UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
Form 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended _______ or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from October 1, 1998 to December 31, 1998.
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
----------------------------------
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
----------------------------------
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 ___ NO _X_
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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $3,240,113 as of March 23, 1999, 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 10,123,247 shares of Registrant's Common Stock issued and
outstanding as of March 23, 1999.
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.
<PAGE>
PART I
In the fourth quarter of calendar 1998, the Registrant changed its
fiscal year end from September 30 to December 31. This Transition Report on Form
10-K is for the three-month period from October 1, 1998 through December 31,
1998 (the "Transition Period").
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 Suppliers," "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 Form 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(R), 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, integrated non-linear editing workstations, on-line video editing systems,
digital video effects systems, digital switchers 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.
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<TABLE>
The following table summarizes the Company's key products:
<CAPTION>
------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------
Dveous(TM) and Brutus Digital Video Effects systems for news and sports
------------------------------------------------------------------------------------------------------------------
8150 Switcher Digital switcher for on-line post production editing
for commercials and long form television programs
------------------------------------------------------------------------------------------------------------------
Digital Editors
------------------------------------------------------------------------------------------------------------------
Axial(R) 3000 Edit controller for on-line post production editing
for commercials and long form television programs
Sphere(TM) Integrated non-linear editing workstation 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 leverage its established position in the
professional segment of the video post-production market to develop innovative
products and market them to production, post-production, and distribution
segments. 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 editing 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 more than a 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.
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 three-dimensional ("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
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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 uncompressed 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 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 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:
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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;
o Non-linear editing workstations 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 tools 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:
Leverage Market and Technical Position. The Company has established a
reputation for meeting the exacting needs of the high-end segment of the video
post-production market. The Company's strategy is to leverage its market and
technical position to continue to offer innovative new products to the
post-production market segment and to expand its product offerings into the
production and distribution market segments.
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Broaden Lower-Priced Product Line. 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. 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.
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 Scitex Digital Video, the Company obtained access to
digital switchers, digital video effects and non-linear editing technologies.
Enhance Distribution Channels. The Company intends to enhance its
distribution channels on an ongoing basis to improve market penetration and
increase sales.
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>
------------------------------------------------------------------------------------------------------------------
MARKETS / Product Primary Applications
------------------------------------------------------------------------------------------------------------------
PRODUCTION:
------------------------------------------------------------------------------------------------------------------
<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
------------------------------------------------------------------------------------------------------------------
POST PRODUCTION:
------------------------------------------------------------------------------------------------------------------
Digital Signal Processors
------------------------------------------------------------------------------------------------------------------
8150 Digital Switcher Digital switcher for on-line post production
editing for commercials and long form television
programs
------------------------------------------------------------------------------------------------------------------
Digital Editors
------------------------------------------------------------------------------------------------------------------
Axial(R) 3000 Edit controller for on-line post production editing
for commercials and long form television programs
Sphere(TM) Integrated non-linear editing workstation 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
------------------------------------------------------------------------------------------------------------------
DISTRIBUTION:
------------------------------------------------------------------------------------------------------------------
Digital Signal Processors
------------------------------------------------------------------------------------------------------------------
Dveous(TM) and Brutus Digital Video Effects systems for news and sports
------------------------------------------------------------------------------------------------------------------
Digital News Graphics and Clip Servers
------------------------------------------------------------------------------------------------------------------
Axess(TM) Creation and broadcast distribution of news graphics
and short video segments
------------------------------------------------------------------------------------------------------------------
</TABLE>
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The following table summarizes the Company's net sales, in thousands, for the
three months ended December 31, 1998, by market segment:
For Three Months Ended
December 31, 1998
-------------------------
Market Amount Percent
------ -----
Production $1,113 33.1%
Post Production 1,493 44.4%
Distribution 424 12.6%
Other 333 9.9%
------ -----
$3,363 100.0%
====== =====
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 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 currently offers three ELSET(R) Virtual Set products:
ELSET(R) LIVE software operates on the Silicon Graphics ("SGI")
Onyx2(TM) 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(TM) 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 and MAYA 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(TM) 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(TM)
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.
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
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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. 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)/2Xtreme also provides both Ethernet and SCSI
connections, thereby enabling it to interface with applications running on SGI,
Windows-NT(TM) and Apple Macintosh computer platforms.
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 product. 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 optical domain at one point
in time. The Dveous is considered by many as the leading high-end DVE 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 through 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.
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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 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.
Nonlinear Editing
The Company's Sphere family of digital nonlinear editing workstations
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). The key features of the higher-end
VideoSphere(R) and the StrataSphere(R) models are, simple and easy to use human
interface, speed of editing and high quality real-time video effects.
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)
APR(TM)/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 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
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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 14%, 16% and 13% of the Company's total
revenues for the three months ended December 31, 1998, and the twelve months
ended September 30, 1998 and 1997, respectively. No customer accounted for more
than 10% of the Company's total revenues during the twelve months ended
September 30, 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 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 computer graphics and animation content creators. 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 the three months ended December 31, 1998 and the twelve
months ended September 30, 1998, 1997, and 1996, the Company generated 45%, 45%,
42%, and 38%, respectively, of its net sales from customers in
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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 March 31, 1999, the
Company employed 44 people in its research and development organization, of
which approximately 24 professionals are focused on software development. During
the three months ended December 31, 1998, and the twelve months ended September
30, 1998, 1997 and 1996, the Company's research and development expenses were
approximately $1.2 million, $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.
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.
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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, The Grass Valley Group (a subsidiary of
Tektronix, Inc.), Media 100, Inc. and Avid Technology, Inc. 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), Leitch Technology Corporation and Pinnacle Systems, Inc. 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 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., 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
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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 29 United States patents, 16 foreign patents and has applications
pending for nine additional United States patents and eight foreign patents. 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 29 registered trademarks in the United States, 16
registered foreign trademarks 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 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
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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 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 March 31, 1999, the Company had 127 full-time employees, including
44 in research and development, 43 in marketing, sales and technical support, 24
in manufacturing and 16 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 Suppliers," "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 the day-to-day business of the Company. As
of March 31, 1999, integration of facilities as well as the various functional
departments has been accomplished. Although most of the integration has been
accomplished, the full extent of the cost savings in operations is not known. If
the integration does not result in the anticipated cost savings in operations,
there may be 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 $3.9 million for the three-month Transition Period ending December 31,
1998. The Company also incurred net losses of $2.9 million, $4.5 million and
$916,000, respectively, in the twelve months ended September 30, 1998, 1997 and
1996. There can
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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 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, digital switchers 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. 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 SGI
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. 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 a significant 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.
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
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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, the Company experienced technical
problems with the introduction of Axess(TM), including delays in delivering
additional functionality when originally requested by certain initial 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 predict.
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
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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 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 Senior Vice President
and Chief Financial Officer. 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 the three-month Transition Period ended
December 31, 1998 and in the twelve months ended September 30, 1998, 1997 and
1996, international sales accounted for 45%, 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 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
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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 11.3, an upgrade of this software, is
Year 2000 compliant and has been procured by the Company by renewal of its
Man-Man license at a cost of $67,000. Total cost to implement this upgrade is
estimated to be less than $100,000. As of December 31, 1998, at least $20,000 of
expected costs had been identified which related to replacement of software
applications and operating systems (which currently are readily available for
licensing by the Company) which the Company anticipates will take place in the
third quarter of 1999. Related to these software upgrades, hardware on certain
computers may also need to be replaced to make them compatible with the upgraded
software. The estimated cost of replacing such hardware is $50,000. If required
modifications to existing software and hardware and conversions to new software
are not made, or are not completed in a timely way, 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.
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
19
<PAGE>
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 June, 1999, 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 third quarter 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 third
quarter 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.
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. The
amount incurred to date was not material.
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 March 23, 1999, the Company's executive officers
and directors, and their affiliates, beneficially own approximately 19.2% 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
20
<PAGE>
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.
Also, a current director of the Company was appointed by American Bankers
Insurance Group, which holds 6% Senior Subordinated Convertible Notes of the
Company which are convertible into up to 2,307,692 shares of the Company's
common stock.
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 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. Also, the aggregate market value of the voting
stock held by non-affiliates ("public float") of the Company is only
approximately $3,240,000 which affects the liquidity of the Common Stock.
