video editing is critical to the post-production process and is often
completed in two steps: off-line, to reduce raw material to a smaller, more
manageable group of elements; and on-line, to assemble video, audio and graphic
elements into a final program. The on-line video editing process typically
occurs in a video "editing suite" comprised of sophisticated, interconnected
equipment such as video recorders and switchers, digital video effects systems,
storage devices for still images and computer-based graphics systems. Video
editing suites can cost up to several million dollars due to the cost and
variety of equipment required, and professional post-production services can
cost in excess of $1,000 per hour.
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Over the past several years, a number of personal computer-based
off-line editing systems have been introduced to enable more efficient and
cost-effective editing. However, these off-line systems rely upon compression
algorithms to convert raw video content to signals capable of being manipulated
on personal computers. This use of highly compressed video compromises video
fidelity. Currently, video effects and compositing, as well as two-dimensional
("2D") and 3D graphic elements, must be created in an uncompressed format. An
editor using a compression-based off-line system must decompress the video, add
effects and graphics and then recompress the video. This adds complexity to the
editing process and often further compromises the video fidelity of the final
content. Moreover, these off-line systems typically provide the user with a
single video stream, which does not allow the simultaneous manipulation of
multiple streams of video elements in real time.
To improve productivity and creative flexibility, high-end
professionals increasingly require on-line editing systems with simultaneous
random access to multiple video streams and video of D1 quality, a standard
digital video format that represents one of the highest levels of video quality
commercially available today. Unlike traditional taped-based analog systems, an
on-line editing system based on digital video disk recorders enables the user to
instantly and randomly access any part of the stored video, audio or other
material, rearrange the material and play back edited material without
repeatedly winding and rewinding tape to locate desired sequences. In contrast
to off-line systems, on-line digital-based systems do not require high levels of
compression and, therefore, do not detract from the fidelity of the final video
content. As post-production professionals transition their on-line edit rooms to
digital technologies, they often create hybrid environments that integrate
traditional analog video processing equipment with digital systems. Therefore,
these professionals need on-line editing systems that easily interface with
equipment made by different manufacturers.
Distribution
Most distributors of video content such as television networks and
cable broadcasters currently rely on standalone still image disk storage devices
and analog tape-based systems when broadcasting graphics and video clips during
news, sports or entertainment presentations. These are typically single-user
devices that cannot be easily networked to serve multiple users. With the
proliferation of distribution channels, distributors of video content
increasingly require more flexible means of accessing and distributing content
over multiple channels. Quick access by multiple users to content such as
computer-generated graphics and short segment video clips is critical to
effective and economical news, sports and entertainment broadcasting. Networked
digital video disk recorders enable distributors of video content to make
material more readily available to multiple users and for broadcast through
multiple channels. Distributors of video content are beginning to transition to
digitally-based networks that increase the speed at which information is shared,
reduce the time necessary to complete production tasks and more efficiently
utilize the content they create and distribute.
The Accom(R) Approach
The Company believes that traditional video systems do not adequately
meet the emerging production, post-production and distribution needs of high-end
content creators and broadcasters. Professionals in this market segment require
flexible, cost-effective systems that perform mission-critical tasks reliably
and in real time without detracting from the final video
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quality. These new systems must also be capable of accommodating high-end video
professionals as they transition from traditional stand-alone analog systems to
integrated digital systems. In addition, high-end professionals require systems
that can be easily integrated with existing video content creation and
distribution equipment to leverage their significant equipment investments.
Accom provides innovative products that cost-effectively meet the needs
of high-end content creators and broadcasters in real time video production,
post-production and distribution. Relying on its core technologies and its
knowledge of the high-end video market, the Company develops sophisticated
digital systems comprised of both standard and proprietary hardware and
software. Accom believes that this approach results in flexible solutions,
offering price and performance advantages over competitive systems while
facilitating the transition to hybrid and digital environments.
Accom's systems offer the following benefits:
Open Systems. The Company designs products for ease of integration with
other manufacturers' products, such as video switchers, digital video effects
devices and video recorders. This capability allows users to leverage their
existing equipment investments and customize their systems to meet current and
future requirements.
Real Time Performance. Accom systems operate in real time and execute
processing and control functions 50 or 60 times per second. This enables content
producers to instantly view video content in full-quality video resolution
during production and post-production.
High Video Fidelity. Accom systems operate in fully uncompressed video
formats. This capability provides video content creators with D1 quality video,
enabling them to deliver the same content for high-end distribution channels or
distribution channels requiring lower resolution.
Ease Of Use. The Company's systems are designed to improve the
productivity of users and to reduce training time. For example, certain of the
Company's products utilize video images and graphical user interfaces that
eliminate the need for complicated menu structures and time codes.
Leveraged Solutions. Accom combines certain of its individual products
to create integrated solutions that offer performance benefits beyond those
available when such products are used individually. For example, the Company
integrates its on-line editor products with its digital video disk recorders to
provide on-line, random access editing capability.
The Company offers a range of products to the high-end segment of the
video production, post-production and distribution markets. The Company's
current key products are:
o Virtual set tools, which are designed to enable content producers to
cost-effectively create programs with virtual production sets instead of
traditional sets;
o Digital disk recorders to produce computer graphics and animation;
o On-line video editing systems used by post production professionals;
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o Non-linear editing systrems used by post production professionals;
o Digital video effects and switchers used by broadcasters and
post-production professionals;
o Digital video disk recorders used during the on-line post production
editing process; and
o Networked still image and video clip storage systems used by broadcast
distributors of video content.
Accom Strategy
Accom's goal is to be a leading supplier of production, post-production
and distribution systems to the high-end video content creation, editing and
broadcast markets. To achieve this goal, Accom is following a strategy that
includes the following key elements:
Maintain Leadership Position in Current High-End Market. The Company
has established a reputation for meeting the exacting needs of the high-end
segment of the video post-production market. The Company plans to maintain its
leadership position in the high-end segment of the video post-production market
developing new products that establish higher standards of performance in video
editing and digital recording.
Expand into New High-End Market Segment. The Company plans to leverage
its existing reputation in the high-end post-production segment to market the
ELSET(R) Virtual Set and the Axess(TM) to the production and distribution market
segments, respectively.
Broaden Lower-Priced Product Line. The Company has introduced products,
such as the Axial(R) 3000 on-line editor, the Workstation Disk ("WSD(R)")
digital video disk recorders, and the APR(TM) digital video disk recorders that
provide high-end users with reduced feature sets at lower prices. In the past
the Company first developed and marketed full-featured systems to prove
technological feasibility and market acceptance, then designed lower-priced
products with reduced feature sets to appeal to a broader base of customers.
Beginning with the WSD(R)/2Xtreme and APR(TM) (Accom Professional Recorder) line
of products, the Company has shifted to introducing products that offer high
value but also significant price advantages over competing products.
Invest in Innovative Technologies. The Company has developed
significant expertise in core technologies relating to editing, real time
control, and digital video disk recording. The Company intends to continue to
internally develop and acquire new technologies as necessary to design products
that satisfy customer requirements for quality, speed, cost and functionality.
For example, by acquiring the company that developed ELSET(R), the Company
obtained access to virtual set technology.
Enhance Distribution Channels. The Company plans to expand its direct
marketing and sales efforts to more effectively penetrate the high-end market
segment. In addition, the Company intends to expand its indirect distribution
channels, including dealers, value-added resellers and third-party software
solutions vendors, to increase sales of lower-priced products.
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Products
The Company currently offers six product lines that address the needs
of the video and computer graphics production, post-production and distribution
market segments. The ELSET(R) Virtual Set is designed to be used in the
production of video content. The Company's video digital on-line editing
systems, disk recorders and signal processing equipment are used primarily in
post-production. Digital news graphics and clip servers address the needs of
video distribution. The Company's digital disk recorders are also used in the
production of computer graphics and animation.
<TABLE>
The following table summarizes the Company's key market segments and
products:
<CAPTION>
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MARKETS / Product Primary Applications
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<S> <C>
PRODUCTION:
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Virtual Set Production Tools
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ELSET(R) Virtual Set Virtual sets for high-end video content creation
production in real time
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Computer Graphics and Animation Digital Disk Recorders
- ------------------------------------------------------------------------------------------------------------------------------------
WSD(R)/2Xtreme Desktop computer graphics and animation production
- ------------------------------------------------------------------------------------------------------------------------------------
POST PRODUCTION:
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Digital Signal Processors
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8150 Digital Switcher On-line post production editing for commercials and
long form television programs
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Digital Editors
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Axial(R) 3000 On-line post production editing for commercials and
long form television programs
Sphere(TM) Non-linear editing for long and short form programs
and commercials
- ------------------------------------------------------------------------------------------------------------------------------------
Video Digital Disk Recorders
- ------------------------------------------------------------------------------------------------------------------------------------
APR(TM)/Attache On-line post production editing and effects and on-air
playback of graphics for broadcast
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DISTRIBUTION:
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Digital Signal Processors
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Dveous(TM) and Brutus Digital Video Effects systems for news and sports
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Digital News Graphics and Clip Servers
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Axess(TM) Creation and broadcast distribution of news graphics and
short video segments
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</TABLE>
The following table summarizes the Company's fiscal 1998 net sales by market
segment:
1998
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Market Amount Percent
------ ------ -------
Production $ 6,551 51.9%
Post Production 3,593 28.5%
Distribution 1,847 14.6%
Other 626 5.0%
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$12,617 100.0%
====================================
Video Virtual Set Production Tools
The ELSET(R) Virtual Set is designed to enable content creators to
create virtual sets utilizing standard 2D and 3D painting, modeling and
animation tools and to combine these virtual sets with live actors in real time.
The ELSET(R) Virtual Set combines the virtual world
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and the real world to create the illusion that the actors are a part of the
virtual set. Thus, content creators are able to achieve greater artistic control
over the environments in which content is developed. Traditional physical sets
can be replaced or augmented by virtual sets to achieve the desired look of
large studios while using a small physical studio. Virtual sets can be readily
altered.
The Company believes that ELSET(R) Virtual Set will enable content
producers and the organizations that service such producers to leverage their
investment in existing studio infrastructures. Content producers can utilize the
same virtual set in different studios and quickly load new sets to alter the
appearance of the set. The Company believes that by implementing the ELSET(R)
Virtual Set, these professionals will be able to greatly increase the amount of
content that can be produced in their existing studios and substantially reduce
the labor and storage costs associated with traditional physical sets. The
company anticipates that the ELSET(R) Virtual Set will be used primarily in the
production of news and sports broadcasts, children's programs, news magazines,
music videos, video games and talk shows.
To broadcast a virtual set or to produce a program using virtual sets,
standard production equipment such as lights, cameras, camera control heads,
video keyers, switchers is required. The Company does not supply this equipment
but it is readily available from a variety of sources. Similarly, 2D and 3D
painting and modeling tools are required for creating the virtual sets, which
the Company does not supply but are readily available from various sources.
The Company currently offers three ELSET(R) Virtual Set products:
ELSET(R) LIVE software operates on the Silicon Graphics ("SGI") Onyx 2
computers and is used for real time productions. The Company primarily offers
the ELSET(R) LIVE software; however from time to time will also resell the SGI
hardware for the convenience of the customers.
ELSET(R)POST software operates on the SGI O2 computer and is used for
non-real time productions. ELSET(R)POST offers a lower cost alternative to
ELSET(R)LIVE by allowing users to trade off production time against cost.
ELSET(R)POST utilizes Alias 3D software to create the set and to preview scenes
in lower quality during production. During production, camera moves in addition
to animation triggers are recorded on the O2 while the actors are recorded in
full quality on a video recorder. After the production is complete, the virtual
scenes are rendered in full quality using the SGI computer and recorded on the
Accom WSD(R) digital disk recorder. The final program is composited using the
recording of the actors and the rendered sets from the Accom WSD(R) digital disk
recorder. By rendering virtual sets off-line, complex scenes may be produced
that are not possible in real time virtual set productions.
ELSET(R) LIVE-NT system is a real time virtual set system offering a
lower cost alternative to the ELSET(R)LIVE running on the SGI Onyx2 platform.
ELSET(R) LIVE-NT runs on a Windows NT platform and a graphics engine from Real
3D. The virtual sets are designed by using 3D Studio Max modeling software from
Kinetex. The Accom proprietary software is a "plug in" for the 3D Studio Max
software.
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Computer Graphics and Animation Digital Disk Recorder
The Company's WSD digital disk recorder is primarily used in the
production and post production of computer graphics and animation. The
WSD(R)/2Xtreme, the fourth generation WSD(R) product, is a D1 quality digital
video disk recorder and video subsystem that enables users to record and play
back digital video images in real time and rapidly transfer digital video images
to and from computer workstations. The WSD(R)/2Xtreme enables more efficient
creation of 2D and 3D graphics and animation by providing a bridge between the
computer workstation and video tape recorders and other video devices. The
WSD(R)/2Xtreme's digital random access recording and playback features improve
the quality of desktop graphics production by eliminating the speed and
maintenance problems associated with analog video tape recorders. With the
WSD(R)/2Xtreme, frames can be played back in real time so the user can see the
end result in full motion on a video monitor. An SGI graphic interface option
enables users to preview frames on the workstation display at full resolution or
display real time video from the WSD(R)/Xtreme disk or input source. The Company
has worked closely with a number of third-party software developers to integrate
the WSD(R)/2Xtreme with their applications. The WSD(R)/Xtreme also provides both
Ethernet and SCSI interfaces, thereby enabling connection to other computer
platforms. Accom has interfaces for the WSD(R)/Xtreme to enable Windows(TM)
personal computer and Apple Macintosh users to integrate the WSD(R)/Xtreme into
their systems. The WSD(R)/2Xtreme offers all of the features of its
predecessors, but at a price that is almost half of the Xtreme model it
replaced.
Digital Signal Processing Equipment
On December 10, 1998 Accom acquired substantially all of the assets of
Scitex Digital Video. The 8150 switcher, the Dveous(TM) and the Brutus digital
video effects (DVE) product lines were a part of this acquisition.
The 8150 Digital Switcher with Built-in 3D Effects
The 8150 switcher is typically used in an on-line post-production editing suite.
In addition to a switcher, this type of an editing suite requires an on-line
editor like the Axial(R) and digital disk recorder like the APR(TM) Attache or
the WSD 2Xtreme --- products manufactured by Accom. This 8150 is a powerful
switcher which combines the familiar Mix/Effects architecture with limitless
effects layering capabilities. The 8150's graphically assisted control panel and
built-in high density 3.5" floppy drive and other advanced features make it easy
to operate. The 8150 offers an optional 3D Digital Video Effects based on the
twin channel Dveous(TM) architecture. This technology provides powerful new
effects such as SuperShadow(TM), UltraWarp(TM), and the realistic textures and
light sources of SurfaceFX(TM).
Dveous(TM) Digital Video Effects
The Dveous is a powerful, full quality and fully featured DVE. Dveous is used in
post-production suites as well as for live sports and news applications by
television stations and production companies. DVEs are used to manipulate video
images in real-time to create effects like flying pictures, page turns and more
complex effects which were only possible in the opitcal domain at one point in
time. The Dveous is considered by many as the leading high-end DVE
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product and is used by many well-known broadcasters through out the world. The
Dveous video processing system is based around four-field video framestores.
Video information is upsampled vertically to create a full frame of data for
every field. The Dveous also contains 23x12-point video filters and four-point
store output interpolators to provide superb image quality for picture expansion
and compression. All picture transform information is calculated to 1.2nS
spatial precision with full 10 bits per pixel precision.
Brutus Digital Video Effects
Brutus is a solution built on the established benchmark of Dveous(TM) . Brutus
offers multi-channels of Dveous DVE combined throught the Brutus combiner to
create complex effects and manipulate multiple images in real-time. Any Dveous
can easily upgrade to Brutus. The primary application of Brutus is in live
sports production where effects have to be applied to multiple pictures
simultaneously in a coordinated fashion.
Digital Video Editors
The Company currently offers two product lines in the digital editing
area, the Axial and the Sphere family of editors. On December 10, 1998 Accom
acquired substantially all the assets of Scitex Digital Video. The Sphere
product line was a part of this acquisition.
On-Line Editors
The Company's Axial(R) line of digital on-line video editing systems
consists of various models of the new Axial(R) 3000. (The Axial(R) 3000 replaces
the Axial(R) 2010, and with options offers most of the features of the top-end
Axial(R) 2020.) The Key upgrade option for the Axial(R) 3000 is Live Video,
Random Access Visual Editing System ("RAVE") and the Axial(R) Cache Editor. A
primary benefit of the Axial(R) line of products is their ability to import edit
decision lists from off-line editing systems for quick assembly of full-quality
video content. The Axial(R) 3000 are used to perform editing and compositing for
the high-end segment of the post-production market.
The Axial(R) 3000 with Live Video Option offers an enhanced visual
interface that enables the video editor to edit information by working with
pictures and video clips instead of only timecode numbers. Axial(R) models
utilize a text file approach for interfacing with external equipment that
minimizes the need to write new software device drivers, thereby facilitating
the integration of external equipment with the editing system. Axial(R) is based
on a multi-process architecture that enables it to simultaneously control up to
47 independent devices. In August 1994, the Company received an International
Teleproduction Society ("ITS") Monitor Award for Special Achievement in
Engineering Excellence for the Axial(R) 2020.
The basic Axial(R) 3000 is a lower-priced, on-line editing system
designed to address the needs of a broader group of professional users. The
Axial(R) 3000 is used in post-production suites producing content such as long
form programs and corporate videos under lower production budgets.
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RAVE and the Axial(R) Cache are options that enable users to integrate
the Company's on-line video editing and digital video disk recording
technologies. RAVE combines the Axial(R) and Accom's WSD(R) or APR(TM)
uncompressed digital disk recorders (DDRs). These DDRs provide immediate random
access to stored images and the flexibility of non-linear operation. RAVE was
one of the first editing systems to feature non-linear, D1 quality video for
on-line editing.
Nonlinear Editing
The Company's Sphere family of digital nonlinear editing systems offers
a complete range of solutions for simple to complex applications. The Sphere
family consists of four main products, MicroSphere(R), VideoSphere(R),
StrataSphere(R) and DigiSphere(R).
MicroSphere(R) offers dual stream, realtime video editing with effects
for multimedia and graphics production. Files are stored in native QuickTime(TM)
format for up and downstream compatibility throughout the Sphere line, and for
compatibility with all QuickTime-capable graphics applications. MicroSphere(R)
may be used as a stand-alone platform, or may be integrated into a Sphere
collaborative workgroup.
VideoSphere(R) is a finishing platform featuring dual-stream
broadcast-quality video, four internal stereo pair audio, realtime effects,
wipes, and transitions. In addition to the standard 3D DVE the DveousFX(R)
option adds Abekas(R) caliber effects capabilities including SurfaceFX(TM) 3D
light sourcing and texturing that fully interact with the UltraWarp(R) palette.
VideoSphere(R) also features sophisticated picture correction controls
originally developed for the Abekas(R) 8150.
StrataSphere(R) offers all the features of the VideoSphere(R) with the
addition of full motion alpha channel. The StrataSphere(R) combines Abekas(R)
8150 Production Switcher keying power and the brilliant 3D effects of the
Abekas(R) Dveous(TM) DVE to allow composition of up to fifty layers of video,
each with full key signal integrity in real time.
DigiSphere(R) was designed to perform the tasks of media acquisition
and distribution without the expensive need to tie up a full-blown editing
workstation.
Post Production Digital Video Disk Recorder -- APR(TM)
The Company's newest family of digital video disk recorders is the
Accom Professional Recorder ("APR(TM)"), which again is used in on-line video
post production editing. APR(TM)s are based on newer hard drive technology.
APR(TM)/Attache is the first product from this family and the seventh
DDR product from Accom. Attache was announced and first shown in September 1997,
and full production shipments began in the second quarter of calendar 1998. The
APR(TM) enables the digital recording and playback of D1 quality video onto a
real time, random access redundant arrays of individual disks ("RAID").
Applications of the APR(TM) include random access video editing and the editing
of 2D and 3D graphics and animation for production and post-production. Unlike a
video tape recorder, the APR(TM) can instantly access stored images and play
back the images at
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speeds ranging from 1/100th to 100 times normal play speed. The APR(TM) is
configured to offer storage of 30 minutes and 60 minutes of uncompressed video
recording times. The APR(TM) offers a "half-bandwidth" channel option called
KeyTrack(TM). KeyTrack allows a synchronous key/matte signal to be recorded in
sync with the video. Two complete videotape recorders or DDRs are normally
required for this capability.
APR(TM)/Attache is the first digital disk recorder to offer "PreRead"
and "PostRead" functions. "PreRead" (write-after-read) allows material to be
played off the disk, processed externally, and re-recorded back on the same disk
in real time. This allows one Attache to function as both a playback device and
a record device, effectively replacing two devices in the post production suite.
"PostRead" (read-after-write) allows material to be played out. Limited versions
of PreRead and PostRead have been available on videotape recorders for several
years and have become standard features of videotape recorders.
Digital News Graphics and Clip Servers
The Axess(TM) is designed to be used by broadcast professionals for the
preparation and on-air presentation of computer-generated graphics, still images
and video clips. The Axess(TM) enables broadcasters to digitally store,
categorize, search and obtain quick access to a library of previously recorded
still images, computer-generated graphics and video clips for use during on-air
presentations of news, sports or entertainment events. The Axess(TM) is a
networked system of individual nodes, each having its own storage modules.
Storage is configured to meet the needs of each user, but every node on the
network has access to the information stored in other nodes. An option designed
with RAID provides real-time video storage. The storage options enable a user to
record and play back a mixture of still and moving images. Depending on the
selected storage options, a single node can be configured to store from 1,000 up
to 70,000 still images or from 17 minutes up to 2+ hours of uncompressed video.
Each Axess(TM) system is a user-designed configuration based on just a few
standard hardware components. The price of the Axess(TM) varies widely depending
on the number of nodes and the amount of storage per node.
Customers and Applications
The primary end users of the Company's products are production,
post-production, broadcast and cable companies and studios. One customer, AIM
Co. Ltd., a distributor, accounted for 16% and 13% of the Company's total
revenues in fiscal 1998 and 1997, respectively. No customer accounted for more
than 10% of the Company's total revenues during fiscal 1996.
Marketing, Sales and Service
The Company markets its products through a combination of its direct
sales force and indirect distribution channels. The Company exhibits its
products at major trade shows for the video and computer graphics industries.
The Company also initiates special direct mail and advertising campaigns prior
to certain trade shows and advertises in industry trade journals.
In the United States, the Company markets its products at trade shows
such as those held by the National Association of Broadcasters ("NAB") and ACM
SIGGRAPH. The Company conducts domestic direct sales through employees based in
New Jersey, Illinois, Florida, Texas
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and California, and uses independent representatives to market its products in
geographic areas that are not served by its direct sales organization. The
Company utilizes an additional sales channel of distributors for its
WSD(R)/2Xtreme product line to more effectively reach the independent dealers
and VARs that integrate workstations, software and peripheral devices.
Outside the United States, the Company markets its products at trade
shows such as those held by the International Broadcast Conference in Europe and
the InterBee in Japan. The Company sells its products through a network of
distributors that cover a myriad of countries. During fiscal 1998, 1997, and
1996 the Company generated 45%, 42%, and 38%, respectively, of its net sales
from customers in markets outside of the United States. The Company has two
employees based in the United Kingdom to manage and support the Company's
distributors in Europe, Africa and Middle East. The Company has one employee
based in Hong Kong to manage and support its distributors in Asia Pacific. The
Company manages its distributors in Central and South America through its
corporate headquarters in Menlo Park, California.
The Company provides technical support and training to its customers
directly and through its distributors and maintains a technical support group in
its Menlo Park facility.
The Company generally ships its products within 30 days after
acceptance of a customer purchase order. The Company does not believe that its
backlog at any particular point in time is material or indicative of future
revenue levels.
Research and Development
The Company's research and development efforts currently are focused on the
development of product enhancements and new products for its digital video
on-line editor, video and computer graphics digital disk recorders and virtual
set product lines. The Company's engineering staff consists of software and
hardware engineers and other support personnel. As of September 30, 1998, the
Company employed 26 people in its research and development organization, of
which approximately 17 professionals are focused on software development. As of
December 29, 1998, following the acquisition of the business of Scitex Digital
Video, the Company employed 44 people in its research and development
organization, of which approximately 25 professionals are focused on software
development. During fiscal 1998, 1997 and 1996, the Company's research and
development expenses were approximately $3.3 million, $3.3 million, and $3.9
million, respectively. The Company believes that its success will depend in part
upon its ability to enhance its existing products and to develop and introduce
new products and features to incorporate new technologies and meet changing
customer requirements and emerging industry standards on a timely and
cost-effective basis.
Manufacturing and Suppliers
The Company manufactures its systems at its facility in Menlo Park,
California. The Company's manufacturing operation consists primarily of the
testing of subassemblies and components purchased from third parties, the
duplication of software and the configuration, assembly and testing of complete
systems. The Company relies on independent contractors to manufacture certain
systems, components and subassemblies in accordance with the Company's
specifications. Each of the Company's products undergoes testing and quality
inspection during the final assembly stage.
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The Company is dependent on sole source suppliers for certain key
components and parts used in its products. The Company purchases sole source
components in some product lines pursuant to purchase orders placed from time to
time, does not carry significant inventories of these components and has no
long-term supply arrangements. Financial, market or other developments adversely
affecting sole source suppliers could have an adverse effect on its ability to
supply the Company with components and, consequently, upon the Company's
business, financial condition and results of operations. In addition, the
Company and certain of its suppliers subcontract the manufacture of certain
systems, components and subassemblies to third parties. While the timeliness and
quality of deliveries to date from the Company's suppliers and assemblers have
been acceptable, there can be no assurance that supply or assembly problems will
not occur in the future. While the Company believes that alternative sources for
these components or services could be arranged, the process of qualifying new
suppliers or assemblers could be lengthy, and there can be no assurance that any
additional sources would be available to the Company on a timely basis or at a
cost acceptable to the Company. Any disruption or reduction in the future supply
of any key components currently obtained from a single or limited source could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Competition
The video production, post-production and distribution equipment
markets are highly competitive and are characterized by rapid technological
change, frequent new product introductions, short product lives, evolving
industry standards and significant price erosion over the life of a product. The
Company anticipates increased competition in these markets from both existing
vendors and new market entrants. The Company believes that the primary
competitive factors in the high-end market are feature availability, quality,
price, ease of use, compatibility with other manufacturers' products, ability to
provide complete systems, continued introduction of new products and product
enhancements, customer service and support and distribution. The Company
believes that it competes favorably in the high-end segment of the video
production, post-production and distribution market with respect to most of
these factors.
In the digital on-line video editor, nonlinear video editor and digital
video disk recorder market, the Company has to date encountered competition
primarily from a limited number of comparably-sized companies as well as larger
vendors such as Sony Corporation ("Sony"), The Grass Valley Group (a subsidiary
of Tektronix, Inc.) ("Grass Valley"), Media 100, Inc. and Avid Technology, Inc.
("Avid"). Each of these larger companies has substantially greater financial,
technical, marketing, sales and customer support resources, greater name
recognition and larger installed customer bases than the Company. As the Company
continues to broaden its lower-priced on-line video editor and digital video
disk recorder product lines, the Company anticipates that it will encounter
increased competition, including from these larger vendors.
The digital news graphics and clip server market segment is an emerging
market segment. The Company currently is encountering competition from
established video companies such as Quantel Ltd. (a subsidiary of Carlton
Communications plc) ("Quantel"), Leitch Technology Corporation ("Leitch") and
Pinnacle Systems, Inc. ("Pinnacle"). In addition, certain established computer
and electronics companies are currently offering or have announced their
intentions to offer products or solutions that compete with the Axess(TM). In
addition, the Company expects that
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existing vendors and new market entrants will develop products that will compete
directly with the Axess(TM) and that competition will increase significantly as
the market for digital news graphics and clip servers develops. Many of the
Company's current and potential competitors have substantially greater
financial, technical, marketing, sales and customer support resources, greater
name recognition and larger installed customer bases than the Company.
The virtual set system market is also an emerging market. The Company
competes with, among others, Discreet Logic, Inc. ("Discreet Logic"), RT-SET
Ltd. (a subsidiary of BVR Technologies Ltd., an Israeli corporation), ORAD (an
Israeli corporation) and privately-held companies such as Brainstorm (a Spanish
company). The Company expects that competition will increase significantly as
the market for virtual set systems develops. In addition, certain established
software and computer companies such as SGI, which have substantially greater
financial, technical, marketing, sales and customer support resources than the
Company, may acquire or develop virtual set technology and compete with the
Company.Increased competition in any of the Company's markets could result in
price reductions, reduced margins and loss of market share, all which would
materially and adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully against current or future competitors.
