UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from ________ to ________.
Commission file number: 0-26620
ACCOM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3055907
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1490 O'Brien Drive
Menlo Park, CA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 328-3818
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
----------------------------------
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 $ 8,493,309 as of March 15, 2000, 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 10,133,538 shares of Registrant's Common Stock issued and
outstanding as of March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Information required under Part III will be filed not later than 120
days after the end of the fiscal year covered by this Form 10-K as part of the
Registrant's Proxy Statement for its annual meeting of stockholders.
"Accom," "Abekas," "Axial," "DveousFX," "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. This Report also includes trademarks of companies other than Accom,
Inc. 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
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, Inc. ("Accom" or the "Company") designs, manufactures, sells,
and supports a complete line of digital video signal processing, editing, and
disk recording tools, primarily for the professional, worldwide video
post-production and live broadcasting, and computer video 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 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 and digital
video servers 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>
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 using compressed
video
------------------------------------------------------------------------------------------------------------------
AFFINITY(TM) Integrated non-linear editing work station for long and
short form programs and commercials using multiple
streams of uncompressed video
------------------------------------------------------------------------------------------------------------------
Video Digital Disk Recorders
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APR(TM)/Attache On-line post-production editing and effects and on-air
playback of graphics for broadcast
------------------------------------------------------------------------------------------------------------------
WSD(R)2Xtreme Desktop computer graphics and animation production
------------------------------------------------------------------------------------------------------------------
Axess(TM) Creation and broadcast distribution of news graphics
and short video segments
------------------------------------------------------------------------------------------------------------------
Abekas(R)6000 Multi-user digital video server for broadcast
applications
------------------------------------------------------------------------------------------------------------------
</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 the 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 included 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.
On January 21, 2000, Accom and certain of its subsidiaries sold
substantially all of their respective assets related to the ELSET virtual set
product line ("ELSET") to IMadGINE Video Systems Marketing, B.V. ("IMadGINE"), a
Dutch company that is a wholly owned subsidiary of Orad Hi-Tec Systems Ltd.
("Orad"), an Israeli corporation. IMadGINE also purchased the stock of Accom's
subsidiary, Accom Poland Sp. z o.o., a Polish corporation ("Accom Poland"). The
Company and its subsidiaries also sold to IMadGINE certain intellectual property
related to the ELSET business. ELSET products consist of virtual sets for
high-end video content creation in real time. The Company's first shipment of
ELSET virtual set tools occurred in March 1996 with the final shipment occurring
in December 1999. With the sale of ELSET to IMadGINE, Accom reduced its
headcount of full-time employees by 13. The positions eliminated consisted of 9
software engineers and 1 administrative aide in the employment of Accom Poland
and 3 marketing and sales employees operating out of the Company's main office
in Menlo Park, California.
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<PAGE>
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.
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 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 post-production and distribution segments
of marketplace.
With the sale of the ELSET virtual set product line in January 2000 to
IMadGINE, Accom greatly reduced its presence in the production market place. The
production market place is characterized by product offerings used in the
creation of video content. Accom anticipates that its emphasis in the
foreseeable future will be on the post-production and distribution market
places.
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 half a million dollars due to the cost and
variety of equipment required, and professional post-production services can
cost in excess of $750 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
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<PAGE>
in an uncompressed format. An editor using a compression-based off-line system
must decompress the video, add effects and graphics and then recompress the
video. This adds complexity to the editing process and often further compromises
the video fidelity of the final content. Moreover, these off-line systems
typically provide the user with a single video stream, which does not allow the
simultaneous manipulation of multiple streams of video elements in real time.
To improve productivity and creative flexibility, high-end
professionals increasingly require on-line editing systems with simultaneous
random access to multiple video streams and video of 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 stand-alone still image disk storage
devices and analog tape-based systems when broadcasting commercials and programs
such as news, sports and 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 shared content and
distributing it over multiple channels. Quick access by multiple users to
content is critical to effective and economical news, sports and entertainment
broadcasting. Networked digital video disk recorders and servers 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 and repurpose the content
they create and distribute.
The Accom Approach
The Company believes that traditional video systems do not adequately
meet the emerging 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 digital environments.