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. In addition, the Company has offices in Grass Valley,
California, consisting of approximately 15,000 square feet, under a lease that
expires in April, 2004. The Company also leases work space in Hong Kong under an
operating lease which expires in January, 2001. 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 Transition Period, the three months ended December 31,
1998.
21
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
The executive officers of the Company, and their ages as of March 31,
1999, are as follows:
Name Age Position(s)
- ---- --- -----------
Junaid Sheikh.................... 45 Chairman of the Board, President and
Chief Executive Officer
Phillip Bennett.................. 45 Executive Vice President, Technology
and Engineering
Donald K. McCauley............... 58 Senior Vice President, Finance, and
Chief Financial Officer
Ian Craven....................... 44 Senior Vice President, Engineering
William T. Ludwig................ 51 Vice President, Sales
William Harris Rogers............ 51 Vice President, Marketing
Donald W. Petersen............... 54 Vice President, Manufacturing
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 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 Senior
Vice President, Finance, and Chief Financial Officer. Prior to joining the
Company, Mr. McCauley served as the Senior Vice President of Finance and Chief
Financial Officer of Scitex Digital Video from 1994. Prior to that, he was a
founder and Chief Financial Officer 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, as Vice
President, Sales. 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 1995, he served in various sales capacities for Abekas Video
Systems.
William Harris Rogers served as Vice President, Sales and Marketing,
for the Company from May, 1998, to December, 1998. From July, 1995, to April,
1998, he served as Vice-President, Marketing, of the Company. He attended the
Stanford University Graduate School of Business from August, 1994, to June,
1995, earning a Master of Science Degree in Business Management. He was a
consultant from November, 1993, to July, 1994. 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.
22
<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.
High Low
-------- --------
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 $ 0.22
For the Three Months ended December 31, 1998: .......... $ 0.86 $ 0.19
The Company had 99 stockholders of record as of March 23, 1999,
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
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.
23
<PAGE>
<TABLE>
Selected Consolidated Financial Data
(in thousands, except per share data)
<CAPTION>
For Three Months
Fiscal Year Ended September 30, Ended December 31,
------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales ................................ $ 18,034 $ 21,312 $ 21,408 $ 17,627 $ 12,617 $ 4,133 $ 3,363
Gross profit ............................. 9,591 11,175 10,398 6,593 6,439 2,387 1,389
Operating income (loss) .................. 1,428 (10,792) (1,621) (4,657) (3,042) 90 (3,882)
Net income (loss) ........................ 918 (10,840) (916) (4,490) (2,881) 142 (3,896)
Basic net income (loss) per share(1) ..... 0.24 (2.47) (0.14) (0.68) (0.43) 0.02 (0.52)
Diluted net income (loss) per share (1) .. 0.20 (2.47) (0.14) (0.68) (0.43) 0.02 (0.52)
Shares used in computing:
Basic net income (loss) per share(1) ..... 3,818 4,397 6,439 6,587 6,662 6,638 7,552
Diluted net income (loss) per share(1) ... 4,660 4,397 6,439 6,587 6,662 7,034 7,552
</TABLE>
<TABLE>
<CAPTION>
For Three Months Ended
Fiscal Year Ended September 30, December 31,
------------------------------------------------------------ ---------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) .......... $ 4,522 $ 12,220 $ 11,171 $ 7,550 $ 4,633 $ 7,492 $ (2,661)
Total assets ....................... 10,111 19,712 17,279 11,545 8,093 12,447 17,213
Long-term notes payable ............ -- 83 24 -- -- -- 1,165
Total stockholders' equity ......... $ 5,650 $ 13,679 $ 12,952 $ 8,566 $ 5,720 $ 8,734 $ 3,929
<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>
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 December 31, 1998 and as of
September 30, 1998 and 1997 and for the three months ended December 31, 1998 and
1997 and for the three fiscal years ended September 30, 1998, 1997 and 1996
included elsewhere in this Report on Form 10-K. In the fourth quarter of
calendar 1998, the Company changed its fiscal year end from September 30 to
December 31.
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 Suppliers," "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.
24
<PAGE>
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 editor
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
- --------------------------------------------------------------------------------
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, as costs incurred subsequent to the
establishment of technical feasibility for each product have not been
significant.
25
<PAGE>
Results of Operations
Three Months Ended December 31, 1998 vs. Three Months Ended December 31, 1997
<TABLE>
The following table presents the Company's Consolidated Statements of
Operations (dollar amounts in thousands) for the three months ended December 31,
1998 and December 31, 1997:
<CAPTION>
For Three For Three
Months Months
Ending Ending Increase (Decrease)
December 31, December 31, ------------------------
1998 1997 Amount Percent
------- ------- ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 3,363 $ 4,133 $ (770) (18.6)%
Cost of sales 1,974 1,746 228 13.1%
------- ------- ------- --------
Gross profit 1,389 2,387 (998) (41.8)%
------- ------- ------- --------
Operating expenses:
Research and development 1,210 784 426 54.3%
Marketing and sales 1,163 1,214 (51) (4.2)%
General and administrative 703 299 404 135.1%
Charge for acquired in-process technology 2,195 -- 2,195 N/A
------- ------- ------- --------
Total operating expenses 5,271 2,297 2,974 129.5%
------- ------- ------- --------
Operating income (loss) (3,882) 90 (3,972) (4,413.3)%
Interest and other income (expense), net (13) 53 (66) (124.5)%
------- ------- ------- --------
Income (loss) before provision for income taxes (3,895) 143 (4,038) (2,823.8)%
Provision for income taxes 1 1 -- --
------- ------- ------- --------
Net income (loss) $(3,896) $ 142 $(4,038) (2,823.8)%
======= ======= ======= =========
</TABLE>
<TABLE>
The following table presents the Company's Consolidated Statements of
Operations as a percentage of net sales for the three months ended December 31,
1998 and December 31, 1997:
<CAPTION>
For the For the
Three Three
Months Months
Ending Ending
December 31, December 31, Increase
1998 1997 (Decrease)
----- ----- -----
(unaudited)
<S> <C> <C> <C>
Net sales 100.0% 100.0% --
Cost of sales 58.7% 42.2% 16.5%
----- ----- -----
Gross margin 41.3% 57.8% (16.5)%
----- ----- -----
Operating expenses:
Research and development 36.0% 19.0% 17.0%
Marketing and sales 34.6% 29.4% 5.2%
General and administrative 20.9% 7.2% 13.7%
Charge for acquired in-process technology 65.2% -- 65.2%
----- ----- -----
Total operating expenses 156.7% 55.6% 101.1%
----- ----- -----
Operating income (loss) (115.4)% 2.2% (117.6)%
Interest and other income (loss), net (0.4)% 1.3% (1.7)%
----- ----- -----
Income (loss) before provision for income taxes (115.8)% 3.5% (119.3)%
Provision for income taxes -- -- --
===== ===== =====
Net income (loss) (115.8)% 3.5% (119.3)%
===== ===== =====
</TABLE>
The following is a discussion comparing the results of operations for
the three months ending December 31, 1998, and December 31, 1997:
Net sales. The decrease in net sales during the three months ended
December 31, 1998, from levels for the three months ended December 31, 1997, was
primarily due to decreased sales in the production and distribution marketplaces
partially offset by increased sales in the post production marketplace.
26
<PAGE>
International sales in the three months ended December 31, 1998 and
1997, represented 45% and 49% of net sales, respectively, as export sales to
Europe decreased, as a percentage of total sales, to 17% from 31% and export
sales to the Pacific Rim increased, as a percentage of total sales, from 16% to
21%.
The following table presents net sales dollar volumes by market and
related percentages of total net sales (dollar amounts in thousands) for the
three months ended December 31, 1998 and 1997:
For the Three Months Ending For the Three Months Ending
December 31, 1998 December 31, 1997
-------------------- --------------------
Market Amount Percent Amount Percent
------ ------ ------- ------ -------
Production $1,113 33.1% $2,389 57.8%
Post Production 1,493 44.4% 1,040 25.2%
Distribution 424 12.6% 631 15.3%
Other 333 9.9% 73 1.7%
------ ----- ------ -----
$3,363 100.0% $4,133 100.0%
====== ===== ====== =====
Cost of sales. Cost of sales, as a percentage of sales, for the three
months ended December 31, 1998, increased from levels for the same period in
1997 due to lower overall sales, the absence in 1998 of higher margin ELSET
software sales, and added overhead created by the acquisition of Scitex Digital
Video in December, 1998.