Proprietary Rights and Licenses
Proprietary Rights
The Company's success and ability to compete is dependent in part upon
its proprietary technology. The Company relies on a combination of patent, trade
secret, copyright and trademark law, nondisclosure agreements and other
intellectual property methods to protect its technology. The Company's products
are generally sold pursuant to purchase and license agreements that contain
terms and conditions restricting unauthorized disclosure or reverse-compiling of
the proprietary software embodied in the products. The Company owns 38 United
States patents, eight foreign patents and has applications pending for 18
additional patents in the United States. The Company is also pursuing patent
applications in certain foreign countries. There can be no assurance that any of
the Company's currently pending patent applications or future applications will
be granted in full or in part or that claims allowed will be sufficiently broad
to protect the Company's technology. The Company also owns 33 registered
trademarks in the United States and has several pending United States and
foreign trademark applications. Although the Company relies to a great extent on
trade secret protection for much of its technology, and has obtained written
confidentiality agreements from all of its key employees, consultants and
vendors, there can be no assurance that third parties will not either
independently develop the same or similar technology, obtain unauthorized access
to the Company's proprietary technology or misuse the technology to which the
Company has granted access.
There has been substantial industry litigation regarding patent,
trademark and other intellectual property rights involving technology companies.
In the future, litigation may be necessary to enforce any patents issued to the
Company, to protect trade secrets, trademarks and other intellectual property
rights owned by the Company, to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of others. The Company is not aware of any stated claims
against it regarding
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intellectual property rights. Any litigation arising out of such claims could
result in substantial cost and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such litigation could result in the loss
of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from manufacturing or selling its products, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that, due to the rapid proliferation of new
technology in the industry, legal protection through means such as the patent
and copyright laws will be less influential on the Company's ability to compete
than such factors as the creativity of its development staff and its ability to
develop new products and markets and to service its customers.
The laws of certain foreign countries treat the protection of
proprietary rights differently from those in the United States, and in many
cases the protection afforded by such foreign laws is weaker than in the United
States.
ELSET(R) Acquisition
Development of the ELSET(R) Virtual Set was initiated by Video Art
Production GmbH ("VAP"), and all title and rights to the ELSET(R) Virtual Set
were contributed to ELSET GmbH when ELSET GmbH was formed as a joint venture by
the Company and VAP in December 1994. Through its wholly-owned subsidiary, Accom
Virtual Studio, Inc. ("AVS"), the Company owns 100% of the outstanding shares of
ELSET GmbH.
Although all title and rights to the ELSET(R) Virtual Set were
contributed to ELSET GmbH when it was formed as a joint venture by the Company
and VAP, VAP has certain obligations under a December 1991 contract with the
Commission of the European Communities entitled "Mona Lisa -- Modeling Natural
Images of Synthesis and Animation" (the "Mona Lisa Contract"). In particular,
materials developed pursuant to the Mona Lisa Contract must be shared with all
members of the consortium of companies that contribute to the Mona Lisa project
(the "Mona Lisa Consortium") for such members' research and development
purposes. However, pursuant to the Mona Lisa Contract, the materials need not be
shared with other members of the Mona Lisa Consortium if such sharing opposes
the major business interests of the developer or the products covered by such
materials are about to become commercially available. It is possible that the
ELSET(R) Virtual Set in the form in which it was contributed to ELSET GmbH by
VAP could be deemed to have been developed pursuant to the Mona Lisa Contract.
Even if this is found to be the case, the Company believes that since the
ELSET(R) Virtual Set has become commercially available, the earlier version need
not be shared with other members of the Mona Lisa Consortium. However, there can
be no assurance that the Mona Lisa Contract would not be interpreted to require
VAP to share the earlier version. Although the Company believes that the
development work that has been undertaken since the contribution of the ELSET(R)
Virtual Set to ELSET GmbH would make it difficult for a member of the Mona Lisa
Consortium to duplicate the ELSET(R) Virtual Set, if such sharing is required,
there can be no assurance that members of the Mona Lisa Consortium, acting alone
or in concert, would not be able to use the shared technology to develop, market
and sell a competitive virtual set system. In such event, the Company's
business, financial condition and results of operations would be materially
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adversely affected. It is also possible that VAP has granted to the other
members of the Mona Lisa Consortium the right to use the trademark "ELSET(R)."
Therefore, there can be no assurance that the ELSET GmbH will be able to claim
the exclusive right to use this trademark, which could have a material adverse
effect on the value of such trademark to the Company.
Employees
On September 30, 1998, the Company had 64 full-time employees,
including 26 in research and development, 20 in marketing, sales and technical
support, 12 in manufacturing and 6 in administration and finance. As a result of
purchasing the assests of Scitex Digital Video on December 10, 1998, the Company
currently has 134 full-time employees including 44 in research and development,
45 in marketing, sales and technical support, 25 in manufacturing and 20 in
administration and finance. The Company's success will depend in large part on
its ability to attract and retain qualified personnel, who are in great demand
throughout the industry. None of the Company's employees is represented by a
labor union. The Company believes that its employee relations are good.
Additional Factors That May Affect Future Results
The company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that the factors set forth in the sections
entitled "Manufacturing and Supplies," "Competition" and "Proprietary Rights and
Licenses," above, the factors set forth below, as well as other factors, could
in the future affect, and in the past have affected, the Company's actual
results and could cause the Company's results for future years or quarters to
differ materially from those expressed in any forward looking statements made by
or on behalf of the Company, including without limitation those contained in
this 10-K report. Forward looking statements can be identified by forward
looking words, such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words.
Failure to Successfully Integrate Newly Acquired Business. On December
10, 1998, the Company acquired substantially all of the assets of Scitex Digital
Video, Inc. and certain of its affiliates (the "Acquisition"). See
"Business--Overview." The Company entered into the Acquisition with the
expectation that the Acquisition would result in certain benefits for the
combined businesses. Achieving the anticipated benefits of the Acquisition will
depend in part upon whether certain of the two companies business operations and
their product offerings can be integrated in an efficient and effective manner.
This will require the dedication of management resources which may temporarily
distract attention from day-to-day business of the Company. The integration may
not be accomplished smoothly or successfully and may not result in cost savings
in operations, in which case the failure to do so could have an adverse effect
on the Company's results of operations and financial condition.
Potential Fluctuations in Operating Results. The Company incurred a net
loss of $2.9 million in fiscal 1998. The Company also incurred a net loss of
$4.5 million in fiscal 1997 and a net loss of $916,000 in fiscal 1996. There can
be no assurance that the Company will be profitable on a quarterly or annual
basis in the future. The Company's quarterly operating results in the past have
fluctuated and may fluctuate significantly in the future depending on such
factors as the timing and shipment of significant orders, new product
introductions and changes in
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pricing policies by the Company and its competitors, the timing and market
acceptance of the Company's new products and product enhancements, including the
ELSET(R) Virtual Set, the Company's product mix, the mix of distribution
channels through which the Company's products are sold, the Company's inability
to obtain sufficient supplies of sole or limited source components for its
products and charges related to refocusing and streamlining operations. In
response to competitive pressures or new product introductions, the Company may
make certain pricing changes or other actions, such as restructuring the product
lines, that could materially and adversely affect the Company's operating
results. In addition, new product introductions by the Company could contribute
to quarterly fluctuations in operating results as orders for new products
commence and orders for existing products decline. The Company believes that its
net sales generally will decrease in the second quarter of each fiscal year as
compared to the prior quarter due to decreased expenditures in the
post-production market during that period and delayed customer purchasing
decisions in anticipation of new product introductions by the Company and others
at the annual NAB convention.
The Company currently anticipates that a number of factors may cause
its gross margins to decline in future periods from current levels. The Company
believes that the market for on-line video editors and digital video disk
recorders will continue to mature and, therefore, that the gross margins the
Company derives from sales of these products may decline in future periods. The
Company intends to increase its sales of lower-margin on-line video editor and
digital video disk recorder products in the future as it pursues the strategy of
broadening its lower-priced product lines. Furthermore, if the Company expands
its indirect sales channels, its gross margins may be negatively impacted
because of discounts associated with sales through these channels. In addition,
the Company currently anticipates that revenues from sales of the ELSET(R)
Virtual Set will positively impact the Company's net sales but may negatively
impact its gross margins if a significant portion of ELSET(R) Virtual Set sales
include the resale of the Onyx, which generates lower gross margins than sales
of the Company's products.
The Company's expense levels are based, in part, on its expectations of
future revenues. In particular, the Company expects to incur significant
expenses in connection with the continued development and marketing of the
ELSET(R) Virtual Set. The Company may therefore be required to incur significant
expenses to support continuing development and marketing of the ELSET(R) Virtual
Set.
Many of the Company's expenses are relatively fixed and cannot be
changed in short periods of time. Because a substantial portion of the Company's
revenue in each quarter frequently results from orders booked and shipped in the
final month of that quarter, revenue levels are extremely difficult to predict.
If revenue levels are below expectations, net income will be disproportionately
affected because only a small portion of the Company's expenses varies with its
revenue during any particular quarter. In addition, the Company typically does
not have material backlog as of any particular date.
As a result of the foregoing factors and potential fluctuations in
operating results, the Company believes that its results of operations in any
particular quarter should not be relied upon as an indicator of future
performance. In addition, in some future quarter the Company's operating results
may be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected.
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Rapid Technological Change; Product Development. The market for the
Company's products is characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions. The Company's success
will depend in part upon its ability to enhance its existing products and to
develop and introduce new products and features to incorporate new technologies
and meet changing customer requirements and emerging industry standards in a
timely and cost-effective manner. The Company is currently developing new
products and product enhancements for its product lines. There can be no
assurance that the Company will be successful in developing, manufacturing and
marketing new products and product enhancements, that the Company will not
experience difficulties that delay or prevent the successful development and
introduction of these products and enhancements or that the Company's new
products and product enhancements will achieve market acceptance. The Company's
business, financial condition and results of operations would be materially and
adversely affected if the Company were to experience delays in developing new
products or product enhancements or if these products or enhancements did not
gain market acceptance. In addition, the introduction of products embodying new
technologies or the emergence of new industry standards can render existing
products unmarketable. There can be no assurance that products or technologies
developed by others will not render the Company's products non-competitive or
obsolete. In such case, the Company's business, financial condition and results
of operations would be materially and adversely affected.
The introduction of new products or product enhancements with
reliability, quality or compatibility problems can result in reduced or delayed
sales, delays in collecting accounts receivable or additional service and
warranty costs. In the past, the Company has delivered certain new products to
customers prematurely, and, as a result, such products have contained
performance deficiencies. For example, in the first half of fiscal 1995, the
Company first delivered its Axess(TM) to certain customers. The Company
experienced technical problems with the introduction of Axess(TM), including
delays in delivering additional functionality when originally requested by these
customers. Similarly, the software component of the Company's products,
particularly the ELSET(R) Virtual Set, may contain errors that may be detected
at any point in the product's life cycle, including after product introduction.
For example, the Company has from time to time needed to update the software for
its products to address performance problems. The Company expects the software
content of its products to increase in the future. There can be no assurance
that the Company will not experience delays and software or hardware related
technical problems in its current and future efforts to develop products and
product enhancements. Any such delays or problems could have a material adverse
effect on the Company's business, financial condition and results of operations.
Uncertainty as to Development and Market Acceptance of ELSET(R) Virtual
Set. The ELSET(R) Virtual Set is still being further developed with respect to
certain key features. There can be no assurance that the Company will be able to
successfully complete these developments of the ELSET(R) Virtual Set in a timely
manner. The failure to complete the development of the ELSET(R) Virtual Set
successfully and in a timely manner would have a material adverse impact on the
Company's business, financial condition and results of operations. In addition,
the ELSET(R) Virtual Set represents a new approach to studio set creation, and
its commercial success will depend on the rate at which potential end users
transition from the use of traditional physical sets to virtual sets and whether
this transition occurs at all. A potential end user's decision to purchase an
ELSET(R) Virtual Set will depend on many factors that are difficult to
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predict. For example, the ELSET(R) Virtual Set is based to a significant extent
on new technology, including continuing enhancements to the Onyx. Therefore,
potential end users such as broadcasters may be reluctant to purchase the
ELSET(R) Virtual Set, especially for mission-critical functions, until the
ELSET(R) Virtual Set's reliability in real time use has been demonstrated. In
addition, a potential end user's decision to purchase the ELSET(R) Virtual Set
may be subject to SGI's timing of shipments of its computer platforms and SGI's
announcement of enhancements to its computer platforms. Potential end users may
be unwilling to incur the significant cost of converting from physical sets to
the ELSET(R) Virtual Set. Although the Company currently anticipates that
broadcasters and post-production facilities will be the primary end users of
virtual set systems, the Company has not conducted any formal market surveys to
determine the potential market for and acceptance of the ELSET(R) Virtual Set.
The Company expects that sales of the ELSET(R) Virtual Set will entail a longer
sales cycle than with the Company's other products. Although the Company made
its first commercial shipments of the ELSET(R) Virtual Set in March 1996, there
can be no assurance that a significant market for virtual set systems will
develop or that the Company will be able to successfully market the ELSET(R)
Virtual Set over time. If this market development does not occur or occurs over
an extended period, or if the ELSET(R) Virtual Set does not achieve market
acceptance, the Company's business, financial condition and results of
operations will be materially and adversely affected.
Dependence on Silicon Graphics, Inc. Some of the ELSET(R) Virtual Set
products operate only on Silicon Graphics, Inc. ("SGI") computer platforms.
Financial, market or other developments adversely affecting SGI could have an
adverse effect on its ability to supply the Company with computer platforms or
enhancements or upgrades, and, consequently, upon the Company's business,
financial condition and results of operations. If the Company were unable to
obtain sufficient quantities of the SGI platforms, or certain key enhancements
or upgrades, on a timely basis or on commercially reasonable terms, or
experienced defects or performance, compatibility or reliability problems with
the SGI platforms, sales of the ELSET(R) Virtual Set and, therefore, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
Dependence on Key Personnel. The Company's success depends in large
part on the continued service of its key technical and senior management
personnel and on its ability to attract, motivate and retain highly qualified
employees. None of the Company's key technical and senior management personnel
is bound by an employment agreement or an agreement not to compete with the
Company following termination of employment. Competition for highly qualified
employees is intense, and the process of identifying and successfully recruiting
personnel with the combination of skills and attributes required to execute the
Company's strategies is often lengthy. Accordingly, the loss of the services of
key personnel could have a material adverse effect upon the Company's research
and development efforts and on its business, financial condition and results of
operations. There can be no assurance that the Company will be successful in
retaining its key technical and management personnel and in attracting and
retaining the personnel it requires for continued growth. The Company has key
person life insurance covering certain of its management personnel.
Management of Growth. Although the Company streamlined its operations
during fiscal 1997, the Company's long-term success will depend in part on its
ability to manage growth, both domestically and internationally. In addition,
the Company will be required to enhance its
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operational, management information and financial control systems. To manage the
growth resulting from the acquisition of Scitex Digital Video in December 1998,
the Company brought on board the following three senior level managers:
Executive Vice President of Technology and Engineering, Vice President of Sales,
and Vice President of Finance and Chief Financial Officer. The Company may be
required at some point to recruit a substantial number of qualified employees to
continue the development and marketing of the ELSET(R) Virtual Set and other
products. To support growth, the Company will be required to increase the
personnel in its sales, marketing and customer support departments. If the
Company is unable to hire a sufficient number of employees with the appropriate
levels of experience to increase the capacity of these departments in a timely
manner, or if the Company is unable to effectively manage its growth, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
International Operations. In fiscal 1998, 1997 and 1996, international
sales accounted for 45%, 42%, and 38%, respectively, of the Company's total net
sales. The Company expects that international sales will continue to represent a
significant portion of its net sales in the future. The Company's results of
operations may be adversely affected by fluctuations in exchange rates,
difficulties in collecting accounts receivable, tariffs and difficulties in
obtaining export licenses. Although the Company's sales are currently
denominated in U.S. dollars, future international sales may result in foreign
currency denominated sales. Gains and losses on the conversion to U.S. dollars
of receivables and payables arising from international operations may contribute
to fluctuations in the Company's results of operations. In addition,
international sales are primarily made through distributors and result in lower
gross margins than direct sales. Moreover, the Company's international sales may
be adversely affected by lower sales levels that typically occur during the
summer months in Europe and other parts of the world. International sales and
operations are also subject to risks such as the imposition of governmental
controls, political instability, trade restrictions and changes in regulatory
requirements, difficulties in staffing and managing international operations,
generally longer payment cycles and potential insolvency of international
dealers. There can be no assurance that these factors will not have a material
adverse effect on the Company's future international sales and, consequently, on
the Company's business, financial condition and results of operations.
Dependence on Distributors. The Company derives a majority of its
revenues from sales through distributors. The Company depends on distributors
for substantially all of its international sales. The loss of certain of these
distributors could have a material adverse effect on the Company. Certain of the
Company's distributors also act as distributors for competitors of the Company
and could devote greater effort and resources to marketing competitive products.
Because the Company's products are sold to high-end video professionals,
effective distributors must possess sufficient technical, marketing and sales
resources and must devote these resources to a lengthy sales cycle and
subsequent customer support. There can be no assurance that the Company's
current distributors will be able to continue to market and support the
Company's existing products effectively or that economic conditions or industry
demand will not adversely affect such distributors. The markets for new products
such as the ELSET(R) Virtual Set and digital video disk based servers require a
different marketing, sales, distribution and support strategy than markets for
the Company's other products. In addition, the Company currently may expand its
existing indirect sales channels to implement its strategy of broadening its
lower-priced products. There can be no assurance that the Company's distributors
will choose or be
22
<PAGE>
able to effectively market and support these lower priced products or to
continue to market the Company's existing products. In connection with the
acquisition of Scitex Digital Video (SDV) in December 1998, the Company assumed
certain contracts and relationships with SDV's distributors. Because the Company
does not have a historical working relationship with many of such distributors,
there can be no assurance that such distributors will continue to do business
with the Company. A failure of the Company's distributors to successfully market
and support the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations.
Impact of Year 2000. The "Year 2000 Issue" is typically the result of
software being written using two digits rather than four to define the
applicable year. If the Company's software with date-sensitive functions are not
Year 2000 compliant, they may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, interruptions in manufacturing operations, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
Status of Progress in Becoming Year 2000 Compatible: The Company has made a
preliminary review of the most pertinent Year 2000 issues which have been
identified as potentially having a material impact on the Company's operations
and financial condition. More comprehensive study in certain areas is still to
be undertaken.
The Company has identified three areas relating to Year 2000 issues which may
materially affect the Company's business: 1) Information Technology, addressing
internal software and business systems; 2) the Company's Products; and 3) Third
Party, addressing the preparedness of suppliers.
Information Technology Program: Internal applications systems such as inventory
and financial accounting software, computer network hardware and software, and
software applications programs may have Year 2000 problems. As a result of the
acquisition of Scitex Digital Video (SDV) on December 10, 1998, the Company
decided to use the Man-Man software already in use at SDV as its main inventory
and accounting software. The Man-Man software currently in use is version 10.2
which is not Year 2000 compliant. Version 11.0 of this software is Year 2000
compliant and currently is readily available for licensing by the Company. The
Company intends to procure this version as soon as practical. Total cost of this
upgrade is estimated to be less than $100,000. As of September 30, 1998, at
least $11,000 of expected costs had been identified which related to replacement
of Microsoft Office software (which currently is readily available for licensing
by the Company) which the Company anticipates will take place in the first half
of 1999. Related to these software upgrades, hardware on certain personal
computers may also need to be replaced to make them compatible with the upgrade
software. The estimated cost of replacing such hardware is $25,000. If required
modifications to existing software and hardware and conversions to new software
are not made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company due to the inability to
accurately and effectively track inventory and other financial results.
23
<PAGE>
Product Readiness Program: Certain products the Company sells have been
identified to have Year 2000 problems which must be corrected to permit smooth
operation by the user. The Year 2000 solution consists of software changes which
will be transmitted to customers by way of CD-ROMs and floppy diskettes. Certain
of these changes have been completed and transmitted to customers; others have
been completed but not yet transmitted to customers, but should be transmitted
in the first half of 1999. The Company believes the costs associated with these
activities will be immaterial given the relatively low cost of the media and
small amount of internal labor that will be utilized. The Company is currently
assessing its exposure to contingencies related to the Year 2000 Issue for the
products it has sold; however, it does not expect these to have a material
impact on the operations of the Company.
Third Party Program: The Company relies on numerous vendors in the course of
operating the business. If these vendors encountered Year 2000 problems which
impacted their ability to deliver goods and services to the Company, the
Company's business might be materially and adversely affected. The Company has
not to date conducted a comprehensive survey of its vendors to determine their
Year 2000 readiness, but anticipates doing so in the first half of 1999. The
Company has not yet determined the extent to which the Company's operations are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. In order to protect against the acquisition of additional non-compliant
products, the Company will require that certain hardware and software suppliers
providing goods and services to the Company after January, 1999, to warrant that
products sold or licensed to the Company are Year 2000 compliant. Finally, the
Company is also vulnerable to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions.
The Company anticipates addressing and remedying the critical Year 2000 issues
by the first half of 1999, which is prior to any anticipated impact on its
operating systems and expects the Year 2000 project to continue beyond the year
2000 with respect to resolution of non-critical issues. These dates are
contingent upon the timeliness and accuracy of software and hardware upgrades
from vendors, adequacy and quality of resources available to work on completion
of the project and any other unforeseen factors. There can be no assurance that
the Company will be successful in its efforts to resolve any Year 2000 issues
and to continue operations in the year 2000. The failure of the Company to
successfully resolve such issues could result in a shut-down of some or all of
the Company's operations, which would have a material adverse effect on the
Company.
Contingency Plans.
The Company has not yet developed a contingency plan to address situations that
may result if the Company is unable to achieve Year 2000 readiness of its
critical operations, but anticipates developing such a plan during the first
half of 1999. There can be no assurance that the Company will be able to develop
a contingency plan that will adequately address issues that may arise in the
year 2000. The failure of the Company to develop and implement, if necessary, an
appropriate contingency plan could have a material impact on the operations of
the Company.
24
<PAGE>
Costs.
The total expense of the Year 2000 project is currently estimated to be less
than approximately $200,000 which is not material to the Company's business
operations or financial condition. The Company has not yet fully estimated all
the Year 2000 costs, in particular those associated with the replacement of
software running on personal computers and the costs of modifying, testing and
distributing updates to ensure its own products are Year 2000 compliant.
There can be no assurance that these costs will not be material to the Company
or that the Company will be able to resolve in a timely manner any issues that
may arise in these areas. The expenses of the Year 2000 project are being funded
through operating cash flows.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. There can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
Substantial Control by Existing Stockholders; Effect of Certain
Anti-Takeover Provisions. As of December 29, 1998, the Company's executive
officers and directors, and their affiliates, beneficially own approximately
21.4% of the Company's outstanding Common Stock. As a result, the Company's
executive officers and directors and their affiliates will be able to exercise
significant influence over the Company and its business and affairs as well as
over the election of directors, regardless of how other stockholders of the
Company may vote. Furthermore, acting together, such stockholders may be able to
block any change in control of the Company.
In addition, a stockholder of the Company who owns 33.8% of the
Company's outstanding stock has the right to become a director of the Company.
In addition, the Board of Directors has the authority to issue up to 2,000,000
shares of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action by the
Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for third parties to
acquire a majority of the outstanding voting stock of the Company. In September
1996, the Company's Board of Directors adopted a stockholder rights plan, which
entitles existing stockholders of the Company to certain rights (including the
right to purchase shares of Preferred Stock) in the event of the acquisition of
15% or more of the Company's outstanding common stock, or an unsolicited tender
offer for such shares. The existence of the rights plan could delay, prevent, or
make more difficult a merger, tender offer or proxy contest involving the
Company. Further, certain provisions of the Company's Amended and Restated
Certificate of Incorporation and Bylaws and of Delaware law could delay or make
difficult a merger, tender offer or proxy contest involving the Company.
Possible Volatility of Stock Price; Decreased Liquidity. The Company's
stock price may be subject to significant volatility, particularly on a
quarterly basis. Any shortfall in revenue or earnings from levels expected by
securities analysts or others could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given period.
Additionally, the Company may not learn of, or be able to confirm, revenue or
earnings
25
<PAGE>
shortfalls until late in the fiscal quarter or following the end of the quarter,
which could result in an even more immediate and adverse effect on the trading
of the Company's common stock. On July 20, 1998, the Company's Common Stock was
delisted from the Nasdaq National Market System and it is now quoted on the
Over-the-Counter (OTC) Bulletin Board under the symbol ACMM. The OTC Bulletin
Board may not provide as much liquidity for the Company's Common Stock as the
Nasdaq National Market. Finally, the Company participates in a highly dynamic
industry, which may result in significant volatility of the Company's common
stock price.
Item 2. Properties
The Company's principal offices are located in Menlo Park, California
and consist of approximately 30,000 square feet under a lease that expires in
February, 2000. The Company believes that its existing facilities are adequate
to meet its requirements for the near term and that additional space will be
available on commercially reasonable terms if needed.
Item 3. Legal Proceedings
There is no material legal proceeding to which the Company is a party
or to which any of its properties are subject. No material legal proceedings
were terminated in the year ended September 30, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
<TABLE>
The executive officers of the Company, and their ages as of December
29, 1998, are as follows:
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Junaid Sheikh.................... 45 Chairman of the Board, President and Chief Executive
Officer
Phillip Bennett.................. 44 Executive Vice President, Technology and Engineering
Donald K. McCauley............... 58 Vice President, Finance and Chief Financial Officer
Ian Craven....................... 44 Senior Vice President, Engineering
William T. Ludwig................ 51 Vice President, Sales
William Harris Rogers............ 50 Vice President, Marketing
Donald W. Petersen............... 53 Vice President, Manufacturing
</TABLE>
Junaid Sheikh has served as the Chairman of the Company's Board of
Directors since June 1988 and as the Company's President and Chief Executive
Officer since November 1991.
Phillip Bennett joined the Company on December 11, 1998 as Executive
Vice President, Technology and Engineering. Since 1993, Mr. Bennett has been a
private investor and active in
26
<PAGE>
image processing and television systems development. From 1982 to 1993 Mr.
Bennett was a founder and Vice President of Engineering of Abekas Video Systems.
Donald K. McCauley joined the Company on December 11, 1998 as Vice
President of Finance and Chief Financial Officer. Prior to joining the Company,
Mr. McCauley served as the Vice President of Finance and CFO of Scitex Digital
Video from 1994. Prior to that he was a founder and CFO of ImMix, a manufacturer
of non-linear editors.
Ian Craven has served as Senior Vice President, Engineering since
October 1991. From October 1991 to April 1995 he also served as a director of
the Company.
William T. Ludwig joined the Company on December 21, 1998. From July
1996 to December 1998, Mr. Ludwig served as Vice President of Sales for
Americas/Far East (AMFE) for Pinnacle Systems. From January 1996 to July 1996 he
was the Director of Sales for FAST Electronics. From 1985 to 1993 he served in
various sales capacities at Abekas Video Systems.
William Harris Rogers has served as Vice President, Sales and Marketing
since May, 1998. From July 1995 to April 1998, he served as Vice-President,
Marketing of the Company. He attended the Stanford University Graduate of
Business from September 1994 to June 1995, earning a Master of Science Degree in
Business Management. From July 1991 to October 1993, he was Director of Sales
for Dynatech Video Group.
Donald W. Petersen has served as Vice President, Manufacturing of the
Company since April 1990.
Each executive officer serves at the sole discretion of the Board of
Directors.
27
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
Prior to July 20, 1998, the Company's Common Stock was traded on the
NASDAQ National Market under the symbol ACMM since the effective date of the
Company's initial public offering on September 26, 1995. Prior to the initial
public offering, no public market existed for the Common Stock. On July 20,
1998, the Company's Common Stock was delisted from the NASDAQ National Market
System. The Common Stock is now quoted on the Over-the-Counter (OTC) Bulletin
Board under the symbol ACMM. The price per share reflected in the table below
represents, with respect to the period prior to July 20, 1998, the range of low
and high closing sale prices for the Company's Common Stock as reported in the
Nasdaq Stock Market for the quarters indicated and, with respect to the period
after July 20, 1998, the range of low and high bid quotations for the Company's
Common Stock as reported on the OTC Bulletin Board for the quarters indicated.
The OTC Bulletin Board quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year ended September 30, 1997:
First Quarter............................................................. $2.63 $0.91
Second Quarter............................................................ $2.00 $1.00
Third Quarter............................................................. $2.25 $1.00
Fourth Quarter............................................................ $2.88 $1.56
Fiscal Year ended September 30, 1998:
First Quarter............................................................. $2.63 $1.06
Second Quarter............................................................ $1.44 $0.81
Third Quarter............................................................. $1.16 $0.50
Fourth Quarter............................................................ $0.69 $0.35
</TABLE>
The Company had approximately 99 stockholders of record as of December
16, 1998 including several holders who are nominees for an undetermined number
of beneficial owners.
The Company has never paid cash dividends on its capital stock. The
Company currently anticipates that it will retain all available funds for use in
the operation and expansion of its business, and does not anticipate paying any
cash dividends in the foreseeable future. However, the Board of Directors of the
Company will review the dividend policy periodically to determine whether the
declaration of dividends is appropriate. The Company must obtain the approval of
its bank before declaring or paying dividends.
Item 6. Selected Consolidated Financial Data
<TABLE>
The following table presents selected consolidated financial data of
the Company. This historical data should be read in conjunction with the
attached consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Form 10-K.