5
<PAGE>
Accom's systems offer the following benefits:
Open Systems. The Company designs products for ease of integration with
other manufacturers' products, such as video switchers, digital video effects
devices and video recorders. This capability allows users to leverage their
existing equipment investments and customize their systems to meet current and
future requirements.
Real Time Performance. Accom systems operate in real time and execute
processing and control functions 50 or 60 times per second. This enables content
producers to instantly view video content in full-quality video resolution
during production and post-production.
High Video Fidelity. Accom systems operate in fully uncompressed video
formats. This capability provides video content creators with D1 quality video,
enabling them to deliver the same content for high-end distribution channels or
distribution channels requiring lower resolution.
Ease Of Use. The Company's systems are designed to improve the
productivity of users and to reduce training time. For example, certain of the
Company's products utilize video images and graphical user interfaces that
eliminate the need for complicated menu structures and time codes.
Leveraged Solutions. Accom combines certain of its individual products
to create integrated solutions that offer performance benefits beyond those
available when such products are used individually. For example, the Company
integrates its on-line editor products with its digital video disk recorders to
provide on-line, random access editing capability.
The Company offers a range of products to the high-end segment of the
video post-production and distribution markets. The Company's current key
products are:
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;
o Networked still image and video clip storage systems used by broadcast
distributors of video content; and
o Multi-channel digital video servers for broadcast applications.
Accom Strategy
Accom's goal is to be a leading supplier of 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
distribution market segments.
6
<PAGE>
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 in order 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 nine product lines that address the needs
of the post-production and distribution market segments. The Company's
non-linear editing systems, on-line editing control systems, digital disk
recorders and signal processing equipment are used primarily in post-production.
Digital news graphics and clip servers and multi-channel servers address the
needs of the video distribution segment.
<TABLE>
The following table summarizes the Company's key market segments and
products:
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
MARKETS / Product Primary Applications
-----------------------------------------------------------------------------------------------------------------
POST-PRODUCTION:
-----------------------------------------------------------------------------------------------------------------
<S> <C>
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 using
compressed video
-----------------------------------------------------------------------------------------------------------------
AFFINTY(TM) Integrated non-linear workstation for long and short
form programs and commercials using multiple streams
of uncompressed video
-----------------------------------------------------------------------------------------------------------------
Video Digital Disk Recorders
-----------------------------------------------------------------------------------------------------------------
APR(TM)/Attache On-line post-production editing and effects and
on-air playback of graphics for broadcast
-----------------------------------------------------------------------------------------------------------------
WSD(R)2Xtreme Desktop computer graphics and animation production
-----------------------------------------------------------------------------------------------------------------
DISTRIBUTION:
-----------------------------------------------------------------------------------------------------------------
Digital Signal Processors
-----------------------------------------------------------------------------------------------------------------
Dveous(TM)and Brutus Digital Video Effects systems for news and sports
-----------------------------------------------------------------------------------------------------------------
Axess(TM) Creation and broadcast distribution of news graphics
and short video segments
-----------------------------------------------------------------------------------------------------------------
Abekas(R)6000 Multi-user digital video server for broadcast
applications
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the Company's net sales, in thousands,
for the twelve months ended December 31, 1999, by market segment:
For The Twelve Months Ended
December 31, 1999
-----------------
Market Amount Percent
------ ------ -------
Production $ 3,840 11.7%
Post-Production 15,879 48.2%
Distribution 8,813 26.7%
Other 4,437 13.4%
-----------------------------------------
$ 32,969 100.0%
=========================================
7
<PAGE>
With the sale of ELSET virtual set product line to IMadGINE in January
2000, the Company no longer participates in the production market segment. The
sales for the production segment for the twelve months ended December 31, 1999,
included sales of virtual set software and support and the WSD(R)2Xtreme.
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 a digital disk recorder like the APR(TM)
Attache or the WSD(R) 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 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 Editors
The Company currently offers three product lines in the digital editing
area: the Axial(R), the Sphere(R) family of editors, and AFFINITY(TM). On
December 10, 1998, Accom acquired substantially all the assets of Scitex Digital
Video. The Sphere product line was a part of this acquisition.