Research and development. The increase in research and development
expenses in the three months ended December 31, 1998, from levels for the same
period in 1997 was due to increases in headcount resulting from the acquisition
of Scitex Digital Video, increased material and consulting expenses relating to
specific development projects, and expenses relating to consolidating
facilities.
Marketing and sales. The decrease in marketing and sales expenses in
the three months ended December 31, 1998, from levels for the same period in
1997 was due primarily to decreases in sales commissions and trade show expenses
partially offset by increases in headcount resulting from the acquisition of
Scitex Digital Video and the consolidation of facilities.
General and administrative. The increase in general and administrative
expenses in the three months ended December 31, 1998, from levels for the same
period in 1997 was due primarily to increases in travel expenses, professional
fees, bad debt expense, amortization of goodwill, and facilities costs.
Interest and other income, net. The decrease in interest and other
income, net, during the three months ended December 31, 1998, as compared to the
three months ended December 31, 1997, was primarily due to reduced levels of
interest-paying investments as well as an increase in debt taken on to fund the
acquisition of the SDV assets and business.
Provision for income taxes. In the three months ended December 31,
1998, the provision for income taxes represents an estimate of the current
foreign tax liability. No benefit related to U.S. losses incurred in the three
months ended December 31, 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 the three months ended December 31, 1997, the provision for income
taxes represented an estimate of the foreign tax liability. No provision related
to U.S. income in the three months ended December 31, 1997 had been recognized
by the Company due to the expected loss for the fiscal year ended Setpember 30,
1997.
27
<PAGE>
Twelve months ended September 30, 1998 vs. Twelve months ended September 30,
1997
<TABLE>
The following table presents the Company's Consolidated Statements of
Operations for the twelve months ended September 30, 1998 and 1997 (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 profit 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: In the twelve months ended September 30, 1997, charges of $4.0
million pretax were incurred to streamline operations and provide valuation
reserves against inventories, receivables and fixed assets.
The following table presents the Company's Consolidated Statements of
Operations as a percentage of net sales for the twelve months ended September
30, 1998 and 1997:
Increase
1998 1997 (Decrease)
----- ----- ----------
Net sales 100.0% 100.0% 0.0%
Cost of sales 49.0% 62.6% (13.6)%
----- ----- ----
Gross profit 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%
===== ===== ====
Note: In the twelve months ended September 30, 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
the twelve months ended September 30, 1998 and 1997:
Net sales. The decrease in net sales during the twelve months ended
September 30, 1998, from levels for the same period in 1997 was primarily due to
decreased sales in the video post production, video broadcasting and computer
graphics production marketplaces.
28
<PAGE>
International sales in the twelve months ended September 30, 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%.
The following table presents net sales dollar volumes by market and
related percentages of total net sales (dollar amounts in thousands) for the
twelve months ended September 30, 1998 and 1997:
1998 1997
-------------------- --------------------
Market Amount Percent Amount Percent
------ ------ ------- ------ -------
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%
======= ===== ======= ======
Cost of sales. Cost of sales in the twelve months ended September 30,
1998, decreased from levels for the same period in 1997 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 levels for the twelve months ended September 30, 1997 was
primarily a result of decreases in headcount, bonuses earned, and depreciation.
Marketing and sales. The decrease in marketing and sales expenses from
levels for the twelve months ended September 30, 1997, 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 levels for the twelve months ended September 30, 1997, 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 the twelve months ended September 30, 1998, was primarily
due to reduced levels of debt.
Provision for income taxes. For the twelve months ended September 30,
1998, the provision for income taxes represents an estimate of the current
foreign tax liability. No benefit related to U.S. losses incurred in those
twelve months 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. For
the twelve months ended September 30, 1997, no further net operating loss
carrybacks were available and the Company was in a net operating loss
carryforward position.
Net loss. As a result of the factors noted above, the net loss
decreased in the twelve months ended September 30, 1998, from the net loss in
the twelve months ended September 30, 1997.
29
<PAGE>
Twelve months ended September 30, 1997 vs. Twelve months ended September 30,
1996
<TABLE>
The following table presents the Company's Consolidated Statements of
Operations (dollar amounts in thousands, except per share data) for the twelve
months ended September 30, 1997 and 1996:
<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 profit 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 the twelve months ended September 30, 1997, charges of $4.0
million pretax were incurred to streamline operations and provide valuation
reserves against inventories, receivables and fixed assets. In the twelve months
ended September 30, 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 Consolidated Statements of
Operations as a percentage of net sales for the twelve months ended September
30, 1997 and 1996:
<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 profit 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 the twelve months ended September 30, 1997, charges of $4.0
million pretax were incurred to streamline operations and provide valuation
reserves against inventories, receivables and fixed assets. In the twelve months
ended September 30, 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.
30
<PAGE>
The following is a discussion comparing the results of operations for
the twelve months ended September 30, 1997 and 1996:
Net sales. The decrease in net sales during the twelve months ended
September 30, 1997 from levels for the same period in 1996 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 the twelve months ended September 30, 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%.
The following table presents net sales dollar volumes by market and
related percentages of total net sales (dollar amounts in thousands) for the
twelve months ended September 30, 1997 and 1996:
1997 1996
-------------------- -------------------
Market Amount Percent Amount Percent
------ ------ ------- ------ -------
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%
======= ===== ======= =====
Cost of sales. Cost of sales, as a percentage of sales, increased in
the twelve months ended September 30, 1997, over levels for the same period in
1996 due to the special charge incurred in 1997 for increasing inventory
reserves.
Research and development. The decrease in research and development
expenses for the twelve months ended September 30, 1997, was primarily a result
of decreases in headcount and related overhead expenses after the Company's
streamlining of operations.
Marketing and sales. The decrease in marketing and sales expenses for
the twelve months ended September 30, 1997, 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 the
twelve months ended September 30, 1997, increased over levels for the same
period in 1996 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 the twelve months ended September 30, 1997, was primarily due
to reduced average interest bearing cash and cash equivalent balances.
Provision for (benefit from) income taxes. For the twelve months ended
September 30, 1997, the benefit from income taxes was due to the Company's
ability to carry back federal and state net operating losses to prior periods.
For the twelve months ended September 30, 1997, no further net operating loss
carrybacks were available and the Company was in a net operating loss
carryforward position.
31
<PAGE>
Net loss. As a result of the factors noted above, the net loss
increased in the twelve months ended September 30, 1997, from levels for the
same period in 1996.
Liquidity and Capital Resources
Since inception, the Company has financed its operations and
expenditures for property and equipment through the issuance 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 December 31, 1998, the Company had $1.1 million of restricted
cash. Operating activities provided $376,000 in net cash in the three months
ended December 31, 1998, and provided $655,000 in net cash in the three months
ended December 31, 1997. Net cash provided by operating activities in the three
months ended December 31, 1998, was due primarily to decreases in accounts
receivable and inventories partially offset by the net loss. Additional net cash
was used in investing activities for the acquisition of Scitex Digital Video
while additional net cash was provided in financing activities resulting from
increases in notes payable and an increase in common stock. Net cash provided by
operating activities in the three months ended December 31, 1997, was due
primarily to income tax refunds and increases in accounts payable and accrued
liabilities partially offset by increases in accounts receivable and
inventories. In addition, net cash was used in investing activities for the
acquisition of property and equipment.
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 agreement was amended on March 11, 1999. The
credit line is secured by all the assets of the Company. The availability under
this line is primarily calculated based on eligible accounts receivable and
inventory. Borrowings under the line are subject to certain financial covenants
and, as of December 31, 1998, the Company was in compliance with these
covenants. As of December 31, 1998, the Company had an outstanding balance
borrowed under the line of $3.9 million.
On March 12, 1999, the Company completed a private placement of $3.5
million in senior subordinated convertible notes with a group of investors. The
notes have a coupon rate of 6% per year, mature in 2004, and are convertible
into shares of Accom common stock at a price of $1.30 per share. Proceeds from
the private placement were used to partially repay the revolving line of credit.