28
<PAGE>
Selected Consolidated Financial Data
(in thousands, except per share data)
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales........................... $18,034 $21,312 $21,408 $17,627 $12,617
Gross margin........................ 9,591 11,175 10,398 6,593 6,439
Operating income (loss)............. 1,428 (10,792) (1,621) (4,657) (3,042)
Net income (loss)................... 918 (10,840) (916) (4,490) (2,881)
Basic and diluted net income
(loss) per share(1) .............. 0.20 (2.47) (0.14) (0.68) (0.43)
Shares used in computing
basic and diluted net income
(loss) per share(1) .............. 4,660 4,397 6,439 6,587 6,662
Fiscal Year Ended September 30,
-------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital..................... $ 4,522 $12,220 $11,171 $ 7,550 $4,633
Total assets........................ 10,111 19,712 17,279 11,545 8,094
Long-term obligations............... - 83 24 - -
Total stockholders' equity.......... $ 5,650 $13,679 $12,952 $ 8,566 $5,720
<FN>
(1) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements. All share amounts have been adjusted to reflect the
implementation of Financial Accounting Standards Board Statement No. 128 and
Staff Accounting Bulletin No. 98.
</FN>
</TABLE>
29
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Company's Consolidated Financial Statements as of September 30, 1998 and 1997
and for the three fiscal years ended September 30, 1998, 1997 and 1996 included
herein this Report on Form 10-K for the fiscal year ended
September 30, 1998.
In addition, in order to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, the Company hereby
notifies readers that the factors set forth above in Item 1 under the sections
entitled "Manufacturing and Supplies," "Competition," "Proprietary Rights and
Licenses" and"Additional Factors That May Affect Future Results," as well as
other factors, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
periods to differ materially from those expressed in any forward looking
statements made by or on behalf of the Company, including without limitation
those made in the discussion below. Forward looking statements can be identified
by forward looking words, such as "may," "will," "expect," "anticipate,"
"believe," "estimate" and "continue" or similar words.
Overview
Accom designs, manufactures, sells, and supports a complete line of
digital video signal processing, editing, and disk recording tools, and its
ELSET(R) virtual set systems, primarily for the professional worldwide video and
computer graphics production, post production and distribution marketplaces.
The following table summarizes the Company's products and the primary
markets they address.
- --------------------------------------------------------------------------------
Primary Markets / Products
--------------------------
Production:
ELSET(R) Virtual Set
Work Station Disk ("WSD(R)") 2Xtreme(TM) Computer Graphics Digital
Disk Recorder
Post Production:
Editing:
Digital Video Editors:
Axial(R) 3000 on-line eeditor
Sphere non-linear editor
Digital Disk Recorders:
Accom Professional Recorder ("APR(TM) ") Attache(TM)
Digital Switcher:
8150 switcher
Distribution:
Axess(TM) Digital News Graphic and Clip Server
Dveous and Brutus digital video effects systems
- --------------------------------------------------------------------------------
30
<PAGE>
In late fiscal 1995, the Company increased its ownership interest in
ELSET Electronic-Set GmbH, a German limited liability company ("ELSET GmbH"), to
100% for approximately $7.6 million in cash, funded with a portion of the
proceeds of the Company's fiscal 1995 initial public offering (the "ELSET(R)
Acquisition"). The ELSET(R) virtual set system operates on either a Silicon
Graphics, Inc. ("SGI") workstation or a Windows NT platform.
The Company's revenues are currently derived primarily from product
sales. The Company generally recognizes revenue upon product shipment. If
significant obligations exist at the time of shipment, revenue recognition is
deferred until obligations are met. Beginning in the second quarter of fiscal
1996, the Company's revenues included revenues from licensing of ELSET(R)
software. In the fourth quarter of 1996, revenues also included the resale of
SGI workstations. The Company's gross margin has historically fluctuated from
quarter to quarter and declined on an annual basis. If the Company resells a SGI
workstation as part of the ELSET(R) Virtual Set, gross margins may decline. In
the future, gross margins will be dependent on the mix of higher and
lower-priced products and the percentage of sales made through direct and
indirect distribution channels.
Software development costs are recorded in accordance with Statement of
Financial Accounting Standards No. 86. To date, the Company has expensed all of
its internal software development costs.
Results of Operations
Fiscal Years 1998 vs. 1997
<TABLE>
The following table presents the Company's fiscal 1998 and 1997
Consolidated Statements of Operations (dollar amounts in thousands, except per
share data).
<CAPTION>
Increase (Decrease)
-------------------
1998 1997 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
Net sales $ 12,617 $ 17,627 $(5,010) (28.4)%
Cost of sales 6,178 11,034 (4,856) (44.0)%
------------- ------------ ------------- ------------
Gross margin 6,439 6,593 (154) (2.3)%
------------- ------------ ------------- ------------
Operating expenses:
Research and development 3,295 3,344 (49) (1.5)%
Marketing and sales 4,967 5,981 (1,014) (17.0)%
General and administrative 1,219 1,925 (706) (36.7)%
------------- ------------ ------------- ------------
Total operating expenses 9,481 11,250 (1,769) (15.7)%
------------- ------------ ------------- ------------
Operating loss (3,042) (4,657) (1,615) (34.7)%
Interest and other income (expense), net 180 176 4 2.3%
------------- ------------ ------------- ------------
Loss before provision for income taxes (2,862) (4,481) 1,619 36.1%
Provision for income taxes 19 9 10 111.1%
------------- ------------ ------------- ------------
Net loss $ (2,881) $ (4,490) $ 1,609 35.8%
============= ============ ============= ============
Basic and diluted net loss per share $ (0.43) $ (0.68) $ 0.25 36.8%
============= ============ ============= ============
</TABLE>
Note: Special charges for fiscal 1997 represent $4.0 million pretax to
streamline operations and provide valuation reserves against inventories,
receivables and fixed assets.
<TABLE>
The following table presents the Company's fiscal 1998 and 1997
Consolidated Statements of Operations as a percentage of net sales.
31
<PAGE>
<CAPTION>
Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 0.0%
Cost of sales 49.0% 62.6% (13.6)%
---------------------------------
Gross margin 51.0% 37.4% 13.6%
---------------------------------
Operating expenses:
Research and development 26.1% 19.0% 7.1%
Marketing and sales 39.3% 33.9% 5.4%
General and administrative 9.7% 10.9% (1.2)%
---------------------------------
Total operating expenses 75.1% 63.8% 11.3%
---------------------------------
Operating loss (24.1)% (26.4)% 2.3%
Interest and other income (loss), net 1.4% 1.0% 0.4%
---------------------------------
Loss before provision for income taxes (22.7)% (25.4)% 2.7%
Provision for income taxes 0.1% 0.1% --
---------------------------------
Net loss (22.8)% (25.5)% 2.7%
=================================
</TABLE>
Note: In fiscal 1997, charges of $4.0 million pretax were incurred to
streamline operations and provide valuation reserves against inventories,
receivables and fixed assets.
The following is a discussion comparing the results of operations for
fiscal 1998 and fiscal 1997:
Net sales. The decrease in net sales during fiscal 1998 from fiscal
1997 levels was primarily due to decreased sales in the video post production,
video broadcasting and computer graphics production marketplaces.
International sales in fiscal 1998 and 1997 represented 45% and 42% of
net sales, respectively, as export sales to Europe increased, as a percentage of
total sales, to 19% from 10% and export sales to the Pacific Rim decreased, as a
percentage of total sales, from 27% to 22%.
<TABLE>
The following table presents fiscal 1998 and 1997 net sales dollar
volumes by market and related percentages of total net sales (dollar amounts in
thousands).
<CAPTION>
1998 1997
---- ----
Market Amount Percent Amount Percent
------ ------ ------- ------ -------
<S> <C> <C> <C> <C>
Production $ 6,551 51.9% $ 8,259 46.9%
Post Production 3,593 28.5% 6,534 37.1%
Distribution 1,847 14.6% 2,408 13.7%
Other 626 5.0% 426 2.4%
----------------------------- -----------------------------
$12,617 100.0% $17,627 100.0%
============================= =============================
</TABLE>
Cost of sales. Cost of sales in fiscal 1998 decreased from fiscal 1997
levels due to the 1997 results including a special charge of $2.5 million for
increasing inventory reserves and due to the lower level of sales in 1998.
Research and development. The decrease in research and development
expenses from fiscal 1997 levels was primarily a result of decreases in
headcount, bonuses earned, and depreciation.
32
<PAGE>
Marketing and sales. The decrease in marketing and sales expenses from
fiscal 1997 levels was due to the 1997 results including a special charge of
$0.8 million for streamlining operations and providing reserves against fixed
assets and due to decreases in commissions partially offset by increases in
expenses relating to advertising, trade shows, and the marketing of virtual
sets.
General and administrative. The decrease in general and administrative
expenses from fiscal 1997 levels was due to the 1997 results including a special
charge of $0.7 million for streamlining operations and providing reserves
against receivables and due to reduced expenses for professional services.
Interest and other income, net. The increase in interest and other
income, net during fiscal 1998, was primarily due to reduced levels of debt.
Provision for income taxes. In fiscal 1998, the provision for income
taxes represents an estimate of the current foreign tax liability. No benefit
related to U.S. losses incurred in fiscal 1998 has been recognized by the
Company due to the inability to carryback net operating losses and a lack of
earnings history. The deferred tax asset on the balance sheet has been fully
offset by a valuation allowance. In fiscal 1997, no further net operating loss
carrybacks were available and the Company was in a net operating loss
carryforward position.
Net loss. As result of the factors noted above, the net loss decreased
in fiscal 1998 from the net loss in fiscal 1997.
Fiscal Years 1997 vs. 1996
<TABLE>
The following table presents the Company's fiscal 1997 and 1996
Consolidated Statements of Operations (dollar amounts in thousands, except per
share data).
<CAPTION>
Increase (Decrease)
-------------------
1997 1996 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
Net sales $ 17,627 $ 21,408 $ (3,781) (17.7)%
Cost of sales 11,034 11,010 24 0.2%
-------- -------- -------- -------
Gross margin 6,593 10,398 (3,805) (36.6)%
-------- -------- -------- -------
Operating expenses:
Research and development 3,344 3,926 (582) (14.8)%
Marketing and sales 5,981 7,356 (1,375) (18.7)%
General and administrative 1,925 1,487 438 29.5%
Credit for acquired in-process technology -- (750) 750 100.0%
-------- -------- -------- -------
Total operating expenses 11,250 12,019 (769) (6.4)%
-------- -------- -------- -------
Operating loss (4,657) (1,621) (3,036) 187.3%
Interest and other income (expense), net 176 209 (33) (15.8)%
-------- -------- -------- -------
Loss before provision for (benefit from) income taxes (4,481) (1,412) (3,069) (217.4)%
Provision for (benefit from) income taxes 9 (496) 505 (101.8)%
-------- -------- -------- -------
Net loss $ (4,490) $ (916) $ (3,574) (390.2)%
======== ======== ======== =======
Basic and diluted net loss per share $ (0.68) $ (0.14) $ (0.54) (385.7)%
======== ======== ======== =======
</TABLE>
Note: In fiscal 1997, charges of $4.0 million pretax were incurred to
streamline operations and provide valuation reserves against inventories,
receivables and fixed assets. In
33
<PAGE>
fiscal 1996, a $1.2 million pretax charge to write down demonstration inventory
was offset by $0.8 million pretax reversal of acquired in process technology
charges.
<TABLE>
The following table presents the Company's fiscal 1997 and 1996
Consolidated Statements of Operations as a percentage of net sales.
<CAPTION>
Increase
1997 1996 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 0.0%
Cost of sales 62.6% 51.4% 11.2%
------------------------------------
Gross margin 37.4% 48.6% (11.2)%
------------------------------------
Operating expenses:
Research and development 19.0% 18.3% 0.6%
Marketing and sales 33.9% 34.4% (0.4)%
General and administrative 10.9% 6.9% 4.0%
Credit for acquired in-process technology -- (3.5)% (3.5)%
------------------------------------
Total operating expenses 63.8% 56.1% 7.7%
------------------------------------
Operating loss (26.4)% (7.6)% (18.8)%
Interest and other income (expense), net 1.0% 1.0% --
------------------------------------
Loss before (benefit from) income taxes (25.4)% (6.6)% (18.8)%
Provision for (benefit from) income taxes 0.1% (2.3)% 2.4%
====================================
Net loss (25.5)% (4.3)% (21.2)%
====================================
</TABLE>
Note: In fiscal 1997, charges of $4.0 million pretax were incurred to
streamline operations and provide valuation reserves against inventories,
receivables and fixed assets. In fiscal 1996, a $1.2 million pretax charge to
write down demonstration inventory was offset by $0.8 million pretax reversal of
acquired in process technology charges.
The following is a discussion comparing the results of operations for
fiscal 1997 and fiscal 1996:
Net sales. The decrease in net sales during fiscal 1997 from fiscal
1996 levels was primarily due to decreased sales in the video post production
marketplace. That decrease was partially offset by increased sales in the video
broadcasting and computer graphics production and post production marketplaces.
International sales in fiscal 1997 and 1996 represented 42% and 38% of
net sales, respectively, as export sales to Europe decreased to 10% from 14%,
respectively, and export sales to the Pacific Rim increased to 27% from 19%.
<TABLE>
The following table presents fiscal 1997 and 1996 net sales dollar
volumes by market and related percentages of total net sales (dollar amounts in
thousands).
34
<PAGE>
<CAPTION>
1997 1996
---- ----
Market Amount Percent Amount Percent
------ ------ ------- ------ -------
<S> <C> <C> <C> <C>
Production $ 8,259 46.9% $ 7,806 36.5%
Post Production 6,534 37.1% 11,608 54.2%
Distribution 2,408 13.7% 1,681 7.9%
Other 426 2.4% 313 1.5%
----------------------------- -----------------------------
$17,627 100.0% $21,408 100.0%
============================= =============================
</TABLE>
Cost of sales. Cost of sales, as a percentage of sales, increased in
fiscal 1997 over levels in fiscal 1996 due to the special charge incurred in
fiscal 1997 for increasing inventory reserves.
Research and development. Fiscal 1997's decrease in research and
development expenses primarily was a result of decreases in headcount and
related overhead expenses after the Company's streamlining of operations.
Marketing and sales. Fiscal 1997's decrease in marketing and sales
expenses was primarily due to decreases in headcount, demonstration equipment
refurbishment costs, and trade show and promotion expenses after the Company's
streamlining of operations.
General and administrative. General and administrative expenses in
fiscal 1997 increased over fiscal 1996 leveles due to the 1997 results including
a special charge of $0.7 million for streamlining operations and providing for
reserves against receivables partially offset by a decrease in headcount after
the Company's streamlining of operations.
Interest and other income, net. The decrease in interest and other
income, net during fiscal 1997, was primarily due to reduced average interest
bearing cash and cash equivalent balances.
Provision for (benefit from) income taxes. Fiscal 1996's benefit from
income taxes was due to the Company's ability to carry back federal and state
net operating losses to prior periods. In fiscal 1997, no further net operating
loss carrybacks were available and the Company is in a net operating loss
carryforward position.
Net loss. As result of the factors noted above, the net loss increased
in fiscal 1997 from fiscal 1996 levels.
Liquidity and Capital Resources
Since inception, the Company has financed its operations and
expenditures for property and equipment through the sale of capital stock,
borrowings under a bank line of credit and term loans. On September 29, 1995,
the Company completed its initial public offering and received approximately
$17.8 million in net proceeds. On September 29, 1995, it completed the
acquisition of the shares of ELSET GmbH it did not already own for approximately
$7.6 million. As of September 30, 1998, the Company had $3.2 million of cash and
cash equivalents.
35
<PAGE>
Operating activities used $1.5 million in net cash in fiscal 1998 and
provided $1.5 million in net cash in fiscal 1997. Net cash used in fiscal 1998
was due primarily to the net loss and to an increase in inventories and
decreases in accounts payable and accrued liabilities partially offset by
decreases in accounts receivable and income tax refunds receivable. Additional
net cash was used in investing activities for the acquisition of property and
equipment. Net cash provided in fiscal 1997 was due primarily to decreases in
accounts receivable and inventories partially offset by decreases in accounts
payable and accrued liabilities. Additional net cash was used in investing
activities for the acquisition of property and equipment.
There were no bank borrowings outstanding and the Company had no credit
facilities available as of September 30, 1998. On December 10, 1998, the Company
signed an agreement with LaSalle Business Credit, Inc., a member of the ABN AMRO
group, for a $7.5 million revolving line of credit. The credit line is secured
by all the assets of the Company. The availability under this line is primarily
calculated based on the accounts receivable and inventory. As of December 23,
the Company had an outstanding balance borrowed under the line of $4.2 million.
The Company believes that its existing cash, cash equivalents and
credit facilities will be sufficient to meet its cash requirements for at least
the next twelve months. Although operating activities may provide cash in
certain periods, to the extent the Company grows in the future, its operating
and investing activities may use cash and, consequently, such growth may require
the Company to obtain additional sources of financing. There can be no assurance
that any necessary additional financing will be available to the Company on
commercially reasonable terms, if at all.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
36
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements
and supplementary financial information that are attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Certain information required by Part III is omitted from this report
and will be filed as an amendment to this Form 10-K not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of the Company will be filed as
an amendment to this Form 10-K not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
Information as to the Company's executive officers appears at the end
of Part I of this report.
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 will be filed as an amendment to this Form 10-K
not later than 120 days after the end of the fiscal year covered by this Form
10-K.
Item 11. Executive Compensation
Information with respect to executive compensation and related
information will be filed as an amendment to this Form 10-K not later than 120
days after the end of the fiscal year covered by this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management will be filed as an amendment to this Form 10-K not later
than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions will be filed as an amendment to this Form 10-K not later than 120
days after the end of the fiscal year covered by this Form 10-K.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements and Report of Ernst & Young LLP,
Independent Auditors
Report of Ernst & Young LLP, Independent Auditors.
Consolidated Balance Sheet as of September 30, 1998 and 1997.
Consolidated Statements of Operations - For the Fiscal Years
ended September 30, 1998, 1997 and 1996.
Consolidated Statement of Shareholders' Equity - For the three
Fiscal Years ended September 30, 1998.
Consolidated Statements of Cash Flows - For the Fiscal Years
ended September 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements or notes thereto.
<PAGE>
(3) Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
Number Description
- ------ -----------
3.1(1) Bylaws of the Company.
3.2(2) Amended and Restated Certificate of Incorporation of the Company filed
with the Delaware Secretary of State upon the closing of the Company's
initial public offering.
3.3 Certificate of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock. Reference is made to Exhibits
4.3, 4.4 and 4.5.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 4.3, 4.4 and 4.5.
4.2(1) Specimen Common Stock Certificate.
4.3(3) Preferred Shares Rights Agreement, dated as of September 13, 1996,
between the Company and U.S. Stock Transfer Corporation, including the
Certificate of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock, the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B and C,
respectively.
4.4(4) Amendment No. 1 to Preferred Shares Rights Agreement, dated as of July
14, 1998, between the Company and U.S. Stock Transfer Corporation.
4.5(5) Amendment No. 2 to Preferred Shares Rights Agreement, dated as of
December 10, 1998, between the Company and U.S. Stock Transfer
Corporation.
10.1(6) Lease Extension dated October 25, 1996 by and between Menlo Business
Park and Partician Associates, Inc. and the Company.
10.2(7) 1997 Non-Executive Stock Option Plan and Form of Option Agreement.
10.3(1)* 1995 Stock Option/Stock Issuance Plan and Form of Option Agreement.
10.4(8) Asset Purchase Agreement, dated as of December 10, 1998, by and among
the Company, Scitex Digital Video, Inc., Scitex Digital Video (Europe),
Inc., Scitex Digital Video (Asia Pacific), Inc., Scitex Development
Corp. and Scitex Corporation Ltd.
10.5 Loan and Security Agreement, dated December 10, 1998, between the
Company and LaSalle Business Credit, Inc.
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Report of Ernst & Young LLP, Independent Auditors, on Financial
Statement Schedule (reference is made to page F-1 of this Report)
24.1 Power of Attorney (reference is made to page 39 of this Report).
27.1 Financial Data Schedule.
- ----------------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and
Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto (File No.
33-95728), which became effective on September 26, 1995.
(2) Incorporated by reference from an exhibit filed with the Company's
Annual Report on 10-K for the fiscal year ended September 30, 1995
(File No. 0-26620).
(3) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form 8-A (File No. 0-26620) to register
Preferred Share Purchase Rights under the Company's stockholder rights
plan, adopted by the Company's board of directors on September 3, 1996.
(4) Incorporated by reference from an exhibit filed with the Company's
Amendment No. 1 to Registration Statement on Form 8-A/A (File No.
0-26620), filed on September 21, 1998.
<PAGE>
(5) Incorporated by reference from an exhibit filed with the Company's
Amendment No. 2 to Registration Statement on Form 8-A/A (File No.
0-26620), filed on December 23, 1998.
(6) Incorporated by reference from an exhibit filed with the Company's
Annual Report on 10-K for the fiscal year ended September 30, 1997
(File No. 0-26620).
(7) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-8 (File No. 333-23635), filed on March
20, 1997
(8) Incorporated by reference from an exhibit filed with the Company's
Current Report on Form 8-K (File No. 0-26620), filed on December 23,
1998.
* Management Compensatory Plan
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Menlo
Park, California on this 29th day of December 1998.
ACCOM, INC.
By: /s/ JUNAID SHEIKH
---------------------------------------------
Junaid Sheikh
Chairman of the Board of Directors,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Junaid Sheikh and Donald K. McCauley,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JUNAID SHEIKH Chairman of the Board of Directors, December 29, 1998
----------------- President and Chief Executive Officer
(Junaid Sheikh) (Principal Executive Officer)
/s/ DONALD K. MCCAULEY Vice President, Finance and Chief December 29, 1998
- ---------------------- Financial Officer (Principal Financial
(Donald K. McCauley) Officer)
/s/ JAMES CUNNIFFE Controller (Principal Accounting Officer) December 29, 1998
------------------
(James Cunniffe)
/s/ LIONEL M. ALLAN Director December 29, 1998
-------------------
(Lionel M. Allan)
/s/ THOMAS E. FANELLA Director December 29, 1998
- ---------------------
(Thomas E. Fanella)
/s/ DAVID A. LAHAR Director December 29, 1998
------------------
(David A. Lahar)
</TABLE>
<PAGE>
SCHEDULE II
ACCOM, INC.
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In thousands)
<CAPTION>
Balance at Charges to Balance at
Beginning of Cost and End of
Period Expenses Deductions* Period
-------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1996............... 221 67 65 223
Year ended September 30, 1997............... 223 256 78 401
Year ended September 30, 1998............... 401 - 164 237
* All deductions represent write-offs of bad debt.
</TABLE>
<PAGE>
Accom, Inc.
Consolidated Financial Statements
As of September 30, 1998 and 1997
and
For the three fiscal years ended September 30, 1998, 1997 and 1996
with Report of Independent Auditors
<PAGE>
Accom, Inc.
Consolidated Financial Statements
As of September 30, 1998 and 1997
and
For the three fiscal years ended September 30, 1998, 1997 and 1996
with Report of Independent Auditors
Contents
Report of Ernst & Young LLP, Independent Auditors ........................ F-1
Consolidated Financial Statements:
Consolidated Balance Sheets ..................................... F-2
Consolidated Statements of Operations ........................... F-3
Consolidated Statement of Stockholders' Equity .................. F-4
Consolidated Statements of Cash Flows ........................... F-5
Notes to Consolidated Financial Statements ...................... F-7
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Accom, Inc.
We have audited the accompanying consolidated balance sheets of Accom, Inc.
as of September 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended September 30, 1998. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 14(a) in
Form 10-K. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
and schedule presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Accom, Inc. as
of September 30, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three fiscal years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
Ernst & Young LLP
Palo Alto, California
October 30, 1998, except for Note 9, as to which the date is December 10, 1998
F-1
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
<CAPTION>
As of September 30,
1998 1997
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,231 $ 5,317
Accounts receivable, net of allowance for doubtful accounts of
$237 and $401 of September 30, 1998 and 1997, respectively 2,020 3,239
Inventories 1,527 980
Income tax refunds receivable -- 621
Prepaid expenses and other current assets 228 372
-------- ---------
Total current assets 7,006 10,529
Property and equipment, net 1,038 967
Other assets 49 49
-------- ---------
$ 8,093 $ 11,545
======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,276 $ 1,476
Accrued liabilities and customer deposits 1,010 1,338
Deferred revenue 87 141
Notes payable -- 24
-------- ---------
Total current liabilities 2,373 2,979
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000 shares authorized;
no shares issued and outstanding as of September 30, 1998 and 1997 -- --
Common stock, $0.001 par value; 20,233 shares authorized as of
September 30, 1998 and 1997; 6,671 and 6,627 shares
issued and outstanding as of September 30, 1998 and 1997,
respectively 21,462 21,427
Accumulated deficit (15,742) (12,861)
-------- ---------
Total stockholders' equity 5,720 8,566
-------- ---------
$ 8,093 $ 11,545
======== =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-2
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
<CAPTION>
Fiscal Years Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $ 12,617 $ 17,627 $ 21,408
Cost of sales 6,178 11,034 11,010
-------- -------- --------
Gross margin 6,439 6,593 10,398
-------- -------- --------
Operating expenses:
Research and development 3,295 3,344 3,926
Marketing and sales 4,967 5,981 7,356
General and administrative 1,219 1,925 1,487
Charge (credit) for acquired in-process technology
-- -- (750)
-------- -------- --------
Total operating expenses 9,481 11,250 12,019
-------- -------- --------
Operating loss (3,042) (4,657) (1,621)
Interest and other income, net 180 176 209
-------- -------- --------
Loss before provision for (benefit from)
income taxes (2,862) (4,481) (1,412)
Provision for (benefit from) income taxes 19 9 (496)
-------- -------- --------
Net loss $ (2,881) $ (4,490) $ (916)
======== ======== ========
Basic and diluted net loss per share $ (0.43) $ (0.68) $ (0.14)
======== ======== ========
Shares used in computing basic and diluted net
loss per share 6,662 6,587 6,439
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands)
<CAPTION>
Preferred Stock, Common Stock, Total
$0.001 Per Share Par Value $0.001 Per Share Par Value Stock-
-------------------------- -------------------------- Accumulated holders'
Shares Amount Shares Amount Deficit Equity
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1995 -- $ -- 6,404 $ 21,134 $ (7,455) $ 13,679
Issuance of common stock
upon exercise of stock
options -- -- 36 19 -- 19
Issuance of common stock
through Employee Stock
Purchase Plan -- -- 53 170 -- 170
Net loss -- -- -- -- (916) (916)
--------- --------- -------- -------- -------- --------
Balances, September 30, 1996 -- -- 6,494 21,323 (8,371) 12,952
Issuance of common stock
upon exercise of stock
options -- -- 104 58 -- 58
Issuance of common stock
through Employee Stock
Purchase Plan -- -- 29 46 -- 46
Net loss -- -- -- -- (4,490) (4,490)
--------- --------- -------- -------- -------- --------
Balances, September 30, 1997 -- -- 6,627 21,427 (12,861) 8,566
Issuance of common stock
upon exercise of stock
options -- -- 33 25 -- 25
Issuance of common stock
through Employee Stock
Purchase Plan -- -- 15 14 -- 14
Purchase of common stock
by Company -- -- (4) (4) -- (4)
Net loss -- -- -- -- (2,881) (2,881)
--------- --------- -------- -------- -------- --------
Balances, September 30, 1998 -- -- 6,671 $ 21,462 $(15,742) $ 5,720
========= ========= ======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Fiscal Years Ended September 30,
-----------------------
- ---------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $(2,881) $(4,490) $ (916)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Charge (credit) for acquired in-process technology -- -- (750)
Depreciation 550 528 760
Establishment of reserves against accounts
receivable, inventories, and property and
equipment, and accruals for streamlining
operations -- 3,995 --
Changes in operating assets and liabilities, net of effects of
reserves to streamline operations
Accounts receivable 1,219 1,030 (815)
Inventories (547) 1,967 (711)
Income tax refunds receivable 621 (426) (145)
Prepaid expenses and other current assets 144 680 (357)
Accounts payable (200) (766) 523
Accrued liabilities and customer deposits (327) (611) (1,524)
Deferred revenue (54) (387) 192
------- ------- -------
Net cash provided by (used in) operating activities (1,475) 1,520 (3,743)
------- ------- -------
Cash Flows From Investing Activities
Expenditures for property and equipment (622) (563) (847)
Increase (decrease) in other assets -- 93 (88)
------- ------- -------
Net cash used in investing activities (622) (470) (935)
------- ------- -------
Cash Flows from Financing Activities
Repayments on notes payable (24) (58) (59)
Issuance of common stock 39 104 189
Repurchase of common stock (4) -- --
------- ------- -------
Net cash provided by financing activities 11 46 130
------- ------- -------
Net decrease in cash and cash equivalents (2,086) (1,096) (4,548)
Cash and cash equivalents at beginning of the year 5,317 4,221 8,769
------- ------- -------
Cash and cash equivalents at end of the year $ 3,231 $ 5,317 $ 4,221
======= ======= =======
<FN>
-Continued-
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
<CAPTION>
Fiscal Years Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Interest paid $ 1 $ 6 $ 11
====== ======= =====
Income taxes paid $ 17 $ 2 $ 2
====== ======= =====
Noncash investing and financing activities:
Accrued acquisition costs -- -- $(354)
====== ======= =====
Accrued initial public offering costs -- -- $(819)
====== ======= =====
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
1. Nature of the Business and Basis of Presentation
Accom, Inc. (the "Company") designs, manufactures, sells, and supports a
complete line of digital video signal processing, editing, and disk recording
tools, and virtual set systems, primarily for the professional worldwide video
and computer graphics production, post production and distribution marketplaces.