On-Line Editors
The Company's Axial(R) line of digital on-line video editing systems
consists of various models of the Axial(R) 3000. Key upgrade options for the
Axial(R) 3000 are 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
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edit decision lists from off-line editing systems for quick assembly of
full-quality video content. The Axial(R) 3000 is 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 family of digital nonlinear editing workstations offers a
complete range of solutions for simple to complex applications. In 1999, the
Company introduced its next generation of non-linear editing products called the
AFFINITY(TM). In addition, the Company's non-linear product line consists of
four products, MicroSphere(R), VideoSphere(R), StrataSphere(R) and
DigiSphere(R). The key features of the higher-end AFFINITY(TM), 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.
AFFINITY(TM) is a real time editing system offering five streams of
uncompressed and compressed video. Key features include a frame-based 3D DVE
with advanced real time effects based on the Abekas Dveous technology and full
motion alpha keys. There is full support for three-point and drag-and-drop
editing, new project oriented interface with search and sort capability and
stackable video clips, instant cut away shots and quick version comparisons.
AFFINITY(TM) utilizes third party disk arrays from Medea Corporation, offering
the best price performance in terms of storage capacity, access speed and price
to end users. There were no sales of AFFINITY(TM) in 1999. Initial sales of
AFFINITY(TM) occurred in February, 2000.
MicroSphere(R) offers dual stream, real time 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, real time 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 array of individual disks ("RAID").
Applications of the APR(TM) include
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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 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.
Computer Graphics and Animation Digital Disk Recorder
The Company's WSD digital disk recorder is primarily used in the
production and post-production of computer graphics and animation. The
WSD(R)2Xtreme, the fourth generation WSD(R) product, is a D1 quality digital
video disk recorder and video subsystem that enables users to record and play
back digital video images in real time and rapidly transfer digital video images
to and from computer workstations. The WSD(R)2Xtreme enables more efficient
creation of 2D and 3D graphics and animation by providing a bridge between the
computer workstation and video tape recorders and other video devices. The
WSD(R)2Xtreme's digital random access recording and playback features improve
the quality of desktop graphics production by eliminating the speed and
maintenance problems associated with analog video tape recorders. With the
WSD(R)2Xtreme, frames can be played back in real time so the user can see the
end result in full motion on a video monitor. 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
Silicon Graphics, Windows-NT(TM) and Apple Macintosh computer platforms.
Digital News Graphics and Clip Servers-Axess(TM)
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 a 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 to
70,000 still images or from 17 minutes to over 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.
Multi-Channel Digital Video Server-Abekas(R) 6000
The new Abekas(R) 6000 is a disk-based, broadcast quality, digital
video server in a compact, single-chassis design. With user-selectable bit rates
using DVCPRO compression, the Abekas(R) 6000 provides the user with the ability
to select the compression level appropriate to his needs. The system is fully
DTV ready, accepting and
10
<PAGE>
supplying digital video, key, and digital audio signals. It supports either two,
four, six, or eight independently controlled digital video channels, with up to
four tracks (two stereo pairs) of digital audio per video channel when operating
at either the DVCPRO or DVCPRO-50 compression level. With enough disk capacity
to provide dozens of hours of local storage capacity, the Abekas(R) 6000 is
ideal for use in news editing and play out, program cache and play out, spot
cache and play out, and program materials distribution.
Customers and Applications
The primary end users of the Company's products are post-production,
broadcast and cable companies and studios. No customer accounted for more than
10% of total revenues in the twelve months ended December 31, 1999. 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.
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 twelve months ended December 31, 1999, the three months
ended December 31, 1998 and the twelve months ended September 30, 1998 and 1997,
the Company generated 35%, 45%, 45% and 42%, respectively, of its net sales from
customers in markets outside of the United States. The Company has one employee
based in the United Kingdom to manage and support the Company's distributors in
Europe, Africa and the 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
both its Menlo Park and Grass Valley facilities.