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
Interest Rate Risk.
The Company's exposure to interest risk relates primarily to the
Company's short and long-term debt.
The interest rate on certain of the Company's debt is tied to market
interest rates which fluctuate with market changes. The interest rate on the
revolving loan with LaSalle Business Credit is equal to the Prime Rate plus 125
basis points. The interest rate on a $750,000 note payable to Scitex Digital
Video is equal to the Merrill
32
<PAGE>
Lynch Money Market Rate. As the Prime Rate or Merrill Lynch Money Market Rate
fluctuate, the interest expense incurred by the Company on the aforementioned
debt will fluctuate. If the Prime Rate and the Merrill Lynch Money Market Rate
both increased by 100 basis points, the additional, annual interest expense
incurred by the Company would be $48,000 (based on debt balances at December 31,
1998).
The Company does not currently hold interest bearing investments which
would be affected by interest rate fluctuations.
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 Transition Period 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
Transition Period 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 Transition Period 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 Transition Period 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 Transition Period 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 Transition Period covered by this Form 10-K.
33
<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 Sheets as of December 31, 1998 and
September 30, 1998 and 1997.
Consolidated Statements of Operations - For the three months
ended December 31, 1998 and 1997 and for the Fiscal Years
ended September 30, 1998, 1997 and 1996.
Consolidated Statement of Shareholders' Equity - For the three
months ended December 31, 1998 and for the Fiscal Years ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows - For the three months
ended December 31, 1998 and 1997 and 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.
(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.
34
<PAGE>
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.
4.5(6) Amendment No. 3 to Preferred Shares Right Agreement, dated as
of March 12, 1999 between the Company and U.S. Stock Transfer
Corporation.
10.1(7) Lease Extension dated October 25, 1996 by and between Menlo
Business Park and Partician Associates, Inc. and the Company.
10.2(8) 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(9) 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(10) Loan and Security Agreement, dated December 10, 1998, between
the Company and LaSalle Business Credit, Inc.
10.5.1(11) First Amendment to Loan and Security Agreement, dated March
11, 1999, between the Company and LaSalle Business Credit,
Inc.
10.6(12) Restricted Stock Purchase Agreement and Non-Recourse
Promissory Note, each dated December 4, 1998, between Phillip
Bennett and the Company.
10.7(12) Restricted Stock Purchase Agreement and Non-Recourse
Promissory Note, each dated December 7, 1998, between Lionel
M. Allan and the Company.
10.8(12) Restricted Stock Purchase, dated December 7, 1998, among
David A. Lahar, EOS Capital Profit Sharing Plan and the
Company; Non-Recourse Promissory Note, EOS Capital Profit
Sharing Plan of David A. Lahar in favor of the Company.
10.9(12) Stock Purchase Agreement, dated December 10, 1998, between
Michael Luckwell and the Company.
10.10(12) Investor's Rights Agreement, dated December 10, 1998, between
Michael Luckwell and the Company.
10.11(11) Note Purchase Agreement, dated as of March 12, 1999, among
the Company, American Bankers Insurance Group, Inc. and
certain other parties.
10.12(11) Form of 6% Senior Subordinated Convertible Notes due 2004.
10.13(11) Investor Rights Agreement, dated as of March 12, 1999, among
the Company, American Bankers Insurance Group, Inc. and
certain other parties.
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (reference is made to page 38 of this
Report).
27.1 Financial Data Schedule.
35
<PAGE>
(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.
(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
Amendment No. 2 to Registration Statement on Form 8-A/A (File No.
0-26620), filed on March 26, 1999.
(7) 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).
(8) 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.
(9) 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
(10) Incorporated by reference from an exhibit filed with the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998
(File No. 0-26620).
(11) Incorporated by reference from an exhibit filed with the Company's
Current Report on Form 8-K (File No. 0-26620), filed on March 26, 1999.
(12) Incorporated by reference from an exhibit filed with Amendment No. 1 to
the Company's Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1998, filed on January 28, 1999 (File No. 0-26620).
* Management Compensatory Plan
(b) Reports on Form 8-K
On December 23, 1998, the Company filed a Current Report on Form 8-K to
report the Company's acquisition of the assets of Scitex Digital Video, Inc.
("Scitex") and certain of Scitex's affiliates as well as the details of the
financing the Company obtained related to such acquisition, including a loan
agreement and a sale of common stock. The Company did not file the audited
historical financial statements of the acquired business and the pro forma
financial statements of the combined businesses required to be filed as an
amendment to the Form 8-K within 60 days after the original filing due date
because the audited financial statements for SDV did not exist. The Company
currently is in the process of arranging for the preparation of the audited
financials of SDV and will file the financial statements required by such Form
8-K as soon as practicable after the audit is complete.
On March 12, 1999, the Company issued Senior Subordinated Convertible
Notes in the aggregate principal amount of $3,500,000 (the "Notes") to a group
of six investors led by American Bankers Insurance Group, Inc. The Notes mature
on March 12, 2004 and bear interest at the rate of 6% per annum, payable
quarterly beginning on June 30, 1999. The Company used the proceeds from the
issuance of the Notes for the repayment of indebtedness. The Notes are
convertible into shares of the Company's common stock at any time at the option
of the holders. The number of shares of the Company's common stock to be
received upon conversion is calculated by dividing the outstanding principal
amount of the Notes by a conversion price of $1.30, subject to certain
adjustments.
36
<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 14th day of April, 1999.
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, April 14, 1999
----------------- President and Chief Executive Officer
(Junaid Sheikh) (Principal Executive Officer)
/s/ DONALD K. MCCAULEY Senior Vice President and Chief April 14, 1999
---------------------- Financial Officer (Principal Financial
(Donald K. McCauley) and Accounting Officer)
/s/ LIONEL M. ALLAN Director April 14, 1999
-------------------
(Lionel M. Allan)
Director April 14, 1999
---------------------
(Thomas E. Fanella)
/s/ DAVID A. LAHAR Director April 14, 1999
------------------
(David A. Lahar)
Director April 14, 1999
--------------------------
(Eugene M. Matalene, Jr.)
</TABLE>
37
<PAGE>
<TABLE>
SCHEDULE II
ACCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In thousands)
<CAPTION>
Balance at Charges to
Beginning of Cost and Balance at
Period Expenses Deductions** End of 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
Three Months ended December 31, 1998 .......................... 237 29 -- 266
<FN>
** All deductions represent write-offs of bad debt.
</FN>
</TABLE>
38
<PAGE>
Accom, Inc.
Consolidated Financial Statements
As of December 31, 1998 and
September 30, 1998 and 1997
And
For the three months ended December 31,
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 December 31, 1998 and
September 30, 1998 and 1997
And
For the three months ended December 31,
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-2
Consolidated Financial Statements:
Consolidated Balance Sheets ...................................... F-3
Consolidated Statements of Operations ............................ F-4
Consolidated Statement of Stockholders' Equity ................... F-5
Consolidated Statements of Cash Flows ............................ F-6
Notes to Consolidated Financial Statements ....................... F-8
F-1
<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 December 31, 1998 and September 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three months ended December 31, 1998 and 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 December 31, 1998 and September 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the three months
ended December 31, 1998 and 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
February 23, 1999, except for Notes 3 and 12,
as to which the date is April 14, 1999.