The Company incurred a net loss of $2.9 million in fiscal 1998. The Company also
incurred a net loss of $4.5 million in fiscal 1997 and a net loss of $916,000 in
fiscal 1996. There can be no assurance that the Company will be profitable on a
quarterly or annual basis in the future. Management continues to believe, based
on its current operating plan, including the acquisition and financing executed
subsequent to September 30, 1998 (see note 9), that the Company has sufficient
financial resources for its operations through the next 12 months.
One customer accounted for 16% and 13% of net sales in fiscal 1998 and 1997,
respectively. No customers accounted for 10% or more of net sales in fiscal
1996. Export sales for fiscal 1998, 1997, and 1996 were approximately 45%, 42%,
and 38%, respectively. Export sales to Europe and the Pacific Rim as a
percentage of total sales were 19% and 22%, respectively for fiscal 1998, 10%
and 27%, respectively, for fiscal 1997, and 14% and 19%, respectively, for
fiscal 1996.
2. Summary of Significant Accounting Policies
Reclassifications
Certain amounts in the prior years' financial statements have been reclassified
to conform with the fiscal 1998 presentation.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after elimination of significant intercompany
transactions and balances.
Cash and Cash Equivalents
Cash equivalents consist of financial instruments having maturities of 90 days
or less at the time of acquisition that are readily convertible into cash and
have insignificant accounts and municipal notes. Cash and cash equivalents are
held primarily by one major
F-7
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
national bank and two major investment brokerage companies.
Concentration of Credit and Other Risks
The Company sells its product primarily in North America, Europe and the Pacific
Rim. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains allowances for
potential credit losses and such losses have historically been within
management's expectations.
Dependence on key suppliers: The Company purchases certain key components from
single source suppliers. Any significant component supply delay or interruption
could require the Company to qualify new sources of supply, if available, and
could have a material adverse effect on the Company's financial condition and
results of operations.
Dependence on distributors: Currently, a significant amount of the Company's
revenues from product sales are derived from sales to distributors. Loss,
termination or ineffectiveness of distributors to effectively promote the
Company's products could have a material adverse effect on the Company's
financial condition and results of operations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Software Development Costs
Product development costs include costs related to software products that are
expensed as incurred until the technological feasibility of the product is
established. After technological feasibility is established, any additional
costs are capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Cost of Computer Software to be Sold,
Leased or Otherwise Marketed." The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technologies. No software development costs have been capitalized in
1998, 1997, and 1996, as costs incurred subsequent to the establishment of
technical feasibility have not been significant.
F-8
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the assets' estimated useful lives, which generally
ranges from three to five years.
Revenue Recognition
The Company generally recognizes revenue upon shipment of its systems. Estimated
costs for insignificant post shipment obligations are accrued for at the time of
shipment. If significant post shipment obligations exist or there are concerns
about collection at the time of shipment, revenue is deferred until obligations
are met or collection occurs.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed in Note 7, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the marker price of the underlying stock
on the date of the grant, no compensation expense is recognized.
Acquired In-Process Technology
In-process technology acquired in an acquisition accounted for under the
purchase method is expensed upon acquisition.
Income Taxes
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
F-9
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Net Loss Per Share
In 1997, the FASB issued Statement No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.
The Company has securities outstanding that could dilute basic earnings per
share in the future that were not included in the computation of net loss per
share in the periods presented as their effect is antidilutive. For additional
disclosures regarding potentially dilutive stock options, warrants, and
convertible preferred stock, see Note 8.
New Accounting Guidelines
In fiscal 1999, the Company will be required to adopt newly issued accounting
guidelines addressing the reporting of comprehensive income. The adoption is
expected to have no significant impact on the Company's net income (loss) or
shareholders' equity. The guidelines require any unrealized gains and losses on
available-for-sale securities or foreign currency translation adjustments to be
included in other comprehensive income. Prior to adoption of the new guidelines,
such items, if present, are reported as a separate component of stockholders'
equity.
Also in fiscal 1999, the Company will be required to adopt newly issued
accounting guidelines addressing disclosures about segment and related
information. As the Company operates in one segment, the adoption of the new
guidelines is not expected to have a significant impact on the Company's results
of operations, financial position, or disclosure of segment information.
In October, 1997, the Accounting Standards Executive Committee issued Statement
of Position 97-2, as amended by SOP 98-4, "Software Revenue Recognition." These
statements provide guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions that are effective for the
Company's transactions entered into subsequent to October 1, 1998. Under the
Company's current policy, license fees on software are recognized when customer
acceptance has been
F-10
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
achieved. However, the Company has not yet fully assessed what the impact of the
implementation of SOP 97-2 and SOP 98-4 will be on the recognition of revenues
in the 1999 financial statements.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Inventories
Inventories consist of the following:
As of September 30,
-------------------
1998 1997
---- ----
(In thousands)
Purchased parts and materials $ 256 $ 225
Work-in-process 445 204
Finished goods 181 182
Demonstration inventory 645 369
----------------------------------------
$ 1,527 $ 980
========================================
4. Property and Equipment
Property and equipment consist of the following:
As of September 30,
-------------------
1998 1997
---- ----
(In thousands)
Machinery and equipment $ 2,038 $ 1,768
Furniture and fixtures 219 207
Computer equipment 1,409 1,070
----------------------------------------
3,666 3,045
Less accumulated depreciation (2,628) (2,078)
----------------------------------------
Net property and equipment $ 1,038 $ 967
========================================
F-11
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
5. Accrued Liabilities and Customer Deposits
Accrued liabilities and customer deposits consist of the following:
As of September 30,
-------------------
1998 1997
---- ----
(In thousands)
Accrued compensation $ 199 $ 275
Accrued acquisition liabilities 126 208
Accrued streamlining expenses 305 379
Other 380 476
----------------------------------------
$1,010 $1,338
========================================
6. Commitments
Leasing Arrangements
The Company leases its primary office and manufacturing facility an under an
operating lease which expires in February, 2000. Rent expense for fiscal years
1998, 1997 and 1996 was approximately, $465,000, $448,000 and $ 424,000,
respectively.
Future minimum rental payments under noncancelable leases at September 30, 1998
are as follows (in thousands):
1999 $ 504
2000 215
2001 10
----------------------
Total $ 729
======================
The Company is sublessor for a portion of its primary office and manufacturing
facility. Sublease rental income for fiscal 1998, 1997, and 1996 was
approximately $175,000, $84,000, and $0.
F-12
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
7. Stockholders' Equity
Stock Options
The 1995 Stock Option/Stock Isuance Plan (the "1995 Plan") increased the number
of shares available for grant up to 2,000,000, inclusive of options granted
under the predecessor plan, plus automatic annual increases in 1996, 1997 and
1998. Under the 1995 Plan, options may be granted and shares may be issued at a
price not less than 85% of the fair value of the Company's common stock on date
of grant.
During Fiscal 1997, the Company adopted the 1997 Non-Executive Stock Option Plan
(the "1997 Plan"), under which options for up to 500,000 shares of common stock
are available for grant to employees other than officers and directors at a
price not less than 100% of the fair value of the Company's common stock on date
of grant.
<TABLE>
Stock option activity is summarized below:
<CAPTION>
Shares Outstanding Options Weighted
Available ------------------- Average
for Grant Number of Price Per Exercise
of Options Shares Share Price
---------- ------ ----- -----
<S> <C> <C> <C> <C>
Balances at September 30, 1995 1,249,210 740,089 $0.48-$7.20
Shares authorized 64,042 -
Options granted (1,530,703) 1,530,703 $1.88-$9.25
Options exercised (36,364) $0.48-$4.80 $0.51
==================
Options canceled 1,066,612 (1,066,612) $0.48-$9.25
---------------------------------------------------
Balances at September 30, 1996 849,161 1,167,816 $0.48-$5.88
Shares authorized 565,689 -
Options granted (1,719,894) 1,719,894 $1.25-$1.69
Options exercised (103,613) $0.48-$1.31 $0.56
==================
Options canceled 1,253,676 (1,253,676) $0.48-$5.88
---------------------------------------------------
Balances at September 30, 1997 948,772 1,530,421 $0.48-$5.88
Shares authorized 66,597 -
Options granted (1,456,920) 1,456,920 $0.81-$1.63
Options exercised (33,109) $0.48-$1.31 $0.76
==================
Options canceled 1,702,899 (1,702,899) $0.48-$1.69
---------------------------------------------------
Balances at September 30, 1998 1,261,348 1,251,333 $0.48-$5.88
===================================================
</TABLE>
F-13
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Stock Options (continued)
During fiscal 1998, the Company repriced, through cancellation and regrant,
options on 1,176,020 shares having original exercise prices ranging from $1.06
to $1.88 with new options having an exercise price of $1.03. The vesting terms
of the repriced options were changed from five years to four years. In addition,
repriced options vest 25% after one year and then the remaining 75% is vested
proportionately on a monthly basis. Previously, the options vested 20% per year.
In addition, the change in vesting terms also applied to 266,693 options which
were not repriced because the original exercise price was less than the new
exercise price. There were 17,500 options granted to Company directors which
were not subject to repricing or the change in vesting terms.
During fiscal 1997, the Company repriced, through cancellation and regrant,
options on 989,494 shares having original exercise prices ranging from $1.63 to
$4.80 with new options with an exercise price of $1.31. The repriced options had
the same vesting terms as the original options.
<TABLE>
The options outstanding as of September 30, 1998 have been segmented into
ranges:
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Options Average
Exercise Options Contractual Exercise Currently Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.48 - $1.00 249,277 8.02 $0.78 59,877 $0.48
$1.03 984,556 7.80 $1.03 558,703 $1.03
$1.25 - $1.31 12,500 8.44 $1.26 5,000 $1.28
$5.88 5,000 7.38 $5.88 5,000 $5.88
------------------------------------------------------------------------------------
$0.48 - $5.88 1,251,333 7.85 $1.00 628,580 $1.02
====================================================================================
</TABLE>
As of September 30, 1998, the Company has reserved 1,261,348 shares of common
stock for issuance upon the exercise of stock options under all of its plans.
F-14
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Employee Stock Purchase Plan
In July 1995, the Company's Employee Stock Purchase Plan (the "Purchase Plan")
was adopted which authorizes the issuance of 250,000 shares of common stock.
Shares may be purchased under the Purchase Plan at 85% of the lesser of the fair
market value of the common stock on the grant or purchase date.
Pro Forma Disclosure of Employee Stock-Based Compensation
Pro forma information regarding net income and earnings per share is required by
FASB 123 for awards granted after March 31, 1995 as if the Company had accounted
for its stock-based awards to employees under the fair value method of FASB 123.
The fair value of the Company's stock-based awards to employees was estimated
using the minimum value model for awards prior to the Company's initial public
offering in 1995 and the Black-Scholes model subsequent to the initial public
offering. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming the following weighted-average
assumptions:
Fiscal Year Ended
September 30,
1998 1997
---- ----
Risk-free interest rates 4.7% 6.0%
Dividends paid -- --
Volatility factors - Company's common
stock expected market price 0.80 0.80
Expected option life 4.00 years 4.83 years
The weighted average "fair value" of stock options granted during fiscal 1998
and 1997 was $0.55 and $0.56, respectively.
F-15
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Pro Forma Disclosure of Employee Stock-Based Compensation (continued)
For employee purchase rights under the Employee Stock Purchase Plan, the "fair
value" of those rights was estimated at the date of grant using the
Black-Scholes option pricing model. The following weighted-average assumptions
were used:
Fiscal Year Ended
September 30,
-------------
1998 1997
---- ----
Risk-free interest rates 4.7% 6.0%
Dividends paid -- --
Volatility factors - Company's common
stock expected market price 0.80 0.80
Expected option life 0.50 years 0.50 years
The weighted average "fair value" of employee purchase rights issued under the
Employee Stock Purchase Plan during fiscal 1998 and 1997 was $1.47 and $0.85,
respectively.
The pro forma effect of applying the estimated "fair value" for employee
stock-based compensation plans on net loss and net loss per share is as follows:
Fiscal Year Ended
September 30,
1998 1997
---- ----
Pro forma net loss (in thousands): $(3,477) $(5,753)
Pro forma net loss per share: $ (0.52) $ (0.87)
Because FASB 123 is applicable only to awards granted subsequent to March 31,
1995, its pro forma effect will not be fully reflected until approximately 1999.
Stockholder Rights Plan
In September 1996, the Company's Board of Directors adopted a stockholder rights
plan, which entitles existing stockholders of the Company to certain rights
(including the right to purchase shares of Preferred Stock) in the event of the
acquisition of 15% or more of the Company's outstanding common stock, or an
unsolicited tender offer for such shares.
F-16
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
8. Income Taxes
As of September 30, 1998, the Company had federal net operating loss
carryforwards of approximately $5,000,000. The Company also had federal research
and development tax credit carryforwards of approximately $230,000. The federal
net operating loss and credit carryforwards will expire at various dates
beginning on 2012 through 2013.
Utilization of the Company's net operating loss carryforwards and credits may be
subject to an annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are:
As of September 30,
-------------------
1998 1997
---- ----
(In thousands)
Deferred tax assets:
Net operating losses $ 1,747 $ 735
R&D Credits 334 186
Capitalized R&D 2,801 2,711
Nondeductible reserves and accruals 683 354
Inventory valuation 913 1,055
Other individually immaterial items 92 437
------------------------------------
6,570 5,478
Valuation allowance (6,570) (5,440)
------------------------------------
Net deferred tax assets $ - $ 38
====================================
The net valuation allowance increased by $1,130,000 and $5,241,000 during fiscal
years ended September 30, 1998 and September 30, 1997, respectively.
F-17
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
The provision (benefit) for income taxes consists of the following:
Fiscal Year Ended September 30,
-------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Federal:
Current $ -- $(705) $(231)
Deferred -- 705 (231)
----- ----- -----
-- (462)
----- ----- -----
State:
Current -- -- 11
Deferred -- -- (45)
----- ----- -----
-- (34)
----- ----- -----
Foreign:
Current 19 9 --
----- ----- -----
Total $ 19 $ 9 $(496)
===== ===== =====
A reconciliation of the income tax provision (benefit) at the federal statutory
rate to the income tax provision at the effective tax rate is as follows:
Fiscal Year Ended September 30,
-------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Income taxes computed at the federal
statutory rate $(1,033) $(1,524) $ (480)
State taxes (net of federal benefit) (125) (370) (23)
Foreign taxes 19 9 --
Research and development tax credit (71) (123) (18)
Technology basis step-up -- (2,867) (204)
Foreign losses not currently benefitted 163 -- --
Valuation allowance 1,130 5,440 199
Other (64) (556) 30
------- ------ -----
Total $ 19 $ 9 $(496)
======= ====== =====
F-18
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
9. Events Subsequent to September 30, 1998
On December 10, 1998, Accom, Inc. (the "Company"), acquired substantially all of
the assets of Scitex Digital Video, Inc., a Massachusetts corporation ("SDV").
The Company also acquired substantially all of the assets of Scitex Digital
Video (Europe) Limited, a private limited company incorporated in England and
Wales ("SDVE"), and Scitex Digital Video (Asia Pacific), Inc., a California
corporation ("SDVAP"). In addition, the Company acquired certain intangible
personal property of Scitex Corporation Ltd., an Israel corporation ("Scitex
Corporation"), related to SDV's business. These acquisitions were consummated
pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement"), dated
as of December 10, 1998, by and among the Company, SDV, SDVE, SDVAP, Scitex
Development Corp., a Massachusetts corporation ("Scitex Development"), and
Scitex Corporation. The Company acquired these assets in exchange for: (i)
$7,893,400 in cash, (ii) a warrant for 250,000 shares of the Company's common
stock, (iii) a warrant for 750,000 shares of the Company's common stock, and
(iv) non-negotiable subordinated promissory notes of the Company in the
aggregate amount of $2,065,000. As further consideration, the Company assumed
certain liabilities of SDV. There were three sources for the cash consideration
paid to SDV. First, the Company entered into a Loan and Security Agreement (the
"Loan Agreement"), dated as of December 10, 1998, with LaSalle Business Credit,
Inc. The Company borrowed approximately $3,340,000 under the Loan Agreement
which constituted a portion of the cash consideration. The obligations of the
Company under the Loan Agreement are secured by substantially all the assets of
the Company. The second source for the cash consideration paid to SDV was
approximately $3,050,000 from the Company's current cash assets. The third
source for the cash consideration was $1,500,000 which the Company raised from
the private placement of its common stock, on December 10, 1998, in which the
Company sold 2,500,000 unregistered shares of common stock at a price of $0.60
per share. The assets acquired by the Company were used by SDV, SDVE and SDVAP
in connection with SDV's business of developing, manufacturing, marketing and
selling digital video manipulation equipment and non-linear video workstations
for the video industry. The Company currently intends to continue this use of
such assets. The Company entered into an investor rights agreement with each of
SDV and the investor, which, among other things, grants certain registration
rights with respect to the common stock of the Company issuable upon exercise of
the warrants and the common stock held by the investor.
F-19
LOAN AND SECURITY AGREEMENT
Dated as of December 10, 1998
between
ACCOM, INC.
as Borrower
and
LASALLE BUSINESS CREDIT, INC.,
as Lender
$7,500,000
<PAGE>
TABLE OF CONTENTS
-----------------
Page
1. DEFINITIONS.................................................................1
(a)General Definitions.....................................................1
(b)Accounting Terms and Definitions.......................................10
2. REVOLVING LOANS............................................................11
3. [INTENTIONALLY OMITTED.]...................................................12
4. LETTERS OF CREDIT..........................................................12
5. INTEREST, FEES AND CHARGES.................................................13
(a)Rates of Interest......................................................13
(b)Computation of Interest and Fees.......................................13
(c)Maximum Interest.......................................................13
(d)Letter of Credit Fees..................................................13
(e)Facility Fee...........................................................13
(f)Unused Line Fee........................................................14
(g)Examination Fees.......................................................14
(h)Capital Adequacy Charge................................................14
6. LOAN ADMINISTRATION........................................................14
(a)Loan Requests..........................................................14
(b)Disbursement...........................................................15
7. GRANT OF SECURITY INTEREST TO LASALLE......................................15
8. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN....16
9. POSSESSION OF COLLATERAL AND RELATED MATTERS...............................16
10. COLLECTIONS...............................................................16
11. SCHEDULES AND REPORTS.....................................................18
12. TERMINATION...............................................................19
13. REPRESENTATIONS AND WARRANTIES............................................19
14. COVENANTS.................................................................23
15. CONDITIONS PRECEDENT......................................................31
i
<PAGE>
16. DEFAULT...................................................................34
17. REMEDIES UPON AN EVENT OF DEFAULT.........................................35
18. INDEMNIFICATION...........................................................35
19. NOTICES...................................................................36
20. CHOICE OF GOVERNING LAW AND CONSTRUCTION..................................36
21. FORUM SELECTION AND SERVICE OF PROCESS....................................36
22. MODIFICATION AND BENEFIT OF AGREEMENT.....................................37
23. HEADINGS OF SUBDIVISIONS..................................................37
24. POWER OF ATTORNEY.........................................................37
25. WAIVER OF JURY TRIAL; OTHER WAIVERS.......................................37
26. ADVERTISING...............................................................38
27. BORROWER'S ACKNOWLEDGMENT.................................................39
ii
<PAGE>
EXHIBITS AND SCHEDULES
EXHIBIT A CONCENTRATION LIMITS
EXHIBIT B BUSINESS AND COLLATERAL LOCATIONS
EXHIBIT C PERMITTED LIENS
EXHIBIT D FORM OF OFFICER'S CERTIFICATE
EXHIBIT E REPORTING REQUIREMENTS
SCHEDULE 13(i) LITIGATION
SCHEDULE 13(q) INDEBTEDNESS
SCHEDULE 13(s) PARENTS, SUBSIDIARIES AND DIVISIONS
SCHEDULE 15(a) CLOSING AGENDA
iii
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made as of this 10th
day of December, 1998, by and between LASALLE BUSINESS CREDIT, INC., a Delaware
corporation ("LaSalle"), with its principal office at 135 South LaSalle Street,
Chicago, Illinois 60603, and ACCOM, INC., a Delaware corporation ("Borrower"),
with its principal office at 1490 O'Brien Drive, Menlo Park, California 94025.
WITNESSETH:
WHEREAS, from time to time Borrower may request LaSalle to make loans
and advances to and extend certain credit accommodations to Borrower, and the
parties wish to provide for the terms and conditions upon which such loans,
advances and credit accommodations will be made.
NOW, THEREFORE, in consideration of any loans, advances and credit
accommodations (including any loans by renewal or extension) hereafter made to
Borrower by LaSalle, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by Borrower, the parties agree
as follows:
1. DEFINITIONS.
(a) General Definitions.
"A/R Advance Rate" means, at any time, the percentage set forth below
opposite the applicable average Dilution of Borrower's Accounts for the six
months preceding the time of such determination:
Dilution A/R Advance Rate
-------- ----------------
0-5% 85%
5.1-6% 83%
6.1-7% 81%
7.1-8% 79%
8.1-9% 77%
9.1-10% 75%
More than 10% Rate determined by LaSalle
in the exercise of its sole
credit judgment
"Account," "Account Debtor," "Chattel Paper," "Deposit Accounts,"
"Documents," "Equipment," "General Intangibles," "Goods," "Instruments,"
"Inventory," and "Investment Property" shall have the respective meanings
assigned to such terms, as of the date of this Agreement, in the Oregon Uniform
Commercial Code.
"Affiliate" shall mean any Person directly or indirectly controlling,
controlled by or under common control with Borrower.
<PAGE>
"Appraisal" shall mean the net liquidation value appraisal of
Borrower's inventory to be performed by Emerald Technology Valuation at
Borrower's expense as provided in paragraph 14(t) below.
"Asset Purchase Agreement" shall mean the Asset Purchase Agreement
dated December 10, 1998 among Borrower, Scitex Digital Video, Inc. ("Scitex"),
Scitex Digital Video (Europe) Ltd., Scitex Digital Video (Asia Pacific), Inc.,
Scitex Development Corp. and Scitex Corporation Ltd.
"Borrowing Base" shall have the meaning specified in paragraph 2(b)(i)
hereof.
"Business Day" shall mean any day other than a Saturday, Sunday, or
such other day as banks in Chicago, Illinois or Portland, Oregon are authorized
or required to be closed for business.
"Capital Expenditures" shall mean, with respect to any period, the
aggregate of all expenditures (whether paid in cash or accrued as liabilities
and including expenditures for capitalized lease obligations) by Borrower during
such period that are required by GAAP to be included in or reflected by the
property, plant or equipment or similar fixed asset accounts in the balance
sheet of Borrower.
"Cash Flow" shall mean net income before tax, plus depreciation and
amortization, minus tax payments, plus tax refunds received , less Capital
Expenditures (unless financed by Persons other than LaSalle in compliance with
the provisions of this Agreement), less Other Capitalized Expenses, less all
scheduled principal payments made on indebtedness (excluding, however, payments
made under this Agreement and prepayments permitted under the Subordination
Agreement between LaSalle and Scitex Digital Video, Inc.).
"Change of Control" shall mean if the current shareholders of Borrower
shall cease, directly or indirectly, of record or beneficially, to own or
control in the aggregate at least sixty percent (60%) of the voting shares of
Borrower free and clear of all liens and security interests.
"Closing Agenda" shall have the meaning specified in paragraph 15(a)(i)
hereof.
"Closing Date" shall mean the date first stated above.
"Collateral" shall mean all of the personal property of Borrower
described in paragraph 7 hereof, and all other real or personal property of any
Obligor or any other Person now or hereafter pledged to LaSalle to secure,
either directly or indirectly, repayment of any of the Liabilities.
"Debt Service Coverage Ratio" shall mean, with respect to any period,
the ratio of (i) net income before taxes for such period (excluding any pre-tax
gains on the sale of assets
2
<PAGE>
other than the sale of Inventory in the ordinary course of business and
excluding other pre-tax extraordinary gains), minus any income taxes as paid
during such period, plus any income tax refunds received, plus depreciation and
amortization deducted in determining net income for such period, minus Capital
Expenditures for such period not financed, minus Other Capitalized Expenses for
such period and minus any cash dividends paid or accrued and cash withdrawals
paid or accrued to shareholders or other Affiliates for such period which were
not calculated in determining pre-tax net income, to (ii) current principal
maturities of long term debt and capitalized leases paid or scheduled to be paid
during such period, plus any prepayments on indebtedness owed to any Person
(except trade payables, revolving loans and prepayments allowed on subordinated
indebtedness pursuant to paragraph 14(u) below) and paid during such period.
"Default" shall mean any event, condition or default which with the
giving of notice, the lapse of time, or both, would be an Event of Default.
"Dilution" shall mean, with respect to any period, the percentage
obtained by dividing: (a) the sum of non-cash credits against Accounts of
Borrower for such period, plus pending or probable, but not yet applied,
non-cash credits against Accounts of Borrower for such period, as determined by
LaSalle, by (b) gross invoiced sales of Borrower for such period.
"EBITDA" shall mean, with respect to any period, net income before
taxes for such period (excluding any before-tax gains on the sale of assets
other than the sale of inventory in the ordinary course of business and
excluding other pre-tax extraordinary gains) plus interest expense, plus
depreciation and amortization for such period, less Other Capitalized Expenses.
"Eligible Account" shall mean an Account owing to Borrower which is
acceptable to LaSalle in its sole discretion for lending purposes. LaSalle
shall, in general, consider an Account to be an Eligible Account if it meets,
and so long as it continues to meet, the following requirements:
(i) it is genuine and in all respects is what it purports to
be;
(ii) it is owned by Borrower and Borrower has the right to
subject it to a security interest in favor of LaSalle;
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(iii) it arises from (A) the performance of services by
Borrower and such services have been fully performed and have been
acknowledged and accepted by the Account Debtor thereunder; or (B) the
sale of Goods by Borrower, and such Goods have been completed in
accordance with the Account Debtor's specifications (if any) and
delivered to and accepted by the Account Debtor, such Account Debtor
has not refused to accept and has not returned or offered to return any
of the Goods, and has not refused to accept any of the services which
are the subject of such Account, and Borrower has possession of, or has
delivered to LaSalle at LaSalle's request, shipping and delivery
receipts evidencing delivery of such Goods;
(iv) it is evidenced by an invoice rendered to the Account
Debtor thereunder, is due and payable within thirty (30) days after the
stated invoice date thereof and does not remain unpaid more than ninety
(90) days past the invoice date thereof; provided, however, that if
more than twenty-five percent (25%) of the aggregate dollar amount of
invoices owing by a particular Account Debtor remain unpaid for more
than ninety (90) days past the respective invoice dates thereof, then
all Accounts owing to Borrower by that Account Debtor shall be deemed
ineligible;
(v) it is not subject to any prior assignment, claim, lien,
security interest or encumbrance whatsoever, other than Permitted
Liens;
(vi) it is a valid, legally enforceable and unconditional
obligation of the Account Debtor thereunder, and is not subject to
setoff, counterclaim, credit, allowance or adjustment by such Account
Debtor, or to any claim by such Account Debtor denying liability
thereunder in whole or in part;
(vii) it does not arise out of a contract or order which fails
in any material respect to comply with the requirements of applicable
law;
(viii) the Account Debtor thereunder is not a director,
officer, employee or agent of Borrower, or a Subsidiary, Parent or
Affiliate of Borrower;
(ix) it is not an Account with respect to which the Account
Debtor is the United States of America or any department, agency or
instrumentality thereof, unless Borrower assigns its right to payment
of such Account to LaSalle pursuant to, and in full compliance with,
the Assignment of Claims Act of 1940, as amended, or Borrower then has
in effect in accordance with paragraph 10 hereof a lockbox satisfactory
in all respects to LaSalle;
(x) it is not an Account with respect to which the Account
Debtor is located in a state which requires Borrower, as a precondition
to commencing or maintaining an action in the courts of that state,
either to (A) receive a certificate of authority to do business and be
in good standing in such state, or (B) file a
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notice of business activities report or similar report with such
state's taxing authority, unless (x) Borrower has taken one of the
actions described in clauses (A) or (B), (y) the failure to take one of
the actions described in either clause (A) or (B) may be cured
retroactively by Borrower at its election, or (z) Borrower has proven,
to LaSalle's satisfaction, that it is exempt from any such requirements
under any such state's laws;
(xi) it is an Account which arises out of a sale made in the
ordinary course of Borrower's business;
(xii) after December 31, 1998, the Account Debtor is a
resident or citizen of, and is located within, the United States of
America or Canada or if the Account Debtor is not a resident of the
United States or Canada, either (A) the Account Debtor has supplied
Borrower with an irrevocable commercial letter of credit issued by a
financial institution and in form and substance satisfactory to
LaSalle, and, if so requested by LaSalle, delivered to LaSalle or its
agent in pledge for negotiation and presentment, or (B) the Account is
covered by credit insurance acceptable to LaSalle;
(xiii) it is not an Account with respect to which the Account
Debtor's obligation to pay is conditional upon the Account Debtor's
approval of the Goods or services or is otherwise subject to any
repurchase obligation or return right, as with sales made on a
bill-and-hold, guaranteed sale, sale on approval, sale or return or
consignment basis;
(xiv) it is not an Account (A) with respect to which any
representation or warranty contained in this Agreement is untrue or (B)
which violates any of the covenants of Borrower contained in this
Agreement;
(xv) except to the extent otherwise permitted with respect to
Account Debtors listed in Exhibit A attached hereto (as such exhibit
may be amended from time to time by a writing signed by LaSalle), it is
not an Account which, when added to a particular Account Debtor's other
indebtedness to Borrower, exceeds the lesser of ten percent (10%) of
the aggregate of Borrower's Accounts or a credit limit determined by
LaSalle in its reasonable credit judgment for that Account Debtor,
provided, however, that Accounts excluded from Eligible Accounts solely
by reason of this paragraph 1(a)(xv) shall be Eligible Accounts to the
extent of such credit limit; and
(xvi) it is not an Account with respect to which the prospect
of payment or performance by the Account Debtor is or will be impaired,
as determined by LaSalle in its sole discretion.