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 and its video and computer graphics digital disk recorders. The
Company's engineering staff consists of software and hardware engineers and
other support
11
<PAGE>
personnel. As of February 29, 2000, the Company employed 31 people in its
research and development organization, of which approximately 13 professionals
were focused on software development. During the twelve months ended December
31, 1999, the three months ended December 31, 1998, and the twelve months ended
September 30, 1998 and 1997, the Company's research and development expenses
were approximately $7.3 million, $1.2 million, $3.3 million and $3.3 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.
Competition
The video 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 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 competed primarily with a
limited number of comparably-sized companies as well as larger vendors such as
Sony Corporation, The Grass Valley Group, 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
12
<PAGE>
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 competition from these larger vendors.
The multi-channel digital video server and digital news graphics and
clip server market segment is an emerging market segment. The Company currently
competes with established video companies such as Quantel Ltd. (a subsidiary of
Carlton Communications plc), Leitch Technology Corporation, The Grass Valley
Group 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 Abekas(R) 6000 and
Axess(TM). In addition, the Company expects that existing vendors and new market
entrants will develop products that will compete directly with the Abekas(R)
6000 and Axess(TM) and that competition will increase significantly as the rate
of conversion from analog tape-based systems to digital disk-based systems
increases. 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.
Increased competition in any of the Company's markets could result in
price reductions, reduced margins and loss of market share, all of which would
materially and adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully against current or future competitors.
Proprietary Rights and Licenses
Proprietary Rights
The Company's success and ability to compete is dependent in part upon
its proprietary technology. The Company relies on a combination of patent, trade
secret, copyright and trademark law, nondisclosure agreements and other
intellectual property methods to protect its technology. The Company's products
are generally sold pursuant to purchase and license agreements that contain
terms and conditions restricting unauthorized disclosure or reverse-compiling of
the proprietary software embodied in the products. The Company owns 37 United
States patents, 17 foreign patents and has applications pending for five 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 36 registered trademarks in the United States,
39 registered foreign trademarks and has four pending United States and two
pending 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
13
<PAGE>
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.
Employees
On February 29, 2000, the Company had 109 full-time employees,
including 31 in research and development, 39 in marketing, sales and technical
support, 25 in manufacturing and 14 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--General." 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
depends in part upon whether certain of the two companies' business operations
and their product offerings can be integrated in an efficient and effective
manner. 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. In
addition, if benefits resulting from product development that was under way at
Scitex Digital Video at the time of the Acquisition are not fully realized, the
resulting shortfall in revenues anticipated from these products under
development may have an adverse effect on the Company's results of operations
and financial condition. Additionally, the estimates used by the Company in
valuing the in-process research and development acquired were based upon
assumptions the Company believed to be reasonable but which are inherently
uncertain and unpredictable. The Company's assumptions may have been incomplete
or inaccurate. No assurance can be given that unanticipated events or
circumstances will not occur. Accordingly, actual results may vary from
projected results. Any such variance may result in an adverse effect on the
financial condition and results of the Company.
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<PAGE>
Potential Fluctuations in Operating Results. The Company incurred a net
loss of $2.6 million for the twelve months ended December 31, 1999. For the
three-month Transition Period ending December 31, 1998, the Company incurred a
net loss of $3.9 million. The Company also incurred net losses of $2.9 million
and $4.5 million, respectively, in the twelve months ended September 30, 1998
and 1997. There can be no assurance that the Company will be profitable on a
quarterly or annual basis in the future. The Company's quarterly operating
results in the past have fluctuated and may fluctuate significantly in the
future depending on such factors as the timing and shipment of significant
orders, new product introductions and changes in pricing policies by the Company
and its competitors, the timing and market acceptance of the Company's new
products and product enhancements, 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 take 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 first 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.
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.
Dependence on AFFINITY(TM) Sales. The Company anticipates that a
significant proportion of its sales in 2000 will come from sales of its new,
non-linear editing product, AFFINITY(TM). AFFINITY(TM) was introduced in 1999.
Initial shipments occurred in February 2000. As a new product with no record of
prior sales, there can be no assurance that sales of AFFINITY(TM) will reach the
levels anticipated by the Company. To the extent that sales of AFFINITY(TM) are
less than planned, there could be an adverse effect on the Company's business,
financial condition, and results of operations.