F-2
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
<CAPTION>
As of As of September 30,
December 31, -----------------------
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ 3,231 $ 5,317
Accounts receivable, net of allowance for doubtful accounts of
$266 as of December 31, 1998 and $237 and $401 as of
September 30, 1998 and 1997, respectively 3,578 1,903 3,123
Inventories 5,345 1,527 980
Income tax refunds receivable -- -- 621
Prepaid expenses and other current assets 535 345 488
-------- -------- --------
Total current assets 9,458 7,006 10,529
Property and equipment, net 3,299 1,038 967
Intangibles assets 3,247 -- --
Restricted cash 1,132 -- --
Other assets 77 49 49
-------- -------- --------
$ 17,213 $ 8,093 $ 11,545
======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Bank borrowings-line of credit $ 3,916 $ -- $ --
Current portion of notes payable 900 -- 24
Accounts payable 2,108 1,276 1,476
Accrued liabilities 3,823 973 1,313
Customer Deposits 1,285 37 25
Deferred revenue 87 87 141
-------- -------- --------
Total current liabilities 12,119 2,373 2,979
Long-term portion of notes payable 1,165 -- --
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000 shares authorized; no shares issued
and outstanding -- -- --
Common stock, $0.001 par value, at amount paid in; 20,233
shares authorized as of December 31, 1998 and September 30, 1998 and 1997;
10,121 shares issued and outstanding as of December 31, 1998 and 6,671 and
6,627 shares issued and outstanding as of September 30, 1998 and 1997,
respectively
24,197 21,462 21,427
Notes receivable from stockholders (630) -- --
Accumulated deficit (19,638) (15,742) (12,861)
-------- -------- --------
Total stockholders' equity 3,929 5,720 8,566
-------- -------- --------
$ 17,213 $ 8,093 $ 11,545
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
<CAPTION>
Three Months Ended
December 31, Fiscal Years Ended September 30,
------------------------ ----------------------------------------
1998 1997 1998 1997 1996
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales $ 3,363 $ 4,133 $ 12,617 $ 17,627 $ 21,408
Cost of sales 1,974 1,746 6,178 11,034 11,010
-------- -------- -------- -------- --------
Gross profit 1,389 2,387 6,439 6,593 10,398
-------- -------- -------- -------- --------
Operating expenses:
Research and development 1,210 784 3,295 3,344 3,926
Marketing and sales 1,163 1,214 4,967 5,981 7,356
General and administrative 703 299 1,219 1,925 1,487
Charge (credit) for acquired in-process
technology 2,195 -- -- -- (750)
-------- -------- -------- -------- --------
Total operating expenses 5,271 2,297 9,481 11,250 12,019
-------- -------- -------- -------- --------
Operating income (loss) (3,882) 90 (3,042) (4,657) (1,621)
Interest and other income, net (13) 53 180 176 209
-------- -------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes (3,895) 143 (2,862) (4,481) (1,412)
Provision for (benefit from) income taxes 1 1 19 9 (496)
-------- -------- -------- -------- --------
Net income (loss) $ (3,896) 142 $ (2,881) $ (4,490) $ (916)
======== ======== ======== ======== ========
Basic net income (loss) per share $ (0.52) $ 0.02 $ (0.43) $ (0.68) $ (0.14)
======== ======== ======== ======== ========
Diluted net income (loss) per share $ (0.52) $ 0.02 $ (0.43) $ (0.68) $ (0.14)
======== ======== ======== ======== ========
Shares used in computing basic net income
(loss) per share 7,552 6,638 6,662 6,587 6,439
======== ======== ======== ======== ========
Shares used in computing diluted net
income (loss) per share 7,552 7,034 6,662 6,587 6,439
======== ======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands)
<CAPTION>
Notes Total
Common Stock Receivable Stock-
------------------------- From Accumulated Holders'
Shares Amount Stockholders Deficit Equity
-------- -------- ------------ -------- --------
<S> <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 and comprehensive
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 and comprehensive
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 and comprehensive
loss -- -- -- (2,881) (2,881)
-------- -------- -------- -------- --------
Balances, September 30, 1998 6,671 21,462 -- (15,742) 5,720
Issuance of common stock
through private sales
for cash and notes receivable 3,450 2,180 (630) -- 1,550
Issuance of warrants for
common stock -- 555 -- -- 555
Net loss and comprehensive
loss -- -- (3,896) (3,896)
-------- -------- -------- -------- --------
Balances, December 31, 1998 10,121 $ 24,197 $ (630) $(19,638) $ 3,929
======== ======== ======== ======== ========
<FN>
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
(in thousands)
<CAPTION>
Three Months Fiscal Years Ended
Ended December 31, September 30,
-------------------- ---------------------------------
1998 1997 1998 1997 1996
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $(3,896) $ 142 $(2,881) $(4,490) $ (916)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Charge for acquired in-process technology 2,195 -- -- -- (750)
Depreciation and amortization 275 118 550 528 760
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 950 (325) 1,219 (1,300) (595)
Inventories 799 (309) (547) 1,967 (711)
Income tax refunds receivable -- 378 621 (426) (145)
Prepaid expenses and other current assets 36 (97) 144 410 (357)
Accounts payable (114) 570 (200) (766) 303
Accrued liabilities and customer deposits 131 187 (327) (611) (1,524)
Deferred revenue -- (9) (54) (387) 192
------- ------- ------- ------- -------
Net cash provided by (used in) operating activities 376 655 (1,475) 1,520 (3,743)
------- ------- ------- ------- -------
Cash Flows From Investing Activities
Expenditures for property and equipment (48) (344) (622) (563) (847)
Acquisition of Scitex Digital Video business (7,893) -- -- -- --
Increase (decrease) in other assets -- -- -- 93 (88)
------- ------- ------- ------- -------
Net cash used in investing activities (7,941) (344) (622) (470) (935)
------- ------- ------- ------- -------
Cash Flows from Financing Activities
Borrowings and payments on line of credit, net 3,916 -- -- -- --
Repayments on notes payable -- (14) (24) (58) (59)
Issuance of common stock 1,550 26 39 104 189
Repurchase of common stock -- -- (4) -- --
Restricted cash (1,132) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by financing activities 4,334 12 11 46 130
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents (3,231) 323 (2,086) (1,096) (4,548)
Cash and cash equivalents at beginning of the period 3,231 5,317 5,317 4,221 8,769
------- ------- ------- ------- -------
Cash and cash equivalents at end of the period $ -- $ 5,640 $ 3,231 $ 5,317 $ 4,221
======= ======= ======= ======= =======
-Continued-
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
<CAPTION>
Three Months Ended Fiscal Years Ended
December 31, September 30,
-------------------- --------------------------------
1998 1997 1998 1997 1996
------- ------ ------ ------- -----
(Unaudited)
Supplemental Disclosure of Cash Flow
Information
<S> <C> <C> <C> <C> <C>
Interest paid $ 22 $ 1 $ 1 $ 6 $ 11
======= ====== ====== ======= =====
Income taxes paid $ 1 $ 1 $ 17 $ 2 $ 2
======= ====== ====== ======= =====
Noncash investing and financing activities:
Accrued acquisition costs $ -- -- -- -- $(354)
======= ====== ====== ======= =====
Accrued initial public offering costs -- -- -- -- $(819)
======= ====== ====== ======= =====
Issuance of common stock in exchange for notes
receivable $ 630 -- -- -- --
======= ====== ====== ======= =====
Issuance of warrants as partial consideration for
acquisition of Scitex Digital Video business $ 555 -- -- -- --
======= ====== ====== ======= =====
Issuance of notes payable as partial consideration
for Scitex Digital Video business $ 2,065 -- -- -- --
======= ====== ====== ======= =====
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-7
<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.
In conjunction with the acquisition of Scitex Digital Video, Inc. ("SDV") (see
Note 3), the Company changed its fiscal year end from September 30 to December
31. SDV had operated using a fiscal year ending December 31.
The Company incurred a net loss of $3.9 million loss in the three months ended
December 31, 1998. The Company also incurred a net loss of $2.9 million, $4.5
million, and $916,000 in the twelve months ended September 30, 1998, 1997, and
1996, respectively. There can be no assurance that the Company will be
profitable on a quarterly or annual basis in the future. Management believes,
based on its current operating plan, and after considering the acquisition and
financing executed in December 1998 (see note 3) and a private placement of
securities completed in March 1999 (see note 12), that the Company will have
sufficient financial resources to continue its operations through December 31,
1999. In the event that the Company's results from its operations do not attain
management's plans, management will adjust the operating plan and delay or
reduce the Company's expenditures and the scope of its operations so as not to
require additional cash resources.
One customer accounted for 14%, 16% and 13% of net sales in the three months
ended December 31, 1998, and in the twelve months ended September 30, 1998 and
1997, respectively. No customers accounted for 10% or more of net sales in the
twelve months ended September 30, 1996. Export sales for three months ended
December 31, 1998 and for the twelve months ended September 30, 1998, 1997, and
1996, were approximately 45%, 45%, 42%, and 38%, respectively. Export sales to
Europe and the Pacific Rim as a percentage of total sales were 17% and 21%,
respectively for the three months ended December 31, 1998, 19% and 22%,
respectively for the twelve months ended September 30, 1998, 10% and 27%,
respectively, for the twelve months ended September 30, 1997, and 14% and 19%,
respectively, for the twelve months ended September 30, 1996.