"Eligible Inventory" shall mean Inventory of Borrower which is
acceptable to LaSalle in its sole discretion. Without limiting LaSalle's
discretion, LaSalle shall, in general,
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consider Inventory to be Eligible Inventory if it meets, and so long as it
continues to meet, the following requirements:
(i) it is owned by Borrower and Borrower has the right to
subject it to a security interest in favor of LaSalle;
(ii) it is not in transit and it is located on the premises
listed in Section A on Exhibit B and if any such premises are leased,
LaSalle has received a landlord's waiver with respect to such premises
satisfactory to LaSalle;
(iii) it is not subject to any prior assignment, claim, lien,
security interest or encumbrance whatsoever, other than Permitted
Liens;
(iv) It is not raw materials, component parts, service/spare
parts, supplies or work in process; it is either finished goods held
for immediate sale (subject only to brief, final testing) or finished
goods which are otherwise ready for sale but are being used by
Borrower's employees at Borrower's business premises for purposes of
software development, service or similar purposes for a period not
exceeding three months ("Rotational Inventory"); it is not used for
demonstration or other marketing purposes; it is not obsolete; it is
(except for Rotational Inventory as provided above and except as
LaSalle may otherwise consent in writing) new and unused; and it is
free from defects which would, in LaSalle's sole determination, affect
its market value;
(v) it is not stored with a bailee, consignee, warehouseman,
processor or similar party unless such party is listed in Section B on
Exhibit B (as such exhibit may be amended from time to time by a
writing signed by LaSalle) and Borrower has caused any such bailee,
consignee, warehouseman, processor or similar party to issue and
deliver to LaSalle, in form and substance acceptable to LaSalle, such
UCC financing statements, warehouse receipts, waivers and other
documents as LaSalle shall require;
(vi) LaSalle has determined in accordance with LaSalle's
customary business practices that it is not unacceptable due to age,
type, category or quantity; and
(vii) it is not Inventory (A) with respect to which any of the
representations and warranties contained in this Agreement are untrue
or (B) which violates any of the covenants of Borrower contained in
this Agreement.
Eligible Inventory may change after LaSalle receives the Appraisal.
"Environmental Laws" shall mean all applicable foreign, Federal, State
and local laws (including common law), legislation, rules, codes, licenses,
permits (including any conditions imposed therein), authorizations, judicial or
administrative decisions, injunctions or
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agreements between Borrower and any governmental authority, (a) relating to
pollution and the protection, preservation or restoration of the environment
(including air, water vapor, surface water, ground water, drinking water,
drinking water supply, surface land, subsurface land, plant and animal life or
any other natural resource), or to human health or safety (including under the
Occupational Health and Safety Act), (b) relating to the exposure to, or the
use, storage, recycling, treatment, generation, manufacture, processing,
distribution, transportation, handling, labeling, production, release or
disposal, or threatened release, of Hazardous Materials, or (c) relating to all
laws with regard to record keeping, notification, disclosure and reporting
requirements respecting Hazardous Materials. The term "Environmental Laws"
includes (i) the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act,
the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act,
the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of
1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal
Solid Waste Disposal Act and the Federal Toxic Substances Control Act, the
Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe
Drinking Water Act of 1974, (ii) applicable state counterparts to such laws, and
(iii) any common law or equitable doctrine that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Materials.
"Event of Default" shall have the meaning specified in paragraph 16
hereof.
"Excess Availability" means the excess, if any, of (x) the Borrowing
Base over (y) the total outstanding Revolving Loans. For purposes of calculating
Borrower's Excess Availability and the amount of the Borrowing Base relating
thereto, all of Borrower's trade payables and outstanding debt, other than the
Liabilities hereunder, which remain unpaid 30 days or more after the due dates
thereof shall, on the date of the determination of Excess Availability, be
deemed to have been paid by Borrower from proceeds of a Revolving Loan.
"Exhibit B" shall mean the exhibit entitled "Exhibit B - Business and
Collateral Locations" which is attached hereto and made a part hereof.
"Fiscal Year" shall mean with respect to Borrower, the twelve (12)
month accounting period of Borrower commencing January 1 of each calendar year
and ending December 31 of such calendar year.
"GAAP" shall mean generally accepted accounting principles and policies
in the United States as in effect from time to time.
"Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including hydrocarbons (including naturally
occurring or man-made petroleum and hydrocarbons), flammable explosives,
asbestos, urea formaldehyde insulation, radioactive materials, biological
substances, polychlorinated biphenyls, pesticides, herbicides and any other kind
and/or type of pollutants or contaminants (including materials which include
hazardous constituents), sewage, sludge, industrial slag, solvents and/or any
other similar substances, materials, or wastes and including any other
substances, materials or wastes
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that are or become subject to regulation under any Environmental Law (including
any that are or become classified as hazardous or toxic under any Environmental
Law).
"Indemnified Party" shall have the meaning specified in paragraph 18
hereof.
"Interest Coverage Ratio" shall mean, with respect to any period, the
ratio of (i) EBITDA, to (ii) interest expense for such period.
"Inventory Advance Rate" shall mean (a) with respect to Eligible
Inventory which is not Rotational Inventory, the lesser of (i) forty percent
(40%) or (ii) eighty-five percent (85%) of the net liquidation value of such
Inventory as determined by the Appraisal and (b) with respect to Eligible
Inventory which is Rotational Inventory, the lesser of (i) thirty-five percent
(35%) or (ii) eighty-five percent (85%) of the net liquidation value of such
Inventory as determined by the Appraisal.
"Letters of Credit" shall mean those documentary or stand-by letters of
credit issued for Borrower's account in accordance with the terms of paragraph 4
hereof.
"Letter of Credit Obligations" shall mean, as of any date of
determination, the sum of (i) the aggregate undrawn face amount of all Letters
of Credit and (ii) the aggregate unreimbursed amount of all drawn Letters of
Credit not already converted to a Loan hereunder.
"Liabilities" shall mean any and all obligations, liabilities and
indebtedness of Borrower to LaSalle or to any parent, affiliate or subsidiary of
LaSalle of any and every kind and nature, howsoever created, arising or
evidenced and howsoever owned, held or acquired, whether now or hereafter
existing, whether now due or to become due, whether primary, secondary, direct,
indirect, absolute, contingent or otherwise (including, without limitation,
obligations of performance), whether several, joint or joint and several, and
whether arising or existing under written or oral agreement or by operation of
law.
"Loan" or "Loans" shall mean any and all Revolving Loans made by
LaSalle to Borrower pursuant to paragraph 2 hereof and all other loans, advances
and financial accommodations made by LaSalle to or on behalf of Borrower
hereunder.
"Lock Box" and "Blocked Account" shall have the meanings specified in
paragraph 10 hereof.
"Material Adverse Effect" shall mean with respect to any event, act,
condition or occurrence of whatever nature (including but not limited to any
adverse determination in any litigation, arbitration or governmental
investigation or proceeding), whether singly or in conjunction with any other
event or events, act or acts, condition or conditions, occurrence or
occurrences, whether or not related, a material adverse change in, or a material
adverse effect upon, any of the business, property, assets, operations,
condition (financial or otherwise) or prospects of Borrower.
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"Note" shall mean the Revolving Note.
"Obligor" shall mean Borrower and each Person who is or shall become
primarily or secondarily liable for any of the Liabilities; provided, however,
that such term shall not include any Account Debtor.
"Original Term" shall have the meaning specified in paragraph 12
hereof.
"Other Agreements" shall mean all agreements, instruments and documents
including, without limitation, guaranties, mortgages, trust deeds, pledges,
powers of attorney, consents, assignments, contracts, notices, security
agreements, leases, financing statements and all other writings heretofore, now
or from time to time hereafter executed by or on behalf of Borrower or any other
Person and delivered to LaSalle or to any parent, affiliate or subsidiary of
LaSalle in connection with the Liabilities or the transactions contemplated
hereby.
"Other Capitalized Expenses" shall mean, with respect to any period,
the aggregate of all expenditures (whether paid in cash or accrued as
liabilities) by Borrower which are capitalized as assets by Borrower and which
are not included within the definition of Capital Expenditures in this
Agreement.
"Parent" shall mean any Person now or at any time or times hereafter
owning or controlling (alone or with any other Person) at least a majority of
the issued and outstanding stock or other similar ownership interests of
Borrower or any Subsidiary.
"Permitted Liens" shall mean (i) statutory liens of landlords,
carriers, warehousemen, mechanics, materialmen or suppliers incurred in the
ordinary course of business and securing amounts not yet due or declared to be
due by the claimant thereunder, (ii) liens or security interests in favor of
LaSalle, (iii) zoning restrictions and easements, rights of way, licenses,
covenants and other restrictions affecting the use of real property that do not
individually or in the aggregate have a Material Adverse Effect on Borrower's
ability to use such real property for its intended purpose in connection with
Borrower's business, (iv) liens securing the payment of taxes or other
governmental charges not yet delinquent or being contested in good faith and by
appropriate proceedings, (v) liens incurred or deposits made in the ordinary
course of Borrower's business in connection with capitalized leases or purchase
money security interests for purchase of, and applying only to, Equipment
included in the permitted borrowings under paragraphs 13(q) or 14(i) or
permitted as Capital Expenditures under paragraph 14(n), such capitalized leases
and purchase money security interests to apply only to the specific Equipment
which is purchased or leased, the amount secured thereby not to exceed the
purchase price for such equipment, and the documents relating to such liens to
be in form and substance acceptable to LaSalle, (vi) liens securing indebtedness
owing by any Subsidiary to Borrower to the extent such indebtedness is permitted
under paragraph 14(i), or to any other Subsidiary of Borrower, (vii) deposits to
secure performance of bids, trade contracts, leases and statutory obligations
(to the extent not excepted elsewhere herein); (viii) liens specifically
permitted by LaSalle in writing as set forth on Exhibit C attached hereto; (ix)
any lien arising out of the refinancing, extension, renewal or refunding of any
indebtedness secured by any lien permitted by any of the foregoing
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subparagraphs (i) through (viii) inclusive; provided, that (a) such indebtedness
is not secured by any additional assets, and (b) the amount of such indebtedness
is not increased, (x) pledges or deposits in connection with worker's
compensation, unemployment insurance and other social security legislation, (xi)
securities and other properties held at banks or financial institutions to
secure the payment or reimbursement under overdraft, acceptance and other
facilities, and (xii) rights of setoff, banker's lien and other similar rights
arising solely by operation of law.
"Person" shall mean any individual, sole proprietorship, partnership,
limited liability company, venture, trust, unincorporated organization,
association, corporation, institution, entity, party or foreign or United States
government (whether federal, state, county, city, municipal or otherwise),
including, without limitation, any instrumentality, division, agency, body or
department thereof.
"Prime Rate" shall mean the publicly announced prime rate of LaSalle
National Bank, Chicago, Illinois, in effect from time to time. The Prime Rate is
not intended to be the lowest or most favorable rate of LaSalle National Bank in
effect at any time.
"Renewal Term" shall have the meaning specified in paragraph 12 hereof.
"Revolving Loans" shall have the meaning specified in paragraph 2
hereof.
"Revolving Loan Facility" shall mean the sum of $7,500,000.
"Revolving Note" shall mean the promissory note in the original
principal amount of $7,500,000, executed by Borrower to the order of LaSalle,
dated as of the Closing Date.
"Subsidiary" shall mean any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time stock of any other class of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, owned by Borrower or by any partnership or joint
venture of which more than fifty percent (50%) of the outstanding equity
interests are at the time, directly or indirectly, owned by Borrower.
"Tangible Net Worth" shall mean shareholders' equity (including
retained earnings) less the book value of all intangible assets, determined by
LaSalle on a consistent basis.
(b) Accounting Terms and Definitions. Unless otherwise defined or
specified herein, all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the audited financial statements delivered by Borrower to LaSalle on or
before the Closing Date. All accounting determinations for purposes of
determining compliance with the covenants contained in paragraph 14 shall be
made in accordance with GAAP as in effect on the Closing Date and applied on a
basis consistent in all material respects with the audited financial statements
delivered to LaSalle by Borrower on or before the Closing Date. The financial
statements required to be delivered
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hereunder from and after the Closing Date, and all financial records, shall be
maintained in accordance with GAAP. LaSalle agrees that interim financial
statements will not include footnotes or a statement of cash flow.
2. REVOLVING LOANS. Subject to the terms and conditions of this Agreement
and the Other Agreements, during the Original Term and any Renewal Term:
(a) LaSalle will make revolving loans and advances (the "Revolving
Loans") to Borrower from time to time based upon Borrower's requests, in
accordance with the terms of paragraph 2(b) hereof. The aggregate unpaid
principal amount of all Revolving Loans outstanding at any one time made to
Borrower shall not exceed the lesser of (i) the Borrowing Base or (ii) the
Revolving Loan Facility less the outstanding Letter of Credit Obligations. All
Revolving Loans shall be repaid in full upon the earlier to occur of (A) the end
of the Original Term or any Renewal Term, if either LaSalle or Borrower elects
to terminate this Agreement as of the end of any such term, and (B) the
acceleration of the Liabilities pursuant to paragraph 17 of this Agreement. If
at any time the outstanding principal balance of the Revolving Loans made to
Borrower exceeds (i) the Borrowing Base or (ii) the Revolving Loan Facility less
the outstanding Letter of Credit Obligations, Borrower shall immediately, and
without the necessity of a demand by LaSalle, pay to LaSalle such amount as may
be necessary to eliminate such excess, and LaSalle shall apply such payment
against the outstanding principal balance of the Revolving Loans. In addition,
if at any time the sum of (A) the outstanding principal balance of the Revolving
Loans and (B) the outstanding Letter of Credit Obligations exceeds the Revolving
Credit Facility, Borrower shall immediately and without the necessity of a
demand by LaSalle pay to LaSalle such amount as may be necessary to eliminate
such excess, and LaSalle shall apply such payment against the outstanding
principal balance of the Loans in such order as LaSalle shall determine in its
sole discretion. Borrower hereby authorizes LaSalle to charge any of Borrower's
accounts to make any payments of principal, interest, fees or reimbursable
expenses required by this Agreement. All Revolving Loans shall, in LaSalle's
sole discretion, be evidenced by one or more promissory notes in form and
substance satisfactory to LaSalle. However, if such Revolving Loans are not so
evidenced, such Revolving Loans may be evidenced solely by entries upon the
books and records maintained by LaSalle.
(b) LaSalle agrees to make Revolving Loans to Borrower up to the lesser
of the following amounts, the amount calculated pursuant to subparagraph (i)
below being the "Borrowing Base":
(i) an amount equal to the sum of:
(A) the applicable A/R Advance Rate applied to the
face amount of Eligible Accounts plus,
(B) the lesser of three million five hundred thousand
dollars ($3,500,000) or the sum of
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(x) the Inventory Advance Rate applied to the
value of Eligible Inventory other than
Rotational Inventory, calculated on the lower
of cost or market value on a first-in,
first-out basis; plus
(y) the lesser of (1) the Inventory Advance
Rate for Eligible Inventory which is
Rotational Inventory applied to the value of
such Rotational Inventory, calculated on the
lower of cost or market value on a first-in,
first-out basis or (2) one million dollars
($1,000,000), less
(C) the amount of all Letter of Credit Obligations,
less
(D) such reserves as LaSalle in its sole discretion
may from time to time establish in determining the Borrowing
Base to reflect events, conditions, contingencies or risks
which may affect the Collateral, the business, business
prospects or financial condition of Borrower, the security
interests of LaSalle, or the security of the Loans, including
but not limited to a five hundred thousand dollar ($500,000)
reserve to be maintained until LaSalle has received and
approved the Appraisal and the Inventory Advance Rate has been
adjusted in LaSalle's reasonable credit judgment based on the
Appraisal, or
(ii) the Revolving Loan Facility, less the amount of all
Letter of Credit Obligations.
3. [INTENTIONALLY OMITTED.]
4. LETTERS OF CREDIT. Subject to the terms and conditions of this
Agreement, and the Other Agreements, during the Original Term or any Renewal
Term, LaSalle may, at its discretion, absent the existence of an Event of
Default, from time to time cause the issuance of and co-sign for, upon
Borrower's request, Letters of Credit; provided, that the Letters of Credit
shall be in form and substance acceptable to LaSalle in its sole discretion and
that the aggregate undrawn face amount of all such Letters of Credit shall at no
time exceed Five Hundred Thousand Dollars ($500,000); and provided further, that
no Letter of Credit shall have an expiry date (a) more than 365 days from the
date of issuance or (b) beyond five (5) days prior to the expiration of the
Original Term or the Renewal Term, as the case may be. Borrower's reimbursement
obligation in respect of the Letters of Credit shall automatically reduce,
dollar for dollar, the amount which Borrower may borrow based upon the Revolving
Loan Facility and the Borrowing Base. Any payment made by LaSalle to any Person
on account of any Letter of Credit shall constitute a Revolving Loan hereunder.
At no time shall the aggregate sum of direct Revolving Loans by LaSalle to
Borrower plus the Letter of Credit Obligations be in excess of the Revolving
Loan Facility or the Borrowing Base.
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5. INTEREST, FEES AND CHARGES.
(a) Rates of Interest. Interest accrued on all Loans shall be due on
the earliest of: (i) the first day of each month (for the immediately preceding
month), computed through the last calendar day of the preceding month; (ii)
LaSalle's election to accelerate the maturity and payment of the Liabilities in
accordance with paragraph 17 hereof; or (iii) termination of this Agreement
pursuant to paragraph 12 hereof. Interest shall accrue on the principal amount
of the Revolving Loans made to Borrower outstanding at the end of each day at a
fluctuating rate per annum equal to one and one-quarter percent (1.25%) above
the Prime Rate. The rate of interest payable on Loans shall increase or decrease
by an amount equal to any increase or decrease in the Prime Rate, effective as
of the opening of business on the day that any such change in the Prime Rate
occurs. Upon and after the occurrence of an Event of Default, and during the
continuation thereof, the principal amount of all Loans shall bear interest on
demand at a rate per annum equal to the rate of interest then in effect under
this paragraph 5(a) plus two percent (2%).
(b) Computation of Interest and Fees. Interest and collection charges
hereunder shall be calculated daily and shall be computed on the actual number
of days elapsed over a year consisting of three hundred and sixty (360) days.
For the purpose of computing interest hereunder, all items of payment received
by LaSalle shall be deemed applied by LaSalle on account of the Liabilities
(subject to final payment of such items) on the first Business Day after receipt
by LaSalle of good funds in LaSalle's account located in Chicago, Illinois.
(c) Maximum Interest. It is the intent of the parties that the rate of
interest and the other charges to Borrower under this Agreement shall be lawful;
therefore, if for any reason the interest or other charges payable under this
Agreement are found by a court of competent jurisdiction, in a final
determination, to exceed the limit which LaSalle may lawfully charge Borrower,
then the obligation to pay interest and other charges shall automatically be
reduced to such limit and, if any amount in excess of such limit shall have been
paid, then such amount shall be refunded to Borrower.
(d) Letter of Credit Fees. Borrower shall remit to LaSalle a Letter of
Credit fee equal to two percent (2.0%) per annum on the aggregate undrawn face
amount of all outstanding Letters of Credit issued for the account of Borrower,
which fee shall be payable monthly in arrears on each day that interest is
payable hereunder. Borrower shall also pay on demand the normal and customary
administrative charges for issuance, amendment, negotiation, renewal or
extension of any Letter of Credit imposed by the bank issuing such Letter of
Credit. Upon the occurrence and during the continuance of an Event of Default,
all Letter of Credit fees shall be payable on demand at a rate equal to four
percent (4.0%) per annum on the aggregate undrawn face amount thereof.
(e) Facility Fee. Borrower shall pay to LaSalle a facility fee equal to
seventy-five thousand dollars ($75,000) , which shall be fully earned,
nonrefundable and due on the Closing Date.
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(f) Unused Line Fee. Borrower shall pay to Lender monthly, in arrears
on the first day of each month, an unused line fee at a rate equal to
three-eighths of one percent (.375%) per annum calculated upon the daily average
amount by which the Revolving Loan Facility exceeds the sum of (i) the
outstanding principal balance of the Revolving Loans plus (ii) the outstanding
Letter of Credit Obligations. The Unused Line Fee shall accrue from the Closing
Date until the last day of the Original Term, and if applicable, from the first
day to the last day of each Renewal Term.
(g) Examination Fees. In addition to the costs and expenses described
in paragraph 14(o) below, Borrower shall pay to LaSalle an examination fee of
$600 per auditor per day, plus reasonable costs and expenses (including but not
limited to airfare, lodging, transportation and meals) for each examination
performed by or at LaSalle's direction of Borrower's books and records and
Collateral and such other matters as LaSalle shall deem appropriate in its
commercially reasonable judgment, such fees to be paid upon demand by LaSalle.
(h) Capital Adequacy Charge. If LaSalle shall have determined that the
adoption of any law, rule or regulation regarding capital adequacy, or any
change therein or in the interpretation or application thereof, or compliance by
LaSalle with any request or directive regarding capital adequacy (whether or not
having the force of law) from any central bank or governmental authority enacted
after the Closing Date, does or shall have the effect of reducing the rate of
return on LaSalle's capital as a consequence of its obligations hereunder to a
level below that which LaSalle could have achieved but for such adoption, change
or compliance (taking into consideration LaSalle's policies with respect to
capital adequacy) by a material amount, then from time to time, after submission
by LaSalle to Borrower of a written demand therefor ("Capital Adequacy Demand")
together with the certificate described below, Borrower shall pay to LaSalle
such additional amount or amounts ("Capital Adequacy Charge") as will compensate
LaSalle for such reduction, such Capital Adequacy Demand to be made with
reasonable promptness following such determination. A certificate of LaSalle
claiming entitlement to payment as set forth above shall be conclusive in the
absence of manifest error. Such certificate shall set forth the nature of the
occurrence giving rise to such reduction, the amount of the Capital Adequacy
Charge to be paid to LaSalle, and the method by which such amount was
determined. In determining such amount, LaSalle may use any reasonable averaging
and attribution method, applied on a non-discriminatory basis.
6. LOAN ADMINISTRATION.
(a) Loan Requests. A request for a Revolving Loan shall be made or
shall be deemed to be made, each in the following manner: (i) Borrower shall
give LaSalle same day notice, no later than 10:30 A.M. (Portland time) of such
day, of its intention to borrow a Revolving Loan, in which notice Borrower shall
specify the amount of the proposed borrowing and the proposed borrowing date;
provided, however, that no such request may be made at a time when there exists
a Default or an Event of Default; and (ii) the coming due of any amount required
to be paid under this Agreement or any Note, whether on account of interest or
for any other Liability, shall be deemed irrevocably to be a request for a
Revolving Loan on the due date
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thereof in the amount required to pay such interest or other Liability. As an
accommodation to Borrower, LaSalle may permit telephone requests for Revolving
Loans and electronic transmittal of instructions, authorizations, agreements or
reports to LaSalle by Borrower. Unless Borrower specifically directs LaSalle in
writing not to accept or act upon telephonic or electronic communications from
Borrower, LaSalle shall have no liability to Borrower for any loss or damage
suffered by Borrower as a result of LaSalle's honoring of any requests,
execution of any instructions, authorizations or agreements or reliance on any
reports communicated to it telephonically or electronically and purporting to
have been sent to LaSalle by Borrower and LaSalle shall have no duty to verify
the origin of any such communication or the authority of the Person sending it.
Each notice of borrowing shall be irrevocable by and binding on Borrower.
(b) Disbursement. Borrower hereby irrevocably authorizes LaSalle to
disburse the proceeds of each Revolving Loan requested by Borrower, or deemed to
be requested by Borrower, as follows: (i) the proceeds of each Revolving Loan
requested under paragraph 6(a)(i) shall be disbursed by LaSalle in lawful money
of the United States of America in immediately available funds, in the case of
the initial borrowing, in accordance with the terms of the written disbursement
letter from Borrower, and in the case of each subsequent borrowing, by wire
transfer to such bank account as may be agreed upon by Borrower and LaSalle from
time to time, or elsewhere if pursuant to a written direction from Borrower; and
(ii) the proceeds of each Revolving Loan requested under paragraph 6(a)(ii)
shall be disbursed by LaSalle by way of direct payment of the relevant interest
or other Liability.
7. GRANT OF SECURITY INTEREST TO LASALLE. As security for the payment of
all Loans now or in the future made by LaSalle to Borrower hereunder and for the
payment or other satisfaction of all other Liabilities, Borrower hereby assigns
to LaSalle and grants to LaSalle a continuing security interest in the following
property of Borrower, whether now or hereafter owned, existing, acquired or
arising and wherever now or hereafter located: (a) all Accounts (whether or not
Eligible Accounts) and all Goods whose sale, lease or other disposition by
Borrower has given rise to Accounts and have been returned to or repossessed or
stopped in transit by Borrower; (b) all Chattel Paper, Instruments, Documents
and General Intangibles (including, without limitation, all patents, patent
applications, trademarks, trademark applications, trade names, trade secrets,
goodwill, copyrights, registrations, licenses, franchises, customer lists, tax
refund claims, claims against carriers and shippers, guarantee claims, contracts
rights, security interests, security deposits and any rights to
indemnification); (c) all Inventory; (d) all Goods (other than Inventory)
including, without limitation, Equipment, vehicles and fixtures; (e) all Deposit
Accounts; (f) all Investment Property; (g) all deposits and cash and any other
property of Borrower now or hereafter in the possession, custody or control of
LaSalle or any agent or any parent, affiliate or subsidiary of LaSalle or any
participant with LaSalle in the Loans for any purpose (whether for safekeeping,
deposit, collection, custody, pledge, transmission or otherwise); and (h) all
additions and accessions to, substitutions for, and replacements, products and
proceeds of the foregoing property, including, without limitation, proceeds of
all insurance policies insuring the foregoing property, and all of Borrower's
books and records relating to any of the foregoing and to Borrower's business.
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8. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN.
Borrower shall, at LaSalle's request, at any time and from time to time, execute
and deliver to LaSalle such financing statements, documents and other agreements
and instruments (and pay the cost of filing or recording the same in all public
offices deemed reasonably necessary or desirable by LaSalle) and do such other
acts and things as LaSalle may deem necessary or desirable in order to establish
and maintain a valid, attached and perfected security interest in the Collateral
in favor of LaSalle (free and clear of all other liens, claims and rights of
third parties whatsoever, whether voluntarily or involuntarily created, except
Permitted Liens) to secure payment of the Liabilities, and in order to
facilitate the collection of the Collateral. Borrower irrevocably hereby makes,
constitutes and appoints LaSalle (and all Persons designated by LaSalle for that
purpose) as Borrower's true and lawful attorney and agent-in-fact to execute
such financing statements, documents and other agreements and instruments and do
such other acts and things as may be necessary to preserve and perfect LaSalle's
security interest in the Collateral. Borrower further agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement shall be sufficient as a financing statement.
9. POSSESSION OF COLLATERAL AND RELATED MATTERS. Until an Event of Default
has occurred, Borrower shall have the right, except as otherwise provided in
this Agreement, in the ordinary course of Borrower's business, to (a) sell,
lease or furnish under contracts of service any of Borrower's Inventory normally
held by Borrower for any such purpose, and (b) use and consume any raw
materials, work in process or other materials normally held by Borrower for such
purpose; provided, however, that a sale in the ordinary course of business shall
not include any transfer or sale in satisfaction, partial or complete, of a debt
owed by Borrower.