2. Summary of Significant Accounting Policies
Reclassifications
Certain amounts in the prior years' financial statements have been reclassified
to conform with the presentation for the three months ended December 31, 1998.
F-8
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
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 interest rate risk.
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. In the ordinary course of business, the Company may be
liable to purchase from such suppliers certain inventories in excess of normal
operating requirements.
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.
Financial instruments: Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist of cash investments, and
accounts receivable. Other financial instruments include short term borrowing
under a bank line of credit. The carrying amount of such financial instruments
represent their fair value. The Company's cash investments generally consist of
money market funds. All cash balances are pledged under the short term credit
line with LaSalle Business Credit (See Note 7) and are subject to withdrawal
restrictions.
F-9
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
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." Based on the Company's product development
process, technological feasibility is established upon the completion of a
working model. Costs incurred by the Company between the completion of the
working model and the point at which the product is ready for general release
have been insignificant. Therefore, through December 31, 1998, the Company has
charged all such costs to research and development expense in the period
incurred.
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.
The Company periodically evaluates the carrying value of long-lived assets to be
held and used when events and circumstances indicate that the carrying amount of
an asset may not be recovered. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
disposal costs.
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.
F-10
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Certain of the Company's products include a significant software portion.
Software revenues are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant obligations with
regard to implementation remain, the fee is fixed or determinable, and
collection is probable. Services software revenues, primarily warranty, are
deferred and recognized on a straight-line basis as services revenue over the
life of the related agreement, which is typically one year. Effective October 1,
1998, the Company adopted Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" ("SOP 97-2"), and SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 97-2 and
SOP 98-4 provide guidance for recognizing revenue on software transactions and
superseded SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did not have a
material impact on the Company's financial results.
In December, 1998, the American Institute of Certified Public Accountants issued
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 98-4 to extend the
deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999. All other provisions
of SOP 98-9 are effective for transactions entered into in fiscal years
beginning after March 15, 1999. The Company has not yet determined the effect of
the final adoption of SOP 98-9 on its financial condition or results of
operations.
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.
Intangible Assets
Intangible assets were acquired in the acquisition of the SDV business.
Intangibles are being amortized on a straight line basis. The Company will
regularly perform reviews to determine if the carrying value of the assets is
F-11
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
impaired. The reviews look for the existence of facts or circumstances, either
internal or external, which indicate the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If there is impairment
in the future, the Company will measure the amount of the loss based on
undiscounted expected future cash flows from the impaired assets. The cash flow
calculations would be based on management's best estimates, using appropriate
assumptions and projections at the time. Intangible assets consist of the
following:
Estimated
Useful December 31,
Life 1998
---- ----
(In years) (In thousands)
Core Technology 8 $ 869
Developed technology 5 1,732
Other intangibles 3-15 692
-----------
3,293
Less: Accumulated amortization 46
-----------
$ 3,247
===========
Acquired In-Process Technology
In-process technology acquired in an acquisition accounted for under the
purchase method was 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.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share have been calculated using the
weighted average common shares outstanding during the periods in accordance with
Statements of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share," issued by
F-12
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
the Financial Accounting Standards Board and the Securities and Exchange
Commission Staff Accounting Bulletin No. 98 ("SAB 98").
The total number of shares related to outstanding options and warrants excluded
from the calculations of diluted net loss per share were 12,000 for the three
months ended December 31, 1998 and 77,000, 268,000, and 351,000 for the fiscal
years ended September 30, 1998, 1997, and 1996, respectively.
<TABLE>
The following table sets forth the computation of basic and diluted net income
(loss) (in thousands, except for per share amounts):
<CAPTION>
For the For the
Three Months Three Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
December 31 December 31, September 30, September 30, September 30,
1998 1997 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss) ................................... $(3,896) $ 142 $(2,881) $(4,490) $ (916)
======= ======= ======= ======= =======
Shares used in computing basic
net income (loss) per share ......................... 7,552 6,638 6,662 6,587 6,439
======= ======= ======= ======= =======
Basic net income (loss) per share ................... $ (0.52) $ 0.02 $ (0.43) $ (0.68) $ (0.14)
======= ======= ======= ======= =======
Calculation of shares outstanding
for computing diluted net income
(loss) per share:
Shares used in computing basic
net income (loss) per share ....................... 7,552 6,638 6,662 6,587 6,439
Shares used to reflect the
effect of the assumed
conversion of:
Employee stock options ....................... -- 396 -- -- --
------- ------- ------- ------- -------
Shares used in computing
fully-diluted net income (loss)
per share ........................................... 7,552 7,034 6,662 6,587 6,439
======= ======= ======= ======= =======
Diluted net income (loss) per share ................. $ (0.52) $ 0.02 $ (0.43) $ (0.68) $ (0.14)
======= ======= ======= ======= =======
</TABLE>
Comprehensive Income
Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." There are no material components of other comprehensive
income (loss) and, accordingly, the comprehensive income (loss) is the same as
net income (loss) for all periods presented.
Segment Information
Effective October 1, 1998, the Company became subject to SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected
F-13
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Polices (continued)
information about operating segments interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers.
<TABLE>
Management has organized the business in four market sub-segments under one
industry segment which includes activities relating to development,
manufacturing and marketing of digital video equipment. The chief operating
decision maker relies primarily on revenue to assess market segment performance.
The following table presents revenues by market.
<CAPTION>
For the Three Months Ending For the Years Ending
--------------------------- --------------------
December 31, September 30,
-------------- -------------
Market 1998 1997 1998 1997 1998
------ ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Production $ 1,113 $ 2,389 $ 6,551 $ 8,259 $ 7,806
Post Production 1,493 1,040 3,593 6,534 11,608
Distribution 424 631 1,847 2,408 1,681
Other 333 73 626 426 313
------- ------- ------- ------- -------
$ 3,363 $ 4,133 $12,617 $17,626 $21,408
======= ======= ======= ======= ========
</TABLE>
Substantially all of the Company's assets are in the United States. All sales
are accepted and approved in the United States.
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. Business Combinations
On December 10, 1998, the Company acquired substantially all of the assets of
Scitex Digital Video, Inc., a Massachusetts corporation, Scitex Digital Video
(Europe) Limited, a private company incorporated in England and Wales, and
Scitex Digital Video (Asia Pacific), Inc., a California corporation (together
"SDV"). In addition, the Company acquired certain intangible personal property
of Scitex Corporation Ltd., an Israeli corporation, related to SDV's business.
SDV developed, manufactured, marketed and sold digital video manipulation
equipment and non-linear video workstations that are used throughout the
professional video and multimedia industry.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the assets and liabilities of the acquired business are included in
the consolidated balance sheet as of December 31, 1998. The results of
operations of SDV are included in the consolidated statement of operations from
December 10, 1998.
F-14
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
3. Business Combinations (continued)
Under the terms of the agreement, the total purchase consideration included the
following:
(in thousands)
Cash payment $ 7,893
Fair value of Warrants (1) 555
Subordinated promissory notes (2) 2,065
Liabilities assumed 3,324
Other transaction costs 1,589
-------
$15,426
=======
(1) Warrants for 250,000 shares and 750,000 shares of the Company's common
stock, at $1 and $3 per share, respectively, exercisable through the
earlier of December 10, 2009, or a consummation of a corporate transaction
in which 50% or more of the Company's voting power will be sold. In lieu of
payment, the holder has an option to exchange his warrants (or any portion
thereof) for shares of common stock equal to the value of the amount of the
warrant being exchanged on the date of exchange (calculated based on the
excess of the fair value of the share over the exercise price, divided by
the fair value - and then multiplied by the applicable number of shares the
warrant is exercisable into). If the Company's common stock were to trade
for over 20 days at a price of 140% of the exercise price, the Company
shall have the right to call the warrant for redemption at a price of $0.01
per share then outstanding.
(2) Two subordinated promissory notes of $750,000 and $1,315,000. The first
note is due in April, 2000. Principal is to be paid together with interest
in arrears on the unpaid principal balance at a variable rate equal to the
Merrill Lynch Money Market Rate. The second note consists of $900,000 due
in 1999 and $415,000 due in 2000. Payments are to be made on a quarterly
basis starting on March 31, 1999. Principal is to be paid together with
interest in arrears on the unpaid principal balance at an annual rate of
10%, increasing by 1% at the beginning of every fiscal quarter starting
with July 1, 1999.
In addition, during the first five years following the acquisition date, the
Company is to pay scaled percentages of gross revenues and gross margin on
revenues from a specific sale contract. As there is no assurance that revenues
from the contract will be generated, no liability has been established for such
payments.
F-15
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
3. Business Combinations (continued)
The purchase price was allocated based upon the estimated fair value of the
assets acquired. The Purchase Price was allocated as follows (in thousands):
Acquired core technology $ 869
Acquired developed technology 1,732
Acquired in-process technology 2,195
Acquired other identifiable intangible assets 692
Tangible assets acquired 9,938
--------
$ 15,426
========
The Company allocated SDV's purchase price based on the relative fair value of
the net tangible and intangible assets acquired. In performing this allocation,
the Company considered, among other factors, the technology research and
development projects in process at the date of acquisition. SDV's in-process
research and development program consisted of the development of future digital
editing and digital video effects products. At the date of the acquisition,
SDV's research and development programs were approximately 52% completed and
total continuing research and development commitments to complete the projects
were expected to be approximately $3.3 million, and be successfully completed by
early 2000. The value assigned to purchased in-process R&D was determined by
estimating the costs to develop SDV's purchased in-process research and
development into commercially viable products, estimating the resulting net cash
flows from the projects and discounting the net cash flows to their present
value. The rates utilized to discount the net cash flows to their present value
were based on the Company's weighted average cost of capital. A discount rate of
35% was used for valuing the in-process research and development and is intended
to be commensurate with the Company's corporate maturity, the risks involved in
R&D projects of this type, and the uncertainties in the economic estimates
described above. Additionally, these projects will require maintenance
expenditures when and if they reach a state of technological and commercial
feasibility. Management believes the Company has positioned itself to complete
the research and development program. However, there is risk associated with the
completion of the project, which include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the impact of potential changes in future
target markets and there is no assurance that the project will meet either
technological or commercial success. Failure to complete the development of
either the digital editing or the digital video effects projects in their
entirety, or in a timely manner, could have a material adverse impact on the
Company's financial condition and results of operations.
The estimates used by the Company in valuing in-process research and development
were
F-16
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
3. Business Combinations (continued)
based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. The Company's assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from the projected results. Any such variance may result in a material adverse
effect on the financial condition and results of operations of the Company.
Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility and
risks related to the impact of potential changes in future target markets.
Financing
On December 10, 1998, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with LaSalle Business Credit, Inc. The Company borrowed
approximately $3,340,000 under the Loan Agreement which constituted a portion of
the cash consideration for the SDV business.
Unaudited Proforma
The following summary unaudited pro forma information shows the proforma
combined results of Accom and SDV for the three months ended December 31, 1998
and for the twelve months ended September 30, 1998, and 1997, as if the SDV
acquisition had occurred on October 1, 1996 at the purchase price established in
December, 1998. The proforma information has been prepared from unaudited
information and is subject to change as a result of additional procedures that
are currently being performed by management. Accordingly, the results are not
necessarily indicative of those which would have occured had the acquisition
actually been made on October 1, 1996 or of future operations of the combined
companies. The pro forma results for 1997 combine with the Company's results for
the twelve months ended September 30, 1997 with SDV's results for the twelve
months ended December 31, 1997. The pro forma results for the twelve months
ended September 30, 1998 combine the Company's results for the twelve months
ended September 30, 1998 with SDV's results for the twelve months from October
1, 1997 through September 30, 1998. As a consequence of this presentation, SDV's
results for the twelve months of October 1, 1997 through December 31, 1997 are
included, in the results for both the twelve months ended September 30, 1998 and
1997. The following unaudited pro forma results include straight-line
amortization of intangible assets:
Twelve months
Three Months Ended ended
------------------ -----------
December 31, September 30,
------------ ---------------------
(In Thousands, Except Per Share Data) 1998 1998 1997
---- ---- ----
Revenue 9,768 44,679 75,645
Net loss (8,571) (18,529) (15,681)
Basic and diluted loss per share (0.85) (1.83) (1.56)
The purchase price allocation for SDV is tentative and may be adjusted based on
certain factors, including the value received for certain inventories.
Accordingly, the purchase price allocation may be adjusted during 1999.
F-17
<PAGE>
4. Inventories
Inventories consist of the following:
As of
As of September 30,
December 31, -------------------
1998 1998 1997
------ ------ ------
(In thousands)
Purchased parts and materials $2,399 $ 256 $ 225
Work-in-process 394 445 204
Finished goods 151 181 182
Demonstration inventory 2,401 645 369
------ ------ ------
$5,345 $1,527 $ 980
====== ====== ======
5. Property and Equipment
<TABLE>
Property and equipment consist of the following:
<CAPTION>
As of September 30,
As of December 31, -------------------------------
1998 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Machinery and equipment $ 2,488 $ 2,038 $ 1,768
Furniture and fixtures 505 219 207
Computer equipment 1,661 1,409 1,070
Service inventory 1,505 -- --
-------- -------- --------
6,159 3,666 3,045
Less: accumulated depreciation (2,860) (2,628) (2,078)
-------- -------- --------
Net property and equipment $ 3,299 $ 1,038 $ 967
======== ======== ========
</TABLE>
F-18
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
6. Accrued Liabilities
Accrued liabilities consist of the following:
As of
As of September 30,
December 31, ------------------
1998 1998 1997
------ ------ ------
(In thousands)
Accrued compensation $ 167 $ 150 $ 228
Accrued outside sales commissions 655 149 90
Accrued acquisition liabilities 1,589 126 208
Accrued streamlining expenses -- 305 379
Other 1,412 243 408
------ ------ ------
$3,823 $ 973 $ 1,313
====== ====== ======
7. Bank Borrowings
On December 10, 1998, the Company entered into an agreement with LaSalle
Business Credit, Inc. ("LBC") whereby LBC agreed to make revolving loans to the
Company to a maximum of $7,500,000. The funds available at any time are
determined by levels of eligible accounts receivable and by levels of certain
inventory items. The Company's ability to borrow is based on compliance with
certain financial covenants. At December 31, 1998, the Company had $3,916,00 in
borrowings outstanding, due on December 10, 2001, and approximately $50,000 was
available for additional borrowings.
The rate of interest charged on the loans is the bank's prime rate plus 1.25%.
The term of the original agreement is three years and is renewable on a yearly
basis thereafter. The loans are secured by all assets of the Company.
As part of its agreement with LBC, the Company agreed to turn all of its cash
deposits over to LBC. As deposits are received by the Company, the funds are
"swept" into bank accounts controlled by LBC. The deposits are used to reduce
outstanding balances with LBC. To fund operations, the Company requests cash
advances by LBC, the availability of which is determined by the factors
discussed above.
To the extent that the Company does not fully utilize the credit facility, LBC
charges an "unused line fee" which is equal to less than one percent per year of
the "unused" amount.
F-19
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
8. Commitments
Leasing Arrangements
The Company leases its primary office and manufacturing facility under an
operating lease which expires in February, 2000. The Company leases another
office under an operating lease which expires in April, 2004. Rent expense for
the three months ended December 31, 1998 and for fiscal years 1998, 1997 and
1996 was approximately, $131,000, $465,000, $448,000 and $ 424,000,
respectively.
Future minimum rental payments under noncancelable leases at December 31, 1998,
are as follows (in thousands):
1999 $ 901
2000 385
2001 240
2002 165
2003 170
Thereafter 57
---------
Total $ 1,918
=========
The Company is sublessor for a portion of its primary office and manufacturing
facility. Sublease rental income for the three months ended December 31, 1998
and for fiscal 1998, 1997, and 1996 was approximately $ 27,000, $175,000,
$84,000, and $0, respectively.
9. Stockholders' Equity
Stock Options
The 1995 Stock Option/Stock Issuance 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 the 12 months ended September 30, 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.