10. COLLECTIONS.
(a) Borrower shall, at LaSalle's election, direct all of its Account
Debtors to make all payments on the Accounts directly to a post office box
("Lock Box") with a financial institution acceptable to, and in the name and
under exclusive control of, LaSalle. Borrower shall establish an account
("Blocked Account") in LaSalle's name for the benefit of Borrower with a
financial institution acceptable to LaSalle, into which all payments received in
the Lock Box shall be deposited, and into which Borrower will immediately
deposit all payments made for Inventory or services sold or rendered by Borrower
and received by Borrower in the identical form in which such payments were made,
whether by cash or check. If Borrower, any Affiliate or Subsidiary of Borrower,
or any shareholder, officer, director, employee or agent of Borrower or any
Affiliate or Subsidiary, or any other Person acting for or in concert with
Borrower, shall receive any monies, checks, notes, drafts or other payments
relating to or as proceeds of Accounts or other Collateral, Borrower and each
such Person shall receive all such items in trust for, and as the sole and
exclusive property of, LaSalle and, immediately upon receipt thereof, shall
remit the same (or cause the same to be remitted) in kind to the Blocked
Account. Each financial institution with which a Lock Box and Blocked Account
are established shall acknowledge and agree, in a manner satisfactory to
LaSalle, that the amounts on deposit in such Lock Box and Blocked Account are
the sole and exclusive property of LaSalle, that such
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financial institution has no right to setoff against such Lock Box or Blocked
Account or against any other account maintained by such financial institution
into which the contents of such Blocked Account are transferred, and that such
financial institution shall wire, or otherwise transfer in immediately available
funds in a manner satisfactory to LaSalle, funds deposited in the Blocked
Account on a daily basis as such funds are collected. Borrower agrees that all
payments made to the Blocked Account established by Borrower or otherwise
received by LaSalle, whether in respect of the Accounts of Borrower or as
proceeds of other Collateral of Borrower or otherwise, will be applied on
account of the Liabilities of Borrower in accordance with the terms of this
Agreement. Borrower agrees to pay all fees, costs and expenses which Borrower or
LaSalle incurs in connection with opening and maintaining a Lock Box and Blocked
Account. All of such fees, costs and expenses which remain unpaid by Borrower
pursuant to any Lock Box or Blocked Account Agreement with Borrower, to the
extent same shall have been paid by LaSalle hereunder, shall constitute
Revolving Loans hereunder, shall be payable to LaSalle by Borrower upon demand,
and, until paid, shall bear interest at the highest rate then applicable to
Revolving Loans hereunder. All checks, drafts, instruments and other items of
payment or proceeds of Collateral delivered to LaSalle in kind shall be endorsed
by Borrower to LaSalle, and, if endorsement of any such item shall not be made
for any reason, LaSalle is hereby irrevocably authorized to endorse the same on
Borrower's behalf. For the purpose of this paragraph, Borrower irrevocably
hereby makes, constitutes and appoints LaSalle (and all Persons designated by
LaSalle for that purpose) as Borrower's true and lawful attorney and
agent-in-fact (i) to endorse Borrower's name upon said items of payment and/or
proceeds of Collateral of Borrower and upon any Chattel Paper, document,
instrument, invoice or similar document or agreement relating to any Account of
Borrower or goods pertaining thereto; (ii) to take control in any manner of any
item of payment or proceeds thereof; (iii) to have access to any lock box or
postal box into which any of Borrower's mail is deposited; and (iv) to open and
process all mail addressed to Borrower and deposited therein; provided, however,
that LaSalle shall not exercise any such powers described in subparagraphs (i),
(ii) (except for routine Lock Box payments/proceeds) and (iv) unless and until
an Event of Default has occurred.
(b) LaSalle may, at any time and from time to time after the occurrence
of an Event of Default, whether before or after notification to any Account
Debtor and whether before or after the maturity of any of the Liabilities, (i)
enforce collection of any of Borrower's Accounts or contract rights by suit or
otherwise; (ii) exercise all of Borrower's rights and remedies with respect to
proceedings brought to collect any Accounts; (iii) surrender, release or
exchange all or any part of any Accounts of Borrower, or compromise or extend or
renew for any period (whether or not longer than the original period) any
indebtedness thereunder; (iv) sell or assign any Account of Borrower upon such
terms, for such amount and at such time or times as LaSalle deems advisable; (v)
prepare, file and sign Borrower's name on any proof of claim in bankruptcy or
other similar document against any Account Debtor indebted on an Account of
Borrower; and (vi) do all other acts and things which are necessary, in
LaSalle's sole discretion, to fulfill Borrower's obligations under this
Agreement and to allow LaSalle to collect the Accounts. LaSalle, through its
officers, employees or agents, shall have the right, at any time and from time
to time in LaSalle's name, in the name of a nominee of LaSalle or in Borrower's
name, to verify the validity, amount or any other matter relating to any of
Borrower's Accounts, by mail, telephone, telegraph or otherwise. Borrower shall
reimburse LaSalle, on demand, for all
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reasonable costs, fees and expenses incurred by LaSalle in this regard after the
occurrence and during the continuation of any Event of Default. In addition to
any other provision hereof, LaSalle may at any time on or after the occurrence
of an Event of Default, at Borrower's expense, notify any parties obligated on
any of the Accounts of Borrower to make payment directly to LaSalle of any
amounts due or to become due thereunder.
(c) For the purpose of determining Borrower's Borrowing Base hereunder,
LaSalle shall, upon receipt by LaSalle in its bank account in Chicago, Illinois,
of cash or other immediately available funds from collections of items of
payment and proceeds of any Collateral, apply the whole or any part of such
collections or proceeds against the Liabilities in such order as LaSalle shall
determine in its sole discretion.
(d) In its sole credit judgment, without waiving or releasing any
obligation, liability or duty of Borrower under this Agreement or the Other
Agreements or any Event of Default, at any time or times hereafter, LaSalle may
(but shall not be obligated to) pay, acquire or accept an assignment of any
security interest, lien, encumbrance or claim asserted by any Person in, upon or
against the Collateral. All sums paid by LaSalle in respect thereof and all
costs, fees and expenses (including, without limitation, reasonable attorney
fees for both inside and outside counsel, all court costs and all other charges
relating thereto) incurred by LaSalle shall constitute Revolving Loans, payable
by Borrower to LaSalle on demand and, until paid, shall bear interest at the
highest rate then applicable to Revolving Loans hereunder.
(e) Immediately upon Borrower's receipt of any portion of the
Collateral evidenced by an agreement, Instrument or Document including, without
limitation, any Chattel Paper, Borrower shall deliver the original thereof to
LaSalle together with an appropriate endorsement or other specific evidence of
assignment thereof to LaSalle (in form and substance acceptable to LaSalle). If
an endorsement or assignment of any such item shall not be made for any reason,
LaSalle is hereby irrevocably authorized, as Borrower's attorney and
agent-in-fact, to endorse or assign the same on Borrower's behalf.
11. SCHEDULES AND REPORTS.
(a) Borrower shall provide to LaSalle compliance certificates in the
form attached as Exhibit D and the periodic reports and other information and
schedules described on Exhibit E at the times specified on Exhibit E. In
addition, Borrower shall furnish LaSalle with such other statements and reports
as LaSalle may request from time to time, including, without limitation,
providing the reports, information, and schedules listed on Exhibit E on a more
frequent basis than specified on Exhibit E.
(b) Borrower shall immediately notify LaSalle of any event causing loss
or depreciation in value of the Collateral (other than normal depreciation
occurring in the ordinary course of business).
(c) All schedules, certificates, reports and assignments and other
items delivered by Borrower to LaSalle hereunder shall be executed by an
authorized representative of
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Borrower and shall be in such form and contain such information as LaSalle shall
reasonably request.
12. TERMINATION.
(a) This Agreement shall be in effect from the date hereof until the
third anniversary of the Closing Date ("Original Term") and shall automatically
renew itself from year to year thereafter (each such one year renewal being
referred to herein as a "Renewal Term") unless (i) the due date of the
Liabilities is accelerated pursuant to paragraph 17 hereof; or (ii) Borrower
elects or LaSalle elects to terminate this Agreement at the end of the Original
Term or at the end of any Renewal Term by giving the other party written notice
of such election at least ninety (90) days prior to the end of the Original Term
or the then current Renewal Term, in which case Borrower shall pay all of the
Liabilities in full on the last day of such term. If one or more of the events
specified in subparagraphs (i) or (ii) occurs, this Agreement shall terminate on
the date thereafter that the Liabilities are paid in full and the security
interests and liens created under this Agreement and the Other Agreements shall
survive such termination until the date upon which payment and satisfaction in
full of the Liabilities shall have occurred. At such time as Borrower has repaid
all of the Liabilities and this Agreement has terminated, (A) Borrower shall
deliver to LaSalle a release, in form and substance reasonably satisfactory to
LaSalle, of all obligations and liabilities of LaSalle and its officers,
directors, employees, agents, parents, subsidiaries and affiliates to Borrower,
and if Borrower is obtaining new financing from another lender, Borrower shall
deliver such lender's indemnification of LaSalle, in form and substance
satisfactory to LaSalle, for checks which LaSalle has credited to Borrower's
account, but which subsequently are dishonored for any reason and (B) upon
Borrower's request, LaSalle shall deliver to Borrower a release in form and
substance reasonably satisfactory to Borrower.
(b) If, during the term of this Agreement, (including any Renewal Term)
Borrower prepays all or any portion of the Liabilities, Borrower agrees to pay
to LaSalle, as a prepayment fee, in addition to the payment of all other
Liabilities owing by Borrower, an amount equal to three percent (3.0%) of the
Revolving Credit Facility if such prepayment occurs prior to the first
anniversary of the Closing Date, two percent (2.0%) of the Revolving Credit
Facility if such prepayment occurs on or after the first anniversary but prior
to the second anniversary of the Closing Date, and one percent (1.0%) if the
prepayment occurs on or after the second anniversary of the Closing Date, except
if terminated at the end of the Original Term or any Renewal Term, pursuant to
the terms set forth herein.
13. REPRESENTATIONS AND WARRANTIES. Borrower hereby makes the following
representations, warranties and covenants:
(a) the financial statements delivered or to be delivered by Borrower
to LaSalle at or prior to the date of this Agreement and at all times subsequent
thereto accurately reflect the financial condition of Borrower, and since the
date of the Borrower's financial statements delivered to LaSalle most recently
prior to the date of this Agreement, no event or condition has occurred which
has had, or is reasonably likely to have, a Material Adverse Effect;
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(b) the office where Borrower keeps its books, records and accounts (or
copies thereof) concerning the Collateral, Borrower's principal place of
business and all of Borrower's other places of business, locations of Collateral
and post office boxes are as set forth in Exhibit B; Borrower shall promptly
(but in no event less than ten (10) days prior thereto) advise LaSalle in
writing of the proposed opening of any new place of business, the closing of any
existing place of business, any change in the location of Borrower's books,
records and accounts (or copies thereof) or the opening or closing of any post
office box of Borrower;
(c) the Collateral, including without limitation, the Equipment (except
any part thereof which prior to the date of this Agreement Borrower shall have
advised LaSalle in writing consists of Collateral normally used in more than one
state) is and shall be kept, or, in the case of vehicles, based, only at the
addresses set forth on the first page of this Agreement or on Exhibit B, and at
other locations within the continental United States of which LaSalle has been
previously advised by Borrower in writing;
(d) Borrower shall immediately give written notice to LaSalle of any
use of any such Goods in any state other than a state in which Borrower has
previously advised LaSalle such Goods shall be used, and such Goods shall not,
unless LaSalle shall otherwise consent in writing, be used outside of the
continental United States;
(e) no security agreement, financing statement or analogous instrument
exists or shall exist with respect to any of the Collateral other than any
security agreement, financing statement or analogous instrument evidencing
Permitted Liens;
(f) each Account or item of Inventory which Borrower shall, expressly
or by implication, request LaSalle to classify as an Eligible Account or as
Eligible Inventory, respectively, shall, as of the time when such request is
made, conform in all respects to the requirements of such classification as set
forth in the respective definitions of Eligible Account and Eligible Inventory
and as otherwise established by LaSalle from time to time, and Borrower shall
promptly notify LaSalle in writing if any such Eligible Account or Eligible
Inventory shall subsequently become ineligible;
(g) Borrower is and shall at all times during the Original Term or any
Renewal Term be the lawful owner of all Collateral now purportedly owned or
hereafter purportedly acquired by Borrower, free from all liens, claims,
security interests and encumbrances whatsoever, whether voluntarily or
involuntarily created and whether or not perfected, other than the Permitted
Liens;
(h) Borrower has the right and power and is duly authorized and
empowered to enter into, execute and deliver this Agreement and the Other
Agreements and perform its obligations hereunder and thereunder; Borrower's
execution, delivery and performance of this Agreement and the Other Agreements
does not and shall not conflict with the provisions of any statute, regulation,
ordinance or rule of law, or any agreement, contract or other document which may
now or hereafter be binding on Borrower, and Borrower's execution, delivery and
performance of this Agreement and the Other Agreements shall not result in the
imposition of
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any lien or other encumbrance upon any of Borrower's property under any existing
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument by which Borrower or any of its property may be bound or affected;
(i) except as otherwise disclosed on Schedule 13(i), there are no
actions or proceedings which are pending or, to the best of Borrower's
knowledge, threatened against Borrower which are reasonably likely to have a
Material Adverse Effect and Borrower shall, promptly upon becoming aware of any
such pending or threatened action or proceeding, give written notice thereof to
LaSalle;
(j) Borrower has obtained all licenses, authorizations, approvals and
permits, the lack of which would have a Material Adverse Effect on the operation
of its business, and Borrower is and shall remain in compliance in all material
respects with all applicable federal, state, local and foreign statutes, orders,
regulations, rules and ordinances (including, without limitation, statutes,
orders, regulations, rules and ordinances relating to taxes, employer and
employee contributions and similar items, securities, employee retirement and
welfare benefits, employee health and safety or environmental matters), the
failure to comply with which would have a Material Adverse Effect on its
business, property, assets, operations or condition, financial or otherwise;
(k) all written information now, heretofore or hereafter furnished by
Borrower to LaSalle is and shall be true and correct in all material respects as
of the date with respect to which such information was or is furnished (except
for financial projections, which have been prepared in good faith based upon
reasonable assumptions);
(l) Borrower is not conducting, permitting or suffering to be
conducted, nor shall it conduct, permit or suffer to be conducted, any
activities pursuant to or in connection with which any of the Collateral is now,
or will (while any Liabilities remain outstanding) be owned by any Affiliate;
(m) Borrower's name has always been as set forth on the first page of
this Agreement and Borrower uses no trade names or division names in the
operation of its business, except as disclosed in Section C on Exhibit B;
Borrower shall notify LaSalle in writing within ten (10) days of the change of
its name or the use of any trade names or division names not previously
disclosed to LaSalle in writing;
(n) with respect to Borrower's Equipment: (i) Borrower has good and
indefeasible and merchantable title to and ownership of all Equipment; (ii)
Borrower shall keep and maintain the Equipment in good operating condition and
repair and shall make all necessary replacements thereof and renewals thereto so
that the value and operating efficiency thereof shall at all times be preserved
and maintained, ordinary wear and tear excepted; (iii) from time to time
Borrower may sell, exchange or otherwise dispose of obsolete, unused or worn out
Equipment, and (iv) Borrower, immediately on demand by LaSalle, shall deliver to
LaSalle any and all evidence of ownership of, including, without limitation,
certificates of title and applications of
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title to, any of the Equipment, excepting titles to vehicles subject to a
Permitted Lien having priority over the security interest of LaSalle;
(o) this Agreement and the Other Agreements to which Borrower is a
party are the legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms, except
to the extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting the rights of
creditors generally;
(p) Borrower is solvent, is able to pay its debts as they become due
and has capital sufficient to carry on its business, now owns property having a
value both at fair valuation and at present fair saleable value greater than the
amount required to pay its debts, and will not be rendered insolvent by the
execution and delivery of this Agreement or any of the Other Agreements, the
Asset Purchase Agreement or any related agreements, or by completion of the
transactions contemplated hereunder or thereunder;
(q) Borrower is not now obligated, whether directly or indirectly, for
any loans or other indebtedness for borrowed money other than (i) the
Liabilities; (ii) indebtedness disclosed to LaSalle on Schedule 13(q); (iii)
unsecured indebtedness to trade creditors arising in the ordinary course of
Borrower's business; and (iv) unsecured indebtedness arising from the
endorsement of drafts and other instruments for collection, in the ordinary
course of Borrower's business;
(r) Borrower does not own any margin securities, and none of the
proceeds of the Loans hereunder shall be used for the purpose of purchasing or
carrying any margin securities or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase any margin securities or
for any other purpose not permitted by Regulation G or Regulation U of the Board
of Governors of the Federal Reserve System as in effect from time to time;
(s) except as otherwise disclosed on Schedule 13(s), Borrower has no
Parents, Subsidiaries or divisions, nor is Borrower engaged in any joint venture
or partnership with any other Person;
(t) Borrower is duly organized and in good standing in its state of
organization and Borrower is duly qualified and in good standing in all states
where the nature and extent of the business transacted by it or the ownership of
its assets makes such qualification necessary, except for such other states in
which the failure to so qualify would not have a Material Adverse Effect;
(u) Borrower is not in default under any material contract, lease or
commitment to which it is a party or by which it is bound, nor does Borrower
know of any dispute regarding any contract, lease or commitment which is
material to the continued financial success and well-being of Borrower;
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(v) there are no controversies pending or threatened between Borrower
and any of its employees, other than employee grievances arising in the ordinary
course of business which are not, in the aggregate, material to the continued
financial success and well-being of Borrower, and Borrower is in compliance in
all material respects with all federal and state laws respecting employment and
employment terms, conditions and practices, except where the failure to so
comply would not have a Material Adverse Effect;
(w) Borrower possesses, and shall continue to possess, adequate
licenses, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles and trade names to continue to conduct its
business as heretofore conducted by it; and
(x) Borrower and its Subsidiaries have reviewed the areas within their
business and operations which could be adversely affected by, and have developed
or are developing a program to address on a timely basis, the "Year 2000
Problem" (that is, the risk that computer applications used by Borrower and its
Subsidiaries may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date on or after December 31,
1999), and have made related appropriate inquiry of material suppliers and
vendors. Based on such review and program, Borrower believes that the "Year 2000
Problem" will not have a Material Adverse Effect. From time to time, at the
request of LaSalle, Borrower and its Subsidiaries shall provide to LaSalle such
updated information or documentation as is requested regarding the status of
their efforts to address the Year 2000 problem.
Borrower represents, warrants and covenants to LaSalle that all representations,
warranties and covenants of Borrower contained in this Agreement (whether
appearing in paragraphs 13 or 14 hereof or elsewhere) shall be true at the time
of Borrower's execution of this Agreement, shall survive the execution, delivery
and acceptance hereof by the parties hereto and the closing of the transactions
described herein or related hereto, shall remain true until the repayment in
full of all of the Liabilities and termination of this Agreement, and shall be
remade by Borrower at the time each Revolving Loan is made and each Letter of
Credit is issued pursuant to this Agreement.
14. COVENANTS. Until payment or satisfaction in full of all Liabilities and
termination of this Agreement, unless Borrower obtains LaSalle's prior written
consent waiving or modifying any of Borrower's covenants hereunder in any
specific instance, Borrower agrees as follows:
(a) Borrower shall at all times keep accurate and complete books,
records and accounts with respect to all of Borrower's business activities, in
accordance with sound accounting practices and using the accounting terms and
definitions specified in paragraph 1(b) and shall keep such books, records and
accounts, and any copies thereof, only at the addresses indicated for such
purpose on Exhibit B;
(b) Borrower agrees to deliver to LaSalle the following financial
information, all of which shall be prepared in accordance with accounting terms
and definitions specified in paragraph 1(b): (i) no later than thirty (30) days
after each calendar month, copies of internally prepared financial statements of
Borrower and its Subsidiaries, on a consolidated, monthly and
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year-to-date basis including, without limitation, balance sheets and statements
of income and retained earnings of Borrower and its Subsidiaries, certified by
an officer of Borrower and accompanied by an officer's certificate in the form
of Exhibit D attached hereto and (ii) no later than ninety (90) days after the
end of each of Borrower's fiscal years, annual financial statements of Borrower
and its Subsidiaries on a consolidated and consolidating basis audited by
independent certified public accountants selected by Borrower and reasonably
satisfactory to LaSalle, together with such accountants' "management letter," if
any;
(c) LaSalle, or any Persons designated by it, shall have the right in
the exercise of its commercially reasonable credit judgment, to call at
Borrower's places of business at any reasonable times, and, without hindrance or
delay, to inspect the Collateral and to inspect, audit, check and make extracts
from Borrower's books, records, journals, orders, receipts and any
correspondence and other data relating to Borrower's business, the Collateral or
any transactions between the parties hereto, and shall have the right to make
such verification concerning Borrower's business as LaSalle may consider
reasonable under the circumstances. Borrower shall furnish to LaSalle such
information relevant to LaSalle's rights under this Agreement as LaSalle shall
at any time and from time to time reasonably request. Borrower shall also
furnish to LaSalle, at the time of filing or distribution, all reports and
filings submitted to the Securities Exchange Commission and all materials
distributed generally to Borrower's shareholders. Borrower authorizes LaSalle to
discuss the affairs, finances and business of Borrower with any officers or
directors of Borrower or any Affiliate, or with those employees of Borrower with
whom LaSalle has determined in its commercially reasonable judgment to be
necessary or desirable to converse, and to discuss the financial condition of
Borrower with Borrower's independent public accountants. Any such discussions
shall be without liability to LaSalle or to such accountants. Borrower shall pay
to or reimburse LaSalle for all reasonable fees, costs, and out-of-pocket
expenses incurred by LaSalle in the exercise of its rights hereunder (in
addition to the fees payable by Borrower pursuant to paragraph 14(o) hereof in
connection with LaSalle's examination of Borrower's books and records and
Collateral) and all of such costs, fees and expenses shall constitute Revolving
Loans hereunder, shall be payable on demand and, until paid, shall bear interest
at the highest rate then applicable to Revolving Loans hereunder;
(d) (i) Borrower shall keep the Collateral properly housed and shall
keep the Collateral insured against such risks and in such amounts as are
customarily insured against by Persons engaged in businesses similar to that of
Borrower with such companies, in such amounts and under policies in such form as
shall be reasonably satisfactory to LaSalle. Originals or certified copies of
such policies of insurance have been, or within fifteen (15) days after the
Closing Date, shall be, delivered to LaSalle together with evidence of payment
of all premiums therefor, and shall contain an endorsement, in form and
substance acceptable to LaSalle, showing loss under such insurance policies
payable to LaSalle. Such endorsement, or an independent instrument furnished to
LaSalle, shall provide that the insurance company shall give LaSalle at least
thirty (30) days' written notice before any such policy of insurance is altered
or cancelled and that no act, whether willful or negligent, or default of
Borrower or any other Person shall affect the right of LaSalle to recover under
such policy of insurance in case of loss or damage. Borrower hereby directs all
insurers under such policies of insurance to pay all proceeds payable thereunder
directly to LaSalle (subject, however, to the rights of holders of Permitted
Liens with
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priority over LaSalle's security interest). Borrower irrevocably makes,
constitutes and appoints LaSalle (and all officers, employees or agents
designated by LaSalle) as Borrower's true and lawful attorney (and
agent-in-fact) for the purpose of making, settling and adjusting claims under
such policies of insurance, endorsing the name of Borrower on any check, draft,
instrument or other item of payment for the proceeds of such policies of
insurance and making all determinations and decisions with respect to such
policies of insurance; provided, however, that LaSalle shall exercise such
rights only upon the occurrence of an Event of Default;
(ii) Borrower shall maintain, at its expense, such public
liability and third party property damage insurance as is customary for Persons
engaged in businesses similar to that of Borrower with such companies and in
such amounts, with such deductibles and under policies in such form as shall be
reasonably satisfactory to LaSalle, and originals or certified copies of such
policies have been, or within fifteen (15) days after the Closing Date shall be,
delivered to LaSalle together with evidence of payment of all premiums therefor;
each such policy shall contain an endorsement showing LaSalle as additional
insured thereunder and providing that the insurance company shall give LaSalle
at least thirty (30) days' written notice before any such policy shall be
altered or cancelled; and
(iii) If Borrower at any time or times hereafter shall fail to
obtain or maintain any of the policies of insurance required above or to pay any
premium in whole or in part relating thereto, then LaSalle, without waiving or
releasing any obligation or default by Borrower hereunder, may (but shall be
under no obligation to) obtain and maintain such policies of insurance and pay
such premiums and take such other actions with respect thereto as LaSalle deems
advisable. All sums disbursed by LaSalle in connection with any such actions,
including, without limitation, court costs, expenses, other charges relating
thereto and reasonable attorneys' fees, shall constitute Revolving Loans
hereunder and, until paid, shall bear interest at the highest rate then
applicable to Revolving Loans hereunder.
WARNING
UNLESS BORROWER PROVIDES LASALLE WITH EVIDENCE OF THE
INSURANCE COVERAGE AS REQUIRED BY THIS AGREEMENT, LASALLE MAY PURCHASE
INSURANCE AT BORROWER'S EXPENSE TO PROTECT LASALLE'S INTEREST. THIS
INSURANCE MAY, BUT NEED NOT, ALSO PROTECT BORROWER'S INTEREST. IF THE
COLLATERAL BECOMES DAMAGED, THE COVERAGE LASALLE PURCHASES MAY NOT PAY
ANY CLAIM BORROWER MAKES OR ANY CLAIM MADE AGAINST BORROWER. BORROWER
MAY LATER CANCEL THIS COVERAGE BY PROVIDING EVIDENCE THAT BORROWER HAS
OBTAINED THE REQUIRED COVERAGE ELSEWHERE.
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BORROWER IS RESPONSIBLE FOR THE COST OF ANY INSURANCE
PURCHASED BY LASALLE. THE COST OF THIS INSURANCE MAY BE ADDED TO
BORROWER'S LIABILITIES. IF THE COST IS ADDED TO BORROWER'S LIABILITIES,
THE INTEREST RATE APPLICABLE TO THE REVOLVING LOANS WILL APPLY TO THIS
ADDED AMOUNT. THE EFFECTIVE DATE OF COVERAGE MAY BE THE DATE BORROWER'S
PRIOR COVERAGE LAPSED OR THE DATE BORROWER FAILED TO PROVIDE PROOF OF
COVERAGE.
THE COVERAGE LASALLE PURCHASES MAY BE CONSIDERABLY MORE
EXPENSIVE THAN INSURANCE BORROWER CAN OBTAIN ON ITS OWN AND MAY NOT
SATISFY ANY NEED FOR PROPERTY DAMAGE COVERAGE OR ANY MANDATORY
LIABILITY INSURANCE REQUIREMENTS IMPOSED BY APPLICABLE LAW.