F-20
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
9. Stockholders' Equity (continued)
Stock Options (continued)
<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
Shares authorized -- -- --
Options granted (804,000) 804,000 $0.31-$0.65
Options exercised -- -- -- $ 0.85
========
Options canceled 40,615 (40,615) $0.81-$1.03
---------- --------- -----------
Balances at December 31, 1998 497,963 2,014,718 $0.31-$5.88
========= ========== ===========
</TABLE>
During the twelve months ended September 30, 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. 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.
F-21
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
9. Stockholders' Equity (continued)
Stock Options (continued)
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 December 31, 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>
$0.31 - $0.48 114,877 6.55 $0.40 59,877 $0.48
$0.65 749,000 9.95 $0.65 -- --
$0.84 - $1.00 179,400 9.11 $0.88 12,500 $0.88
$1.03 953,938 7.52 $1.03 598,865 $1.03
$1.25 - $5.88 17,500 7.88 $2.58 17,500 $2.58
--------- ---- ----- ------ -----
$0.31 - $5.88 2,014,715 8.51 $0.85 688,742 $1.02
========= ==== ===== ======= =====
</TABLE>
As of December 31, 1998, the Company has reserved 2,512,681 shares of common
stock for issuance upon the exercise of stock options under all of its plans.
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan (the "Purchase Plan") 250,000
shares are authorized for the issuance 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
<TABLE>
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
F-22
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
9. Stockholders' Equity (continued)
Pro Forma Disclosure of Employee Stock-Based Compensation (continued)
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:
<CAPTION>
For the Three Fiscal Year Ended
Months Ended September 30,
December 31, ----------------------------------------
1998 1998 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Risk-free interest rates 5.1% 4.7% 6.0% 6.0%
Dividends paid -- -- -- --
Volatility factors - Company's common
stock expected market price 0.80 0.80 0.80 0.80
Expected option life 4.00 years 4.00 years 4.83 years 4.83 years
</TABLE>
The weighted average "fair value" of stock options granted for the three months
ended December 31, 1998 and for the fiscal years ended September 30, 1998, 1997,
and 1996 was $0.87, $0.55, $0.56, and $2.30, respectively.
F-23
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
9. Stockholders' Equity (continued)
Pro Forma Disclosure of Employee Stock-Based Compensation (continued)
<TABLE>
The fair value of employee purchase rights under the Employee Stock Purchase
Plan was estimated at the date of grant using the Black-Scholes option pricing
model. The following weighted-average assumptions were used:
<CAPTION>
Twelve Months Ended
September 30,
-----------------------------
1998 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates 4.7% 6.0% 6.0%
Dividends paid -- -- --
Volatility factors - Company's common
stock expected market price 0.80 0.80 0.80
Expected option life 0.50 years 0.50 years 0.50 years
</TABLE>
The weighted average "fair value" of employee purchase rights issued under the
Employee Stock Purchase Plan during the fiscal years ended September 30, 1998,
1997, and 1996 was $1.47, $0.85, and $4.06, respectively. No purchase rights
were issued under the Employee Stock Purchase Plan during the three months ended
December 31, 1998.
<TABLE>
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:
<CAPTION>
Three Twelve Months Ended
Months Ended September 30,
December 31, -------------------------------------------------
1998 1998 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pro forma net loss (in thousands): $ (3,979) $ (3,477) $ (5,753) $ (2,379)
Pro forma net loss per share: $ (0.53) $ (0.14) $ (0.87) $ (0.33)
</TABLE>
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.
F-24
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
9. Stockholders' Equity (continued)
Stockholder Rights Plan
Under the Company's stockholder rights plan, existing stockholders of the
Company are entitled 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.
10. Income Taxes
As of December 31, 1998, the Company had federal net operating loss carryforward
of approximately $5,200,000. The Company also had federal research and
development tax credit carryforwards of approximately $250,000.
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.
<TABLE>
Significant components of the Company's deferred tax assets and liabilities are:
<CAPTION>
As of September 30,
As of December 31, -----------------------------
1998 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses $ 1,804 $ 1,747 $ 735
R&D credits 373 334 186
Acquired intangibles 988 -- --
Capitalized R&D 3,152 2,801 2,711
Nondeductible reserves and accruals 900 683 354
Inventory valuation 1,108 913 1,055
Other individually immaterial items 55 92 437
------- ------- -------
8,380 6,570 5,478
Valuation allowance (8,380) (6,570) (5,440)
------- ------- -------
Net deferred tax assets $ -- $ -- $ 38
======= ======= =======
</TABLE>
The net valuation allowance increased by $1,810,000, $1,130,000 and $5,241,000
during the three months ended December 31, 1998, and the twelve months ended
September 30, 1998 and 1997, respectively.
F-25
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
10. Income Taxes (continued)
The provision (benefit) for income taxes consists of the following:
Ended For Three Months
December 31, Fiscal Year Ended September 30,
------------ ------------------------------
1998 1998 1997 1996
----- ----- ----- -----
(In thousands)
Federal:
Current $-- $-- $(705) $(231)
Deferred -- -- 705 (231)
----- ----- ----- -----
-- -- -- (462)
----- ----- ----- -----
State:
Current -- -- -- 11
Deferred -- -- -- (45)
----- ----- ----- -----
-- -- -- (34)
----- ----- ----- -----
Foreign:
Current 1 19 9 --
----- ----- ----- -----
Total $ 1 $ 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:
Ended For Three Months
December 31, Fiscal Year Ended September 30,
1998 1998 1997 1996
------- -----------------------------
(In thousands)
Income taxes computed at the $(1,324) $(1,033) $(1,524) $ (480)
federal statutory rate
State taxes (net of federal
benefit) (88) (125) (370) (23)
Foreign taxes 1 19 9 --
Research and development tax
credit (23) (71) (123) (18)
Technology basis step-up (468) -- (2,867) (204)
Foreign losses not currently
benefited 41 163 -- --
Valuation allowance 1,810 1,130 5,440 199
Other 52 (64) (556) 30
------- ------- ------- -------
Total $ 1 $ 19 $ 9 $ (496)
======= ======= ======= =======
F-26
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
11. Related Party Transactions
In December, 1998, shares of common stock of the Company were issued to two
members of the Company's Board of Directors, Lionel Allen and David Lahar, and
an officer of the Company , Phillip Bennett, in exchange for promissory notes.
300,000 shares were issued at a price of $0.50 per share, 200,000 shares were
issued at a price of $0.65 per share, and 350,000 were issued at a price of
$1.00 per share. The shares were issued in exchange for promissory notes
totaling $630,000. No payments had been made on the notes as of December 31,
1998.
In March, 1999, $300,000 was paid to a company associated with a member of the
Company's Board of Directors, David Lahar, for services provided in the
acquisition of SDV. Such amount is included in accrued liabilities as of
December 31, 1998.
12. Subsequent Event
On March 12, 1999, the Company completed a private placement of $3.5 million in
senior subordinated convertible notes with a group of investors. The notes have
a coupon rate of 6% per year, mature in the year 2004, and are convertible into
shares of Accom common stock at a price of $1.30 per share.
In conjunction with the sale of convertible notes, the Company and the investors
entered into an Investors Rights Agreement. The Investors Right Agreement grants
the investors, among other things, certain rights with respect to the common
stock of the Company issuable upon conversion of the notes.
Subsequent to the completion of the placement, one of the investors was
appointed to the Board of Directors of the Company.
In March, 1999, $88,000 was paid to a company associated with a member of the
Company's Board of Directors for services provided in the private placement.
F-27
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 International, Inc.
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
February 23, 1999, except for notes 3 and 12 as to which the date is April 14,
1999, 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
April 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,844,000
<ALLOWANCES> (266,000)
<INVENTORY> 5,345,000
<CURRENT-ASSETS> 9,458,000
<PP&E> 6,159,000
<DEPRECIATION> (2,860,000)
<TOTAL-ASSETS> 17,213,000
<CURRENT-LIABILITIES> 12,119,000
<BONDS> 0
0
0
<COMMON> 23,567,000
<OTHER-SE> (19,638,000)
<TOTAL-LIABILITY-AND-EQUITY> 17,213,000
<SALES> 3,363,000
<TOTAL-REVENUES> 3,363,000
<CGS> 1,974,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,271,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13,000)
<INCOME-PRETAX> (3,895,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (3,896,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,896,000)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