(e) Borrower shall not use the Collateral, or any part thereof, in any
unlawful business or for any unlawful purpose or use or maintain any of the
Collateral in any manner that does or could result in material damage to the
environment or a violation of any applicable environmental laws, rules or
regulations; Borrower shall keep the Collateral in good condition, repair and
order, ordinary wear and tear excepted; Borrower shall not permit the
Collateral, or any part thereof, to be levied upon under execution, attachment,
distraint or other legal process; Borrower shall not sell, lease, grant a
security interest in or otherwise dispose of any of the Collateral except as
expressly permitted by this Agreement; and Borrower shall not secrete or abandon
any of the Collateral, or remove or permit removal of any of the Collateral from
any of the locations listed on Exhibit B or in any written notice to LaSalle
pursuant to paragraph 13(c) hereof, except for the removal of Inventory sold in
the ordinary course of Borrower's business as permitted herein;
(f) All monies and other property obtained by Borrower from LaSalle
pursuant to this Agreement will be used solely for business purposes of
Borrower;
(g) Borrower shall, at the request of LaSalle, indicate on its records
concerning the Collateral a notation, in form satisfactory to LaSalle, of the
security interest of LaSalle hereunder, and Borrower shall not maintain
duplicates or copies of such records at any address other than Borrower's
principal place of business set forth on the first page of this Agreement;
provided, however, that Borrower, in the ordinary course of its business, may
furnish copies of such records to its accountants, attorneys and other agents or
advisors as it may determine to be necessary or desirable, in the exercise of
its commercially reasonable judgment;
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(h) Borrower shall file all required tax returns and pay all of its
taxes when due, including, without limitation, taxes imposed by federal, state
or municipal agencies, and shall cause any liens for taxes to be promptly
released; provided, however, that Borrower shall have the right to contest the
payment of such taxes in good faith by appropriate proceedings so long as (i)
the amount so contested is shown on Borrower's financial statements, (ii) the
contesting of any such payment does not give rise to a lien for taxes, (iii)
upon the occurrence of an Event of Default, Borrower keeps on deposit with
LaSalle (such deposit to be held without interest) an amount of money which, in
the sole judgment of LaSalle, is sufficient to pay such taxes and any interest
or penalties that may accrue thereon, and (iv) if Borrower fails to prosecute
such contest with reasonable diligence, LaSalle may apply the money so deposited
in payment of such taxes. If Borrower fails to pay any such taxes and in the
absence of any such contest by Borrower, LaSalle may (but shall be under no
obligation to) advance and pay any sums required to pay any such taxes and/or to
secure the release of any lien therefor, and any sums so advanced by LaSalle
shall constitute Revolving Loans hereunder, shall be payable by Borrower to
LaSalle on demand, and, until paid, shall bear interest at the highest rate then
applicable to Revolving Loans hereunder;
(i) Borrower shall not (i) incur, create, assume or suffer to exist any
indebtedness other than (A) indebtedness arising under this Agreement, (B)
unsecured indebtedness owing in the ordinary course of business to trade
suppliers, (C) any other indebtedness described on Schedule 13(q), (D) purchase
money security interests incurred to finance Capital Expenditures after the
Closing Date provided such Capital Expenditures do not to exceed the limit set
forth in paragraph 14(n) below, and (E) indebtedness to any shareholder of
Borrower provided such indebtedness is fully subordinated to the Liabilities on
such terms and conditions and by such documentation as is approved in writing by
LaSalle in its sole discretion; or (ii) assume, guarantee or endorse, or
otherwise become liable in connection with, the obligations of any Person,
except by endorsement of instruments for deposit or collection or similar
transactions in the ordinary course of business;
(j) Borrower shall not enter into any merger or consolidation, or sell,
lease or otherwise dispose of all or substantially all of its assets; Borrower
shall not create any new Subsidiary or Affiliate; Borrower shall not enter into
any transaction outside the ordinary course of Borrower's business;
(k) Borrower shall not (i) declare or pay any dividend or other
distribution (whether in cash or in kind) on, purchase, redeem or retire any
shares of any class of its stock, or make any payment on account of, or set
apart assets for the repurchase, redemption, defeasance or retirement of, any
class of its stock; or (ii) make any optional payment or prepayment on or
redemption (including without limitation by making payments to a sinking fund or
analogous fund) or repurchase of any indebtedness for borrowed money other than
indebtedness pursuant to this Agreement;
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(l) Borrower shall not make any loans to, or investment in, any Person,
whether in cash, securities or other property of any kind, other than
investments that are direct obligations of the United States;
(m) Borrower shall not amend its organizational documents or change its
fiscal year to end on any date other than December 31;
(n) Borrower shall maintain and keep in full force and effect each of
the financial covenants set forth below. The calculation and determination of
each such financial covenant, and all accounting terms contained therein, shall
be calculated and construed in accordance with GAAP, applied on a basis
consistent with the reviewed financial statements of Borrower delivered on or
before the Closing Date:
(i) Consolidated Tangible Net Worth. Borrower and its
Subsidiaries, on a consolidated basis, shall maintain as of the end of
(A) the month ending December 31, 1998 a Tangible Net Worth of not less
than the Base Amount (as defined below) and (B) each month thereafter,
a Tangible Net Worth of not less than the sum of (1) the Base Amount
and (2) an aggregate amount equal to ninety percent (90%) of the net
income after taxes of Borrower and its Subsidiaries, on a consolidated
basis, for each fiscal quarter ending subsequent to the Closing Date
(provided, however, that such aggregate amount shall not be reduced by
the amount of any net loss before taxes of Borrower and its
Subsidiaries, on a consolidated basis, for any fiscal quarter). For
purposes of this paragraph (i), the "Base Amount" shall mean the
greater of (x) five million dollars ($5,000,000) or (y) the sum of the
Consolidated Tangible Net Worth of Borrower and its Subsidiaries as
reflected on Borrower's audited December 31, 1998 balance sheet less
five hundred thousand ---- dollars ($500,000), less any net after-tax
loss in excess of $50,000 sustained by Borrower and ----- its
Subsidiaries on a consolidated basis for the month of December 1998;
(ii) Cash Flow. Borrower and its Subsidiaries, on a
consolidated basis, shall have Cash Flow of no less than the following
amounts:
Period Minimum Cash Flow
------ -----------------
Quarter ending March 31, 1999 $375,000
Two quarters ending June 30, 1999 $750,000
Three quarters ending September 30, 1999 $1,125,000
The twelve (12) month period ending as of the
end of each fiscal quarter thereafter $1,500,000
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(iii) Consolidated Debt Service Coverage Ratio. Borrower and
its Subsidiaries, on a consolidated basis, shall maintain as of each
fiscal quarter for the twelve (12) month period ending with such fiscal
quarter (or, with respect to the fiscal quarters ending March 31, June
30, and September 30, 1999, for the three, six and nine month periods
ending with such fiscal quarters, respectively), a Debt Service
Coverage Ratio of not less than 1.5 to 1.0;
(iv) Consolidated Interest Coverage Ratio. Borrower and its
Subsidiaries, on a consolidated basis, shall maintain as of each fiscal
quarter for the twelve (12) month period ending with such fiscal
quarter (or, with respect to the fiscal quarters ending March 31, June
30, and September 30, 1999, for the three, six and nine month periods
ending with such fiscal quarters, respectively), an Interest Coverage
Ratio of not less than 1.5 to 1.0; and
(v) Consolidated Capital Expenditures. Borrower and its
Subsidiaries, on a consolidated basis, shall not make Capital
Expenditures in any fiscal year in an aggregate amount which exceeds
the sum of three hundred fifty thousand dollars ($350,000).
(o) Borrower shall reimburse LaSalle for all reasonable costs and
expenses including, without limitation, legal expenses and reasonable attorneys'
fees (both in-house and outside counsel), incurred by LaSalle in connection with
the documentation and consummation of this transaction and any amendments or
modifications of this Agreement or the Other Agreements or other transactions
between Borrower and LaSalle, including, without limitation, Uniform Commercial
Code and other public record searches, lien filings, Federal Express or similar
express or messenger delivery, appraisal costs, surveys, title insurance and
environmental audit or review costs, and in seeking to collect, protect or
enforce any rights in or to the Collateral or incurred by LaSalle in seeking to
collect any Liabilities and to administer and enforce any of LaSalle's rights
under this Agreement. Borrower shall also pay all normal service charges with
respect to accounts maintained by LaSalle for the benefit of Borrower. All such
costs, expenses and charges shall constitute Revolving Loans hereunder, shall be
payable by Borrower to LaSalle on demand, and, until paid, shall bear interest
at the highest rate then applicable to Revolving Loans hereunder;
(p) [Deleted.]
(q) Borrower shall not enter into or be a party to, or permit any
Subsidiary to enter into or be a party to, any transaction with any Affiliate of
Borrower except in the ordinary course of business in a manner and to an extent
consistent with past practices of Borrower and necessary or desirable for the
prudent operation of its business, for fair consideration and on terms no less
favorable to Borrower or such Subsidiary as are available from unaffiliated
third parties;
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(r) Borrower shall promptly advise LaSalle in writing of any Material
Adverse Effect or the occurrence of any Default or Event of Default; and
(s) With respect to Environmental Laws and Hazardous Materials:
(i) Borrower shall establish and maintain, at its expense, a
system to assure and monitor its compliance with all Environmental Laws
in all of its operations. Copies of all environmental surveys, audits,
assessments, feasibility studies and results of remedial investigations
shall be promptly furnished by Borrower to LaSalle upon request.
Borrower shall take prompt and appropriate action to respond to any
non-compliance with any of the Environmental Laws;
(ii) Borrower shall give written notice to LaSalle immediately
upon Borrower's receipt of any notice of, or Borrower's otherwise
obtaining knowledge of, (i) the occurrence of any event involving the
release, spill or discharge, threatened or actual, of any Hazardous
Material (unless the release, spill or discharge is fully remediated
within 30 days after Borrower first obtains knowledge of it and
Borrower has no liability or potential liability resulting from the
release, spill or discharge other than remediation costs not exceeding
$10,000) or (ii) any investigation, proceeding, complaint, order,
directive, claim, citation or notice with respect to: (A) any
non-compliance with or violation of any Environmental Law by Borrower;
or (B) the release, spill or discharge, threatened or actual, of any
Hazardous Material except in compliance with applicable Environmental
Laws; or (C) the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous
Materials except in compliance with applicable Environmental Laws; or
(D) any other environmental, health or safety matter which affects
Borrower or its business, operations or assets or any properties at
which Borrower transported, stored or disposed of any Hazardous
Materials (unless, in any such case the investigation, proceeding,
complaint, order, directive, claim, citation or notice is terminated,
dismissed or withdrawn within 30 days and Borrower has no liability or
potential liability resulting therefrom in excess of $10,000); and
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(iii) Borrower shall indemnify and hold harmless LaSalle, its
directors, officers, employees, agents, insurers, representatives,
successors and assigns, from and against any and all losses, claims,
damages, liabilities, costs, and expenses (including attorneys' fees
and legal expenses) directly or indirectly arising out of or
attributable to any violation of any Environmental Law or the use,
generation, manufacture, reproduction, storage, release, threatened
release, spill, discharge, disposal or presence of a Hazardous
Material, including the costs of any required or necessary repair,
cleanup or other remedial work with respect to any property of
Borrower, and the preparation and implementation of any closure,
remedial or other required plans. All covenants and indemnifications in
this subsection 14(s) shall survive the payment of the Liabilities and
the termination or nonrenewal of this Agreement.
(t) On or before January 15, 1999, Borrower shall cause Emerald
Technology Valuation, at Borrower's expense, to complete and deliver to LaSalle
a net liquidation value appraisal of Borrower's Inventory in form and substance
satisfactory to LaSalle. After review of the Appraisal, the Inventory Advance
Rate shall be adjusted in accordance with this Agreement.
(u) Borrower shall not make any prepayments of any indebtedness to
Scitex; provided, however, that so long as Borrower is in compliance with all
covenants in this Agreement, and such payments would not cause Borrower to be
out of compliance with any of such covenants, and (ii) so long as Borrower has
at least $1,500,000 of Excess Availability, will have at least $1,500,000 of
Excess Availability after such payments are made, and would have had average
Excess Availability of at least $1,500,000 on a pro forma basis for the 30 days
immediately preceding the date of payment, such pro forma Excess Availability to
be calculated as if such payments had been made on the 31st day prior to the
proposed date of payment, Borrower, after May 31, 1999, may make prepayments on
indebtedness to Scitex. After the occurrence and during the continuance of any
Default or Event of Default, Borrower shall not make any payments on
indebtedness to Scitex, including any scheduled payments of principal or
interest.
15. CONDITIONS PRECEDENT.
(a) The funding of the initial Revolving Loan and LaSalle's co-signing
as applicant for the initial Letter of Credit are subject to the satisfaction or
waiver on or before the Closing Date of the following conditions precedent:
(i) LaSalle shall have received each of the agreements,
opinions, reports, approvals, consents, certificates and other
documents which it requests in its discretion, including those set
forth on the closing document list attached hereto as Schedule 15(a)(i)
(the "Closing Agenda");
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(ii) Since September 30, 1997, no event shall have occurred
which has had or could reasonably be expected to have a Material
Adverse Effect, as determined by LaSalle in its sole discretion;
(iii) LaSalle shall have received payment in full of all fees
and expenses payable to it by Borrower on or before the Closing Date;
(iv) LaSalle shall have determined that immediately after
giving effect to (A) the making of the initial Revolving Loan requested
to be made on the Closing Date, (B) the issuance of the initial Letter
of Credit, if any, requested to be made on the Closing Date and (C) the
payment or reimbursement by Borrower of LaSalle for all closing costs
and expenses incurred in connection with the transactions contemplated
hereby, (D) the closing of the transactions provided for in the Asset
Purchase Agreement and all related agreements, and (E) the payment by
Borrower of all payments, costs, fees and expenses relating to the
Asset Purchase Agreement and the transactions provided for therein and
in all related agreements, including but not limited to all severance
and other payments to terminated employees, on a pro forma basis the
Excess Availability of Borrower shall not be less than Five Hundred
Thousand Dollars ($500,000);
(v) LaSalle shall have received a certificate from Borrower's
chief executive officer or chief financial officer, pursuant to which
such officer shall certify that in calculating the Excess Availability
described in clause (iv) above, none of Borrower's outstanding trade
payables were (and are) past due 30 days or more;
(vi) LaSalle shall continue to be satisfied with the assets,
books, records, financial and business conditions of Borrower;
(vii) LaSalle shall have entered into a subordination
agreement satisfactory to LaSalle with Scitex which subordination shall
cover not less than one million six hundred fifteen thousand dollars
($1,615,000) of indebtedness;
(viii) Borrower shall have received no less than $1.5 million
in new cash equity capital;
(ix) The transaction shall have received LaSalle's credit
approval;
(x) Borrower shall have its completed acquisition of the
assets of Scitex Digital Video, Inc. LaSalle shall have reviewed and
approved all terms, conditions, and documents relating to such
acquisition and any related transactions; and
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(xi) LaSalle shall have determined in its sole discretion that
the fair saleable value of Borrower's assets will exceed its
liabilities as of the funding of the initial Revolving Loan and that
Borrower will have sufficient working capital to pay its debts as they
become due.
(b) After the Closing Date, the making of any requested Revolving Loan
or LaSalle's co-signing as applicant for any requested Letter of Credit shall be
subject to the satisfaction of the conditions precedent set forth below. Each
such request shall constitute a representation and warranty that such conditions
are satisfied:
(i) All representations and warranties contained in this
Agreement and the Other Agreements shall be true and correct on and as
of the date of such request, as if then made, other than
representations and warranties that relate solely to an earlier date;
(ii) No Default or Event of Default shall have occurred, or
would result from the making of the requested Revolving Loan or the
issuance of the requested Letter of Credit, which has not been waived;
and
(iii) Since the Closing Date, no event has occurred which has
had or could reasonably be expected to have a Material Adverse Effect.
16. DEFAULT. The occurrence of any one or more of the following events
shall constitute an "Event of Default" hereunder:
(a) the failure of any Obligor to pay when due, or when declared due by
LaSalle in accordance with the terms hereof, any of the Liabilities;
(b) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor under
this Agreement or any of the Other Agreements;
(c) the making or furnishing by any Obligor to LaSalle of any
representation, warranty, certificate, schedule, report or other communication
within or in connection with this Agreement or the Other Agreements or in
connection with any other agreement between such Obligor and LaSalle, which is
untrue or misleading in any respect, or the failure of any Obligor to perform,
keep or observe any of the covenants, conditions, promises, or agreements of
such Obligor under any other agreement with any Person if such failure has or is
reasonably likely to have a Material Adverse Effect;
(d) the creation (whether voluntary or involuntary) of, or any attempt
to create, any lien or other encumbrance upon any of the Collateral, other than
the Permitted Liens, or the making or any attempt to make any levy, seizure or
attachment thereof;
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(e) the commencement of any proceedings (i) in bankruptcy by or against
any Obligor, (ii) for the liquidation or reorganization of any Obligor, (iii)
alleging that such Obligor is insolvent or unable to pay its debts as they
mature, or (iv) for the readjustment or arrangement of any Obligor's debts,
whether under the United States Bankruptcy Code or under any other law, whether
state or federal, now or hereafter existing for the relief of debtors, or the
commencement of any analogous statutory or non-statutory proceedings involving
any Obligor; provided, however, that if such commencement of proceedings against
such Obligor is involuntary, such action shall not constitute an Event of
Default unless such proceedings are not dismissed within thirty (30) days after
the commencement of such proceedings;
(f) the appointment of a receiver or trustee for any Obligor, for any
of the Collateral or for any substantial part of any Obligor's assets or the
institution of any proceedings for the dissolution, or the full or partial
liquidation, or the merger or consolidation, of any Obligor which is a
corporation or a partnership; provided, however, that if such appointment or
commencement of proceedings against such Obligor is involuntary, such action
shall not constitute an Event of Default unless such appointment is not revoked
or such proceedings are not dismissed within thirty (30) days after the
commencement of such proceedings;
(g) the entry of any judgment or order in excess of $50,000 against any
Obligor which remains unsatisfied or undischarged and in effect for thirty (30)
days after such entry without a stay of enforcement or execution;
(h) the occurrence of an event of default under, or the revocation or
termination of, any agreement, instrument or document executed and delivered by
any Person to LaSalle pursuant to which such Person has guaranteed to LaSalle
the payment of all or any of the Liabilities or has granted LaSalle a security
interest in or lien upon some or all of such Person's real and/or personal
property to secure the payment of all or any of the Liabilities, or the death of
any such Person;
(i) the occurrence of an event of default under any other agreement or
instrument evidencing indebtedness for borrowed money in excess of $25,000
executed or delivered by Borrower or pursuant to which agreement or instrument
Borrower or its properties is or may be bound;
(j) a Change of Control shall have occurred; or
(k) the occurrence of a material adverse change in Borrower's business,
assets, prospects or financial condition, or the occurrence of any other event
or condition which has or is reasonably likely to have a Material Adverse
Effect.
Notwithstanding anything contained in this paragraph 16 or contained in
any other provision of this Agreement or Other Agreements to the contrary, in
the event of the institution of any proceedings described in paragraphs 16(e) or
16(f) hereof against Borrower, LaSalle may cease to make advances to Borrower
during the thirty (30) day grace periods provided in paragraphs 16(e) and 16(f).
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17. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Upon the occurrence of an Event of Default described in paragraphs
16(e) and 16(f) hereof, all of the Liabilities shall immediately and
automatically become due and payable, without notice or demand of any kind. Upon
the occurrence of any other Event of Default, all of the Liabilities may, at the
option of LaSalle, and without demand, notice or legal process of any kind, be
declared, and immediately shall become, due and payable.
(b) Upon the occurrence of an Event of Default, LaSalle may exercise
from time to time any rights and remedies available to it under the Uniform
Commercial Code and any other applicable law in addition to, and not in lieu of,
any rights and remedies expressly granted in this Agreement or in any of the
Other Agreements and all of LaSalle's rights and remedies shall be cumulative
and non-exclusive to the extent permitted by law. In particular, but not by way
of limitation of the foregoing, LaSalle may, without notice, demand or legal
process of any kind, take possession of any or all of the Collateral (in
addition to Collateral of which it already has possession), wherever it may be
found, and for that purpose may pursue the same wherever it may be found, and
may enter into any of Borrower's premises where any of the Collateral may be,
and search for, take possession of, remove, keep and store any of the Collateral
until the same shall be sold or otherwise disposed of, and LaSalle shall have
the right to store the same at any of Borrower's premises without cost to
LaSalle. At LaSalle's request, Borrower shall, at Borrower's expense, assemble
the Collateral and make it available to LaSalle at one or more places to be
designated by LaSalle and reasonably convenient to LaSalle and Borrower.
Borrower recognizes that if Borrower fails to perform, observe or discharge any
of its Liabilities under this Agreement or the Other Agreements, no remedy at
law will provide adequate relief to LaSalle, and Borrower agrees that LaSalle
shall be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages. Any notification of intended
disposition of any of the Collateral required by law will be deemed reasonably
and properly given if given at least ten (10) calendar days before such
disposition. Any proceeds of any disposition by LaSalle of any of the Collateral
may be applied by LaSalle to the payment of expenses in connection with the
Collateral including, without limitation, legal expenses and reasonable
attorneys' fees (both in-house and outside counsel) and any balance of such
proceeds may be applied by LaSalle toward the payment of such of the
Liabilities, and in such order of application, as LaSalle may from time to time
elect.
18. INDEMNIFICATION. Borrower agrees to defend (with counsel reasonably
satisfactory to LaSalle), protect, indemnify and hold harmless LaSalle, each
affiliate or subsidiary of LaSalle, and each of their respective officers,
directors, employees, attorneys and agents (each an "Indemnified Party") from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature (including, without limitation, the disbursements and the reasonable
fees of counsel for each Indemnified Party in connection with any investigative,
administrative or judicial proceeding, whether or not the Indemnified Party
shall be designated a party thereto), which may be imposed on, incurred by, or
asserted against, any Indemnified Party (whether direct, indirect or
consequential and whether based on any federal, state or local laws or
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regulations including, without limitation, securities, environmental and
commercial laws and regulations, under common law or in equity, or based on
contract or otherwise) in any manner relating to or arising out of this
Agreement or any Other Agreement, or any act, event or transaction related or
attendant thereto, the Collateral, the making and the management of the Loans or
any Letters of Credit or the use or intended use of the proceeds of the Loans or
any Letters of Credit; provided, however, that Borrower shall not have any
obligation hereunder to any Indemnified Party with respect to matters caused by
or resulting solely from the willful misconduct or gross negligence of such
Indemnified Party. To the extent that the undertaking to indemnify set forth in
the preceding sentence may be unenforceable because it is violative of any law
or public policy, Borrower shall satisfy such undertaking to the maximum extent
permitted by applicable law. Any liability, obligation, loss, damage, penalty,
cost or expense covered by this indemnity shall be paid to each Indemnified
Party on demand, and, failing prompt payment, shall, together with interest
thereon at the highest rate then applicable to Revolving Loans hereunder from
the date incurred by each Indemnified Party until paid by Borrower, be added to
the Liabilities of Borrower and be secured by the Collateral. The provisions of
this paragraph 18 shall survive the satisfaction and payment of the other
Liabilities and the termination of this Agreement.
19. NOTICES. All written notices and other written communications with
respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by telecopy or delivered in person, and in the case of LaSalle shall be
sent to it at One Centerpointe Drive, Suite 100, Lake Oswego, Oregon 97035,
Attention: Robert C. Alexander (if by telecopy to (503) 684-4665), and in the
case of Borrower shall be sent to Borrower at its principal place of business as
set forth on the first page of this Agreement (if by telecopy to (650)
327-2511); provided, however, that either party may designate another address or
contact person for itself from time to time by notice given as provided in this
paragraph.
20. CHOICE OF GOVERNING LAW AND CONSTRUCTION. This Agreement and the Other
Agreements are submitted by Borrower to LaSalle for LaSalle's acceptance or
rejection as an offer by Borrower to borrow monies from LaSalle now and from
time to time hereafter, and shall not be binding upon LaSalle or become
effective until accepted by LaSalle, in writing. THIS AGREEMENT AND THE OTHER
AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF
OREGON AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN
ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST
RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN
THE COLLATERAL, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE
RELEVANT JURISDICTION. If any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or remaining provisions of this
Agreement.
21. FORUM SELECTION AND SERVICE OF PROCESS. To induce LaSalle to accept
this Agreement, Borrower irrevocably agrees that, subject to LaSalle's sole and
absolute
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election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT
OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL
SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN CLACKAMAS OR MULTNOMAH
COUNTIES, STATE OF OREGON. BORROWER HEREBY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID COUNTIES
AND STATE. Borrower waives personal service of any process and consents that all
such service of process may be made by certified mail, return receipt requested,
directed to Borrower at the address indicated in LaSalle's records; and service
so made shall be complete five (5) days after the same has been deposited in the
U.S. mail. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE
THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY LASALLE IN ACCORDANCE
WITH THIS PARAGRAPH.
22. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the Other
Agreements may not be modified, altered or amended except by an agreement in
writing signed by Borrower and LaSalle. Borrower may not sell, assign or
transfer this Agreement, or the Other Agreements or any portion thereof
including, without limitation, Borrower's rights, titles, interest, remedies,
powers or duties thereunder. Borrower hereby consents to LaSalle's sale,
assignment, transfer or other disposition, at any time and from time to time
hereafter, of this Agreement, or the Other Agreements, or of any portion
thereof, or participations therein including, without limitation, LaSalle's
rights, titles, interests, remedies, powers and/or duties thereunder. Borrower
agrees that it shall execute and deliver such documents as LaSalle may request
in connection with any such sale, assignment, transfer or other disposition.
23. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this
Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.
24. POWER OF ATTORNEY. Borrower acknowledges and agrees that its
appointment of LaSalle as its attorney and agent-in-fact for the purposes
specified in this Agreement is an appointment coupled with an interest and shall
be irrevocable until all of the Liabilities are paid in full and this Agreement
is terminated.
25. WAIVER OF JURY TRIAL; OTHER WAIVERS.
(a) LASALLE AND BORROWER HEREBY WAIVE ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS
AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY
ALLEGED TORTIOUS CONDUCT OF BORROWER OR LASALLE OR WHICH, IN ANY WAY, DIRECTLY
OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND
LASALLE. IN NO EVENT SHALL
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LASALLE BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
(b) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND
PRIOR TO THE EXERCISE BY LASALLE OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF
BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
(c) Borrower hereby waives demand, presentment, protest and notice of
nonpayment with respect to any promissory note or other instrument, and further
waives the benefit of all valuation, appraisal and exemption laws.
(d) LaSalle's failure, at any time or times hereafter, to exercise any
of its rights or remedies (including the right to establish reserves or adjust
advance rates) or to require strict performance by Borrower of any provision of
this Agreement or any of the Other Agreements shall not waive, affect or
diminish any right of LaSalle thereafter to exercise such rights or remedies or
to demand strict compliance and performance therewith. Any suspension or waiver
by LaSalle of an Event of Default under this Agreement or any default under any
of the Other Agreements shall not suspend, waive or affect any other Event of
Default under this Agreement or any other default under any of the Other
Agreements, whether the same is prior or subsequent thereto and whether of the
same or of a different kind or character. No delay on the part of LaSalle in the
exercise of any right or remedy under this Agreement or any Other Agreement
shall preclude other or further exercise thereof or the exercise of any other
right or remedy. None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the Other
Agreements and no Event of Default under this Agreement or default under any of
the Other Agreements shall be deemed to have been suspended or waived by LaSalle
unless such suspension or waiver is in writing, signed by a duly authorized
officer of LaSalle and directed to Borrower specifying such suspension or
waiver.
26. ADVERTISING. Subject to Borrower's prior consent, LaSalle may use
Borrower's name and trade names, together with variants of such name and related
logotypes in advertising promoting LaSalle and the business transaction between
LaSalle and Borrower through the use of so-called "tombstones" and similar
publicity. Borrower hereby releases LaSalle and its parent, subsidiaries,
affiliates, officers, employees and advertising agents, from any and all
liability to Borrower arising out of or related to the exercise of the rights
granted to LaSalle in this section.
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27. BORROWER'S ACKNOWLEDGMENT. Borrower hereby acknowledges that it has
read and fully understands and accepts this Agreement and each and every
provision hereof. Borrower acknowledges that this Agreement and the Other
Agreements have been prepared by Tonkon Torp LLP on behalf of, and as counsel
for, LaSalle. Borrower further acknowledges that it has had a full and adequate
opportunity to have this Agreement reviewed by other attorneys of its choosing
and by all such other professionals of its choosing as Borrower has deemed
appropriate.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY
LASALLE AFTER OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS
WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY
THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED
BY LASALLE TO BE ENFORCEABLE.
ACCOM, INC.
By: /s/ Junaid Sheikh
-----------------------------------------
Title: CEO
------------------------------------
LASALLE BUSINESS CREDIT, INC.
By: /s/ Robert Alexander
-----------------------------------------
Title: V.P.
------------------------------------
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STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT, dated as of December 10, 1998, is
made by ACCOM, INC., a corporation organized under the laws of the state of
Delaware ("Pledgor"), in favor of LASALLE BUSINESS CREDIT, INC., a corporation
organized under the laws of the state of Delaware ("Lender").
RECITALS
A. Lender has entered into, or is preparing to enter into, a
Loan and Security Agreement with Pledgor. Such Loan and Security Agreement, as
it now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced, is referred to herein as the "Loan Agreement."
Capitalized terms not otherwise defined herein shall have the meanings provided
in the Loan Agreement.
B. As a condition to the making of Loans and the provision of
other financial accommodations pursuant to the Loan Agreement and Other
Agreements, Lender requires that Pledgor pledge and grant to Lender a first
priority security interest in all of the capital stock of Accom Virtual Studio,
Inc., a Delaware corporation ("AVS"), Accom Europe, Ltd., a United Kingdom
corporation, Accom International, Inc., a Barbados corporation, Accom Virtual
Studio GmbH, a German corporation ("AVS GmbH"), ELSET Electronic-Set GmbH, a
German corporation, which is owned by AVS and AVS GmbH, Accom Poland,
s.p.z.o.o., a Polish corporation, which is owned by AVS (collectively, the
"Subsidiaries").
AGREEMENT
Therefore, for valuable consideration, receipt and sufficiency
of which are acknowledged, Pledgor and Lender have agreed as follows:
1. Pledge. To secure payment and performance of the
Liabilities described in Section 2 below, Pledgor hereby irrevocably and
unconditionally pledges, assigns, hypothecates and transfers to Lender, and
grants to Lender a first and prior pledge and security interest in (a) all
shares of capital stock of each and every one of the Subsidiaries now or
hereafter owned beneficially or of record by Pledgor, including but not limited
to the shares described in Exhibit A attached hereto, (b) all proceeds thereof,
and (c) all distributions, dividends, increases and profits received therefrom
(collectively, the "Collateral").
2. Liabilities Secured. The Collateral shall secure payment
and performance of the following (collectively, the "Liabilities"):
a. All Revolving Loans and all other obligations,
liabilities and indebtedness of every kind, nature and description
owing by Pledgor to Lender and/or its affiliates, including principal,
interest, charges, fees, costs and expenses, however evidenced, whether
as principal, surety, endorser, guarantor or otherwise, whether arising
<PAGE>
under the Loan Agreement or otherwise, whether now existing or
hereafter arising, whether arising before, during or after the initial
or any renewal term of the Loan Agreement or after the commencement of
any case with respect to Pledgor under the United States Bankruptcy
Code or any similar statute (including the payment of interest and
other amounts which would accrue and become due but for the
commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due,
primary or secondary, liquidated or unliquidated, secured or unsecured,
and however acquired by Lender; and
b. All costs incurred by Lender to enforce this
Agreement, the Loan Agreement and the Other Agreements, and the pledge
and security interest granted hereby, to collect the Liabilities, and
to maintain, preserve, collect and enforce the Collateral, including
without limitation taxes, assessments, attorneys' fees, and expenses of
sale.
3. Representations and Warranties. Pledgor represents and
warrants that (a) it is the sole legal and beneficial owner of the Collateral;
(b) it has full power, authority and legal right to execute, deliver and perform
this Agreement; (c) the shares of stock pledged hereunder are duly authorized,
validly issued, fully paid and nonassessable; and (d) the pledge, assignment and
delivery of the Collateral create a valid first and prior perfected security
interest in the Collateral, and no other security agreement covering the
Collateral, or any part thereof, has been made, and no pledge or security
interest, other than the one herein created, has attached or been perfected in
the Collateral or in any part thereof. The delivery at any time by Pledgor to
Lender of Collateral shall constitute a representation and warranty by Pledgor
under this Agreement that, with respect to such Collateral, and each item
thereof, Pledgor is the sole legal and beneficial owner of the Collateral, and
that the matters warranted in this paragraph are then true and correct.
4. Covenants.
a. Affirmative Covenants. Pledgor covenants and
agrees (i) promptly to deliver to Lender all instruments, certificates,
documents or agreements evidencing any of the Collateral, together with
executed stock powers or assignments in form acceptable to Lender with
respect to all shares of capital stock included in the Collateral; (ii)
from time to time promptly to execute and deliver to Lender all such
other assignments, certificates, supplemental writings and financing
statements, and do all other acts or things, as Lender may request in
order more fully to evidence and perfect the security interest and
pledge herein created or to effect the purposes of this Agreement;
(iii) promptly to furnish Lender with any information or writings which
Lender may request concerning the Collateral; (iv) to allow Lender to
inspect all records of Pledgor relating to the Collateral, and to make
and take away copies of such records, at Pledgor's expense, at such
reasonable times and as often as may be reasonably requested by Lender;
(v) promptly to notify Lender of any change in any fact or
circumstances warranted or represented by Pledgor in this Agreement or
in any other writings furnished by or on
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behalf of Pledgor to Lender in connection with the Collateral; and (vi)
promptly to notify Lender of any claim, action or proceeding affecting
title to the Collateral, or any part thereof, or Lender's interest
therein, and, at the request of Lender, to appear in and defend, at
Pledgor's expense, any such action or proceeding.
b. Negative Covenants. Pledgor covenants and agrees
that Pledgor will not (i) sell, assign or transfer any of Pledgor's
rights in the Collateral; (ii) create any other security interest or
pledge in, mortgage on, or otherwise encumber the Collateral or any
part thereof, or permit the same to be or become subject to any lien,
attachment, execution, sequestration, other legal or equitable process,
or any encumbrance of any kind or character; or (iii) cause, permit, or
suffer to be taken any action that would cause Pledgor to own less than
100 percent of the outstanding capital stock of any of the
Subsidiaries.
5. Rights to Dividends and Distributions. With respect to such
instruments which are stock certificates, bonds or other securities, Lender may
demand of the corporate obligor issuing the same, and may receive and receipt
for, any and all stock dividends and other distributions (other than cash
dividends) payable in respect thereof, whether ordinary or extraordinary. Lender
shall have the authority, following an Event of Default and without notice to
Pledgor, to have such certificates, bonds or other securities registered either
in Lender's name or in the name of a nominee. If, while this Agreement is in
effect, Pledgor shall become entitled to receive or shall receive any stock
certificate (including, without limitation, any certificate representing a stock
dividend or a distribution in connection with any reclassification, increase or
reduction of capital, or issued in connection with any reorganization), option
or rights, whether as an addition to, in substitution of, as a conversion of or
in exchange for any of the Collateral, or otherwise, Pledgor agrees to accept
the same as Lender's agent and to hold the same in trust on behalf of and for
the benefit of Lender, and to deliver the same forthwith to Lender in the exact
form received, with appropriate undated stock powers, duly executed in blank, to
be held by Lender, subject to the terms hereof, as additional Collateral for the
Liabilities. Until an Event of Default shall have occurred, Pledgor shall be
entitled to receive all cash dividends paid in respect of the Collateral. After
the occurrence of an Event of Default, Lender shall be entitled to all cash
dividends, and to any sums paid upon or in respect of the Collateral upon the
liquidation, dissolution or reorganization of the issuer thereof which shall be
paid to Lender to be held by it as additional Collateral for the Liabilities. In
case any distribution shall be made on or in respect of the Collateral pursuant
to the reorganization, liquidation or dissolution of the issuer thereof, the
property so distributed shall be delivered to Lender to be held by it as
additional Collateral for the Liabilities. After an Event of Default, all sums
of money and property so paid or distributed in respect of the Collateral which
are received by Pledgor shall, until paid or delivered to Lender, be held by
Pledgor in trust as additional Collateral for the Liabilities.
6. Preservation of Collateral. Lender shall not have any duty
to fix or preserve rights against prior parties to the Collateral, nor be liable
for any delay in the collection of, or failure to use diligence to collect on,
the Liabilities or any amount payable in respect of the Collateral.
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7. Performance by Lender. Should Pledgor fail to perform any
covenant, duty or agreement of Pledgor in accordance with the terms of this
Agreement, Lender may, but shall not be obligated to, perform or attempt to
perform such covenant, duty or agreement on behalf of Pledgor, and any amount
expended by Lender in such performance or attempted performance shall become a
part of the Liabilities, shall be payable upon demand and shall bear interest at
a per annum rate equal to the highest rate payable under the Loan Agreement.
8. Voting Rights. It is expressly understood and agreed that
Pledgor shall retain all voting rights with respect to the Collateral until the
occurrence of an Event of Default, at which time such voting rights shall
transfer to Lender, at its sole discretion; provided, however, that no voting or
corporate rights shall be exercised, vote cast, or consent, waiver or
ratification given or action taken by Pledgor that would impair the Collateral
or be inconsistent with or violate any provision of this Agreement or any Other
Agreements.
9. Power of Attorney. PLEDGOR HEREBY IRREVOCABLY GRANTS TO
LENDER PLEDGOR'S PROXY (EXERCISABLE FROM AND AFTER THE OCCURRENCE OF AN EVENT OF
DEFAULT WHICH IS CONTINUING) TO VOTE ANY COLLATERAL AND APPOINTS LENDER
PLEDGOR'S ATTORNEY-IN-FACT WITH POWER OF SUBSTITUTION TO PERFORM ALL LIABILITIES
OF PLEDGOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF LENDER'S RIGHTS
HEREUNDER. THE PROXY AND POWER OF ATTORNEY HEREIN GRANTED (INCLUDING ANY
EVIDENCED BY A SEPARATE WRITING) ARE COUPLED WITH AN INTEREST AND ARE
IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF THE LIABILITIES.
10. Rights and Remedies. Upon the occurrence of an Event of
Default, in addition to any and all other rights and remedies which Lender may
then have hereunder, under any Other Agreements, under applicable law or
otherwise, Lender at its option may, subject to any limitation or restriction
imposed by any applicable bankruptcy, insolvency or other law relating to the
relief of debtors, (a) obtain from any Person information regarding Pledgor, any
issuer of the Collateral, or any of their businesses, which information any such
Person may furnish without liability to Pledgor; (b) require Pledgor to give
possession or control of any of the Collateral to Lender; (c) take control of
funds generated by the Collateral and any other proceeds and exercise all other
rights which an owner of such Collateral may exercise; (d) declare the entire
unpaid balance of principal and interest of the Liabilities immediately due and
payable, without notice, demand or presentment, which are hereby expressly
waived; (e) reduce its claim to judgment, foreclose or otherwise enforce its
security interest in all or any part of the Collateral by any available judicial
procedure; (f) after notification, if any, provided for in this Agreement or any
Other Agreements, sell or otherwise dispose of, at the office of Lender, or at
such other location as Lender may select, all or any part of the Collateral, and
any such sale or other disposition shall be in accordance with applicable law,
and may be as a unit or in parcels, by public or private proceedings, and by way
of one or more contracts (it being agreed that the sale of any part of the
Collateral shall not exhaust Lender's power of sale, but sales may be made from
time to time until all of the Collateral has been sold or until the Liabilities
have been paid in full), and at any such sale it shall not be necessary to
exhibit the Collateral; (g) at its discretion, retain the Collateral in
satisfaction of the Liabilities whenever the circumstances are such that Lender
is
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entitled to do so under applicable law; (h) apply by appropriate judicial
proceedings for appointment of a receiver for the Collateral, or any part
hereof, and Pledgor hereby consents to any appointment; (i) buy the Collateral
at any public sale; and (j) buy the Collateral at any private sale, subject to
any restrictions imposed by applicable law. Pledgor agrees that, if notice is
required to be given by applicable law, 20 days' advance written notice shall
constitute reasonable notice. Lender shall apply the proceeds of any collection,
sale, disposition or other realization upon any Collateral as follows:
First, to the payment of the costs and expenses of
such collection, sale, disposition, or other realization,
including reasonable out-of-pocket costs and expenses of
Lender and the fees and expenses of its agents and counsel;
Next, to the payment of the Liabilities; and
Finally, to the payment to Pledgor, or its successors
or assigns, or as a court of competent jurisdiction may
direct, of any surplus then remaining.
If the proceeds of collection, sale, disposition, or other realization are
insufficient to cover the costs and expenses of such realization and the payment
in full of the Liabilities, Pledgor shall be liable for any deficiency.
11. Securities Laws; Transfer.
a. Immediately upon the occurrence of a Event of
Default, Pledgor hereby grants to Lender the right to have the
Collateral, or any portion thereof, registered and sold under the
Securities Act of 1933, as amended ("Securities Act"), or under any
applicable state blue sky laws. If Lender shall determine to exercise
its right to sell any or all of the Collateral pursuant to the terms
hereof, and if in the reasonable opinion of Lender it is necessary or
advisable to have the Collateral (or that portion thereof to be sold)
registered under the provisions of the Securities Act, Pledgor will
cause the issuer of the Collateral to execute and deliver, and cause
the directors and officers thereof to execute and deliver all such
instruments and documents, and to do or cause to be done all such other
acts and things as may be necessary or, in the opinion of Lender
advisable, to register such Collateral under the provisions of the
Securities Act and to cause the registration statement relating thereto
to become effective and to remain effective for a period of one year
from the date of the first public offering of such Collateral, or that
portion thereof to be sold, and to make all amendments thereto and/or
to the related prospectus which, in the opinion of Lender, are
necessary or advisable, all in conformity with the requirements of
applicable law. Pledgor shall be liable for any costs and expenses
incurred in connection with the registration of the Collateral pursuant
to this paragraph (a). Pledgor agrees to cause the issuer of the
Collateral to comply with the provisions of the securities or "blue
sky" laws of any jurisdiction which Lender shall designate and to cause
the issuer of the Collateral to make available to its security holders,
as soon as practicable, an earnings statement which will satisfy the
provisions of Section 11(a) of the Securities Act.
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b. Pledgor recognizes that Lender may be unable to
effect a public sale of any or all of the Collateral by reason of
certain prohibitions contained in the Securities Act and applicable
state securities laws, but may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers who will be
obliged to agree, among other things, to acquire such Collateral for
their own account for investment and not with a view to the
distribution or resale thereof. Pledgor acknowledges and agrees that
any such private sale conducted in the manner described herein may
result in prices and other terms less favorable to the seller than if
such sale were a public sale. Lender shall be under no obligation to
delay a sale of any of the Collateral for the period of time necessary
to permit the issuer of the Collateral to register such Collateral for
public sale under the Securities Act, or under applicable state
securities laws, even if the issuer of the Collateral would agree to do
so.
c. Pledgor further agrees to do or cause to be done
all such other acts and things as may be necessary to make any sales of
any portion or all of the Collateral pursuant to paragraphs (a) and (b)
of this Section valid and binding and in compliance with any and all
applicable laws (including, without limitation, the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission applicable thereto), regulations,
orders, writs, injunctions, decrees or awards of any and all courts,
arbitrators or governmental instrumentalities, domestic or foreign,
having jurisdiction over any such sale or sales. Pledgor further agrees
that a breach of any of the covenants contained in this section will
cause irreparable injury to Lender and that Lender may not have an
adequate remedy at law in respect of such breach. As a consequence,
Pledgor agrees that each and every covenant contained in this section
shall be specifically enforceable against Pledgor. Pledgor hereby
waives and agrees not to assert any defenses against an action for
specific performance of such covenants.
d. Pledgor agrees (i) that in the event Lender shall,
upon any Event of Default, sell the Collateral or any portion thereof,
at a private sale or sales, Lender shall have the right to rely upon
the advice and opinion of a member of a nationally recognized
investment banking firm acceptable to Lender, as to the best price
reasonably obtainable upon such a private sale thereof, and (ii) in the
absence of fraud, willful misconduct and gross negligence, that such
reliance shall be conclusive evidence that Lender handled such matter
in a commercially reasonable manner under the Uniform Commercial Code.
12. Notice. Notification of the time and place of any public
sale of the Collateral, or reasonable notification of the time after which any
private sale or other intended disposition of the Collateral is to be made,
shall be sent to Pledgor and to any other Person entitled under applicable law
to notice.
13. Lender's Duties. The powers conferred on Lender hereunder
are solely to protect its interest in the Collateral and Lender shall not have
any duty to exercise any such powers. Except for the safe custody of any
Collateral in its possession and the accounting for monies actually received by
it hereunder, Lender shall have no duty as to any Collateral, as to
6
<PAGE>
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders, or other matters relative to any Collateral, whether or not
Lender has or is deemed to have knowledge of such matters, or as to the taking
of any necessary steps to preserve rights against prior parties or any other
rights pertaining to any reasonable care in the custody and preservation of any
Collateral in its possession if such Collateral is accorded treatment
substantially equal to that which Lender accords its own property. Except as set
forth herein, Lender shall not have any duty or liability to protect or preserve
any Collateral or to preserve rights pertaining thereto. Nothing contained in
this Agreement shall be construed as requiring or obligating Lender, and Lender
shall not be required or obligated, (a) to present or file any claim or notice
or take any action, with respect to any Collateral or in connection therewith or
(b) to notify Pledgor of any decline in the value of any Collateral.
14. Cumulative Rights. All rights and remedies of Lender
hereunder are cumulative of each other and of every other right or remedy which
Lender may otherwise have at law or in equity or under any other contract or
other writing for the enforcement of the pledge and security interest herein
granted or the collection of the Liabilities, and the exercise of one or more
rights or remedies shall not prejudice or impair the concurrent or subsequent
exercise of other rights or remedies.
15. Waiver. Should any part of the Liabilities be payable in
installments, the acceptance at any time and from time to time of partial
payment of the aggregate amount of all installments then matured shall not be
deemed a waiver of any Event of Default then existing. No waiver by Lender of
any Event of Default shall be deemed to be a waiver of any other subsequent
Event of Default, nor shall any such waiver by Lender be deemed to be a
continuing waiver. No delay or omission by Lender in exercising any right or
power hereunder, or under any Other Agreements, shall impair any such right or
power or be construed as a waiver thereof or an acquiescence therein, nor shall
any single or partial exercise of any such right or power preclude other or
further exercise thereof, or the exercise of any other right or power of Lender
hereunder or under such other writings.
16. Interest: Limitation of Law. No provision herein or in any
Other Agreements shall require the payment or permit the collection of interest
in excess of the maximum permitted by applicable law. If, in any contingency
whatsoever, Lender shall receive anything of value from Pledgor deemed interest
under applicable law which would exceed the maximum amount of interest
permissible under applicable law, the pertinent provisions of the Loan Agreement
shall govern.
17. Parties Bound. This Agreement shall be binding on Pledgor
and its successors and assigns, and shall inure to the benefit of Lender, and
its successors and assigns; provided, however, that Pledgor may not assign its
rights or delegate its Liabilities hereunder without the prior written consent
of Lender. The rights, powers and interests held by Lender hereunder may be
transferred and assigned by Lender, in whole or in part, at such time and upon
such terms as permitted by the Loan Agreement.
7
<PAGE>
18. Notice. Except as otherwise provided herein, notice shall
be deemed effective if sent by certified mail, return receipt requested, postage
prepaid, or by a reputable commercial overnight delivery service, to the address
of Pledgor given on the signature page below.
19. Waivers by Pledgor. Pledgor waives all rights of appraisal
or valuation and waives any requirement that Lender exhaust any right or take
any action against any other Person or any collateral or pursue any other remedy
in Lender's power whatsoever before exercising its rights under this Agreement.
20. Modifications. No provision hereof shall be modified or
limited except by a written agreement expressly referring hereto and to the
provisions so modified or limited and signed by Lender.
21. Pledge Absolute. The pledge, assignment and security
interest granted pursuant to this Agreement shall be absolute and unconditional
irrespective of, and shall not be impaired, modified or otherwise affected by:
a. the taking or accepting of any other security or
guaranty for any or all of the Liabilities;
b. any increase, reduction or payment at any time or
from time to time of any part of the Liabilities;
c. any lack of validity or enforceability of the Loan
Agreement or any of the Other Agreements or other agreement or
instrument relating thereto, including but not limited to the
unenforceability of all or any part of the Liabilities by reason of the
fact that (i) the Liabilities, and/or the interest paid or payable with
respect thereto, exceeds the amount permitted by applicable law, (ii)
the act of creating the Liabilities, or any part thereof, is ultra
vires, (iii) the officers creating same acted in excess of their
authority, or (iv) for any other reason;
d. any lack of corporate power of Pledgor or any
other Person at any time liable for the payment of any or all of the
Liabilities;
e. any insolvency, bankruptcy, reorganization,
receivership or other proceeding under any applicable liquidation,
conservatorship, bankruptcy, moratorium, arrangement, receivership,
insolvency, reorganization, or similar laws from time to time in effect
affecting the rights of creditors generally (collectively, "Debtor
Relief Laws") involving Pledgor or the issuer of any of the Collateral;
f. any renewal, compromise, extension, acceleration
or other change in the time, manner or place of payment of, or in any
other term of, all or any of the Liabilities; any adjustment,
indulgence, forbearance, or compromise that may be granted or given by
Lender to Pledgor, or any Person at any time liable for the payment of
any or
8
<PAGE>
all of the Liabilities; or any other modification, amendment, or waiver
of or any consent to departure from the Loan Agreement, or any of the
Other Agreements and any other agreement or instrument relating
thereto;
g. any exchange, release, sale, subordination, or
non-perfection of any collateral or any lack of validity or
enforceability or change in priority, destruction, reduction, or loss
or impairment of value of any collateral;
h. any release or amendment or waiver of or consent
to departure from any guaranty for all or any of the Liabilities;
i. the failure by Lender to make any demand upon or
to bring any legal, equitable, or other action against Pledgor or any
other Person, or the failure or delay by Lender to, or the manner in
which Lender shall, proceed to exhaust rights against any direct or
indirect security for the Liabilities;
j. any failure of Lender to notify Pledgor of any
renewal, extension, or assignment of the Liabilities or any part
thereof, or the release of any security, or of any other action taken
or refrained from being taken by any Lender; or
k. any payment by Pledgor to Lender is held to
constitute a preference under any Debtor Relief Law or if for any other
reason Lender is required to refund such payment or pay the amount
thereof to another Person.
22. Governing Law. The validity, interpretation and
enforcement of this Agreement and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of Oregon (without giving
effect to principles of conflicts of law).
23. Jurisdiction. Pledgor and Lender irrevocably consent and
submit to the jurisdiction of the Circuit Courts of the State of Oregon for
Multnomah County and Clackamas County and the United States District Court for
the District of Oregon and waive any objection based on venue or forum non
conveniens with respect to any action instituted therein arising under this
Agreement or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or the transactions related
hereto or thereto, in each case whether now existing or hereafter arising, and
whether in contract, tort, equity or otherwise, and agree that any dispute with
respect to any such matters shall be heard only in the courts described above
(except that Lender shall have the right to bring any action or proceeding
against Pledgor or its property in the courts of any other jurisdiction which
Lender deems necessary or appropriate in order to realize on the Collateral or
to otherwise enforce its rights against Pledgor or its property).
24. Service. Pledgor hereby waives personal service of any and
all process and consents that all such service of process may be made by
certified mail (return receipt requested) directed to Pledgor's address set
forth on the signature page hereof, and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited
9
<PAGE>
in the U.S. mails, or, at Lender's option, by service upon Pledgor in any other
manner provided under the rules of any such courts. Within thirty (30) days
after such service, Pledgor shall appear in answer to such process, failing
which Pledgor shall be deemed in default and judgment may be entered by Lender
against Pledgor for the amount of the claim and other relief requested.
25. Jury Trial Waiver. PLEDGOR AND LENDER EACH HEREBY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i)
ARISING UNDER THIS AGREEMENT OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR
THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. PLEDGOR
AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT
PLEDGOR OR LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT
WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
26. Limitation of Liability. Lender shall not have any
liability to Pledgor (whether in tort, contract, equity or otherwise), for
losses suffered by Pledgor in connection with, arising out of, or in any way
related to the transactions or relationships contemplated by this Agreement, or
any act, omission or event occurring in connection herewith, unless it is
determined by a final and non-appealable judgment or court order binding on
Lender, that the losses resulted solely from acts or omissions constituting
gross negligence or willful misconduct. In any such litigation, Lender shall be
entitled to the benefit of the rebuttable presumption that it acted in good
faith and with the exercise of ordinary care in the performance by it of the
terms of this Agreement.
27. Entire Agreement. THIS AGREEMENT, TOGETHER WITH THE OTHER
AGREEMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
BETWEEN THE PARTIES.
(Signatures on following page.)
10
<PAGE>
IN WITNESS WHEREOF, Pledgor and Lender have executed this
Pledge Agreement as of the date first above written.
ACCOM, INC.
By: /s/ Junaid Sheikh
----------------------------------
Title: CEO
-------------------------------
Address of Pledgor:
1490 O'Brien Drive
Menlo Park, CA 94025
LASALLE BUSINESS CREDIT, INC.
By: /s/ Robert Alexander
----------------------------------
Title: V.P.
-------------------------------
Address of Lender:
One Centerpointe Drive, Suite 100
Portland, OR 97035
<PAGE>
REVOLVING PROMISSORY NOTE
Amount $7,500,000 December 10, 1998
FOR VALUE RECEIVED, the Undersigned (jointly and severally, if
more than one) promises to pay to the order of LASALLE BUSINESS CREDIT, INC.
(hereinafter, together with any holder hereof, called "LaSalle"), at the main
office of the LaSalle, the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND
DOLLARS ($7,500,000) plus the aggregate unpaid principal amount of all advances
made by LaSalle to the Undersigned pursuant to and in accordance with Paragraph
2 of the Loan Agreement (as hereinafter defined) in excess of such amount, or,
if less, the aggregate unpaid principal amount of all advances made by LaSalle
to the Undersigned pursuant to and in accordance with Paragraph 2 of the Loan
Agreement. The Undersigned further promise(s) to pay interest on the outstanding
principal amount hereof on the dates and at the rates provided in the Loan
Agreement from the date hereof until payment in full hereof.
This Revolving Promissory Note is referred to in and was
delivered pursuant to that certain Loan and Security Agreement, as it may be
amended from time to time, together with all exhibits thereto, dated December
10, 1998, between LaSalle and the Undersigned (the "Loan Agreement"). All terms
which are capitalized and used herein and (which are not otherwise defined
herein) shall have the meanings ascribed to such terms in the Loan Agreement.
Prior to maturity, principal hereunder shall be payable
pursuant to the terms of the Loan Agreement. This Note shall immediately mature,
and the full remaining balance hereof shall become immediately due and payable
without demand, upon the earlier of the expiration or termination of the Loan
Agreement or the acceleration of the liabilities of the Undersigned pursuant to
terms of the Loan Agreement.
The Undersigned hereby authorize(s) LaSalle to charge any
account of the Undersigned for all sums due hereunder. If payment hereunder
becomes due and payable on a Saturday, Sunday or legal holiday under the laws of
the United States or the State of Oregon, the due date thereof shall be extended
to the next succeeding business day, and interest shall be payable thereon at
the rate specified during such extension. Credit shall be given for payments
made in the manner and at the times provided in the Loan Agreement. It is the
intent of the parties that the rate of interest and other charges to the
Undersigned under this Note shall be lawful; therefore, if for any reason the
interest or other charges payable hereunder are found by a court of competent
jurisdiction, in a final determination, to exceed the limit which LaSalle may
lawfully charge the Undersigned, then the obligation to pay interest or other
charges shall automatically be reduced to such limit and, if any amount in
excess of such limit shall have been paid, then such amount shall be refunded to
the Undersigned.
Principal of this Note may only be prepaid if the Undersigned
pays a prepayment fee as provided in the Loan Agreement.
<PAGE>
The Undersigned waive(s) the benefit of any law that would
otherwise restrict or limit LaSalle in the exercise of its right, which is
hereby acknowledged, to set-off against the Liabilities, without notice and at
any time hereafter, any indebtedness matured or unmatured owing from LaSalle to
the Undersigned. The Undersigned waive(s) every defense, counterclaim or setoff
which the Undersigned may now have or hereafter may have to any action by
LaSalle in enforcing this Note and/or any of the other Liabilities, or in
enforcing LaSalle's rights in the Collateral and ratifies and confirms whatever
LaSalle may do pursuant to the terms hereof and of the Loan Agreement and with
respect to the Collateral and agrees that LaSalle shall not be liable for any
error or omission unless caused by or resulting from the willful misconduct or
gross negligence of LaSalle.
The Undersigned, any other party liable with respect to the
Liabilities and any and all endorsers and accommodation parties, and each one of
them, if more than one, waive any and all presentment, demand, notice of
dishonor, protest, and all other notices and demands in connection with the
enforcement of LaSalle's rights hereunder.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL
LAWS OF THE STATE OF OREGON AS TO INTERPRETATION, ENFORCEMENT, VALIDITY,
CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT LIMITATION,
THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, and shall be binding upon
the Undersigned and the Undersigned's successors and assigns. If this Note
contains any blanks when executed by the Undersigned, LaSalle is hereby
authorized, without notice to the Undersigned, to complete any such blanks
according to the terms upon which the loan or loans were granted. Wherever
possible, each provision of this Note shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or be invalid under such law, such provision shall be
severable, and shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remaining provisions of this Note. If more
than one party shall execute this Note, the term "Undersigned" as used herein
shall mean all parties signing this Note, and each one of them, and all such
parties, their respective successors and assigns, shall be jointly and severally
obligated hereunder.
To induce LaSalle to make the loan evidenced by this Note, the
Undersigned (i) irrevocably agree(s) that, subject to LaSalle's sole and
absolute election, all actions arising directly or indirectly as a result or in
consequence of this Note or any other agreement with LaSalle, or the Collateral,
shall be instituted and litigated only in courts having situs in Clackamas or
Multnomah County, Oregon, (ii) hereby consent(s) to the exclusive jurisdiction
and venue of any State or Federal Court located and having its situs in said
counties, and (iii) waive(s) any objection based on forum non-conveniens. IN
ADDITION, THE UNDERSIGNED HEREBY WAIVE(S) TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, THE LIABILITIES,
THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY THE UNDERSIGNED OR LASALLE OR
WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE
RELATIONSHIP BETWEEN THE
2
<PAGE>
UNDERSIGNED AND LASALLE, waive(s) personal service of any and all process, and
consent(s) that all such service of process may be made by certified mail,
return receipt requested, directed to the Undersigned at the address indicated
in LaSalle's records; and service so made shall be complete five (5) days after
the same has been deposited in the U.S. mails as aforesaid.
As used herein, all provisions shall include the masculine,
feminine, neuter, singular and plural thereof, wherever the context and facts
require such construction and in particular the word "Undersigned" shall be so
construed.
IN WITNESS WHEREOF, each of the Undersigned, if more than one,
has executed this Note on the date above set forth.
ACCOM, INC.
By: /s/ Junaid Sheikh
----------------------------------------
Title: CEO
------------------------------------
3
EXHIBIT 21.1
Subsidiaries of the Company
Accom Europe Ltd.
Accom Virtual Studio, Inc.
Accom Virtual Studio (Germany) GmbH
ELSET Electronic-Set GmbH
Accom Poland Sp. Z o.o.
Accom Forign Sales Corporation
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-97538 and 333-23635) pertaining to the Accom, Inc. 1995 Stock
Option/Stock Issuance Plan, the Accom, Inc. Employee Stock Purchase Plan, and
the Accom, Inc. 1997 Non-Executive Stock Option Plan of our report dated October
30, 1998, except for note 9 as to which the date is December 10, 1998, with
respect to the consolidated financial statements and the schedule included in
this Annual Report (Form 10-K) of Accom, Inc.
Ernst & Young LLP
Palo Alto, California
December 28,1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 3,231,000
<SECURITIES> 0
<RECEIVABLES> 2,257,000
<ALLOWANCES> 237,000
<INVENTORY> 1,527,000
<CURRENT-ASSETS> 7,006,000
<PP&E> 3,666,000
<DEPRECIATION> 2,628,000
<TOTAL-ASSETS> 8,093,000
<CURRENT-LIABILITIES> 2,373,000
<BONDS> 0
0
0
<COMMON> 21,462,000
<OTHER-SE> (15,742,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,093,000
<SALES> 12,617,000
<TOTAL-REVENUES> 12,617,000
<CGS> 6,178,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,481,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180,000
<INCOME-PRETAX> (2,862,000)
<INCOME-TAX> (19,000)
<INCOME-CONTINUING> (2,881,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,881,000)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