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<PAGE>
Credit Line Financing. In February 2000, the Company entered into an
agreement with The Provident Bank ("Provident") for a $2,000,000 revolving line
of credit ("line"). Borrowings are limited to a maximum of $1,500,000 until
March 31, 2000. Removal of the borrowing limit is dependent on meeting a certain
financial covenant. The Company anticipates that the line will be needed to
provide operating cash for the day-to-day operations of the Company in 2000. The
amount of borrowing allowed under the line is dependent on the level of eligible
accounts receivable. In addition, the Company must fulfill certain financial
performance covenants set by Provident. To the extent that the level of eligible
accounts receivable is not sufficient or the Company fails to meet the financial
performance covenants, the Company's ability to borrow funds to finance
operations will be negatively impacted. In the event the Company is unable to
borrow funds, the Company will reevaluate its operating plans and believes it
will have the ability to delay or reduce expenditures so as to not breach its
loan covenants or require additional resources in order to continue as a going
concern at least through December 31, 2000.
Rapid Technological Change; Product Development. The market for the
Company's products is characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions. The Company's success
will depend in part upon its ability to enhance its existing products and to
develop and introduce new products and features to incorporate new technologies
and meet changing customer requirements and emerging industry standards in a
timely and cost-effective manner. The Company is currently developing new
products and product enhancements for its product lines. There can be no
assurance that the Company will be successful in developing, manufacturing and
marketing new products and product enhancements, that the Company will not
experience difficulties that delay or prevent the successful development and
introduction of these products and enhancements or that the Company's new
products and product enhancements will achieve market acceptance. The Company's
business, financial condition and results of operations would be materially and
adversely affected if the Company were to experience delays in developing new
products or product enhancements or if these products or enhancements did not
gain market acceptance. In addition, the introduction of products embodying new
technologies or the emergence of new industry standards can render existing
products unmarketable. There can be no assurance that products or technologies
developed by others will not render the Company's products non-competitive or
obsolete. In such case, the Company's business, financial condition and results
of operations would be materially and adversely affected.
The introduction of new products or product enhancements with
reliability, quality or compatibility problems can result in reduced or delayed
sales, delays in collecting accounts receivable or additional service and
warranty costs. In the past, the Company has delivered certain new products to
customers prematurely, and, as a result, such products have contained
performance deficiencies. For example, 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, 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.
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
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<PAGE>
no assurance that the Company will be successful in retaining its key technical
and management personnel and in attracting and retaining the personnel it
requires for continued growth. The Company has key person life insurance
covering certain of its management personnel.
Management of Growth. Although the Company streamlined its operations
during fiscal 1997 and sold the ELSET virtual set business in January 2000, 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 twelve months ended December 31, 1999,
the three-month Transition Period ended December 31, 1998 and in the twelve
months ended September 30, 1998 and 1997, international sales accounted for 35%,
45%, 45% and 42%, 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 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
17
<PAGE>
SDV's distributors. Because the Company does not have a historical working
relationship with many of such distributors, there can be no assurance that such
distributors will continue to do business with the Company. A failure of the
Company's distributors to successfully market and support the Company's products
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Impact of Year 2000. In prior years, the Company discussed the nature
and progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Company incurred costs of approximately $200,000 during 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
Substantial Control by Existing Stockholders; Effect of Certain
Anti-Takeover Provisions. As of March 15, 2000, the Company's executive officers
and directors, and their affiliates, beneficially owned approximately 53.0% of
the Company's outstanding Common Stock. As a result, the Company's executive
officers and directors and their affiliates will be able to exercise significant
influence over the Company and its business and affairs as well as over the
election of directors, regardless of how other stockholders of the Company may
vote. Furthermore, acting together, such stockholders may be able to block any
change in control of the Company.
In addition, a current director of the Company was appointed by
American Bankers Insurance Group, which owns 8% 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 has been and may continue to be subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenue or earnings from
levels expected by securities analysts, investors 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
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float") of the Company, as of March 15, 2000, was approximately $8,493,000 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 office is located in Menlo Park, California,
and consists of approximately 30,000 square feet under a lease that expires in
June 2005. In addition, the Company has an office 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 twelve months ended December 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
<TABLE>
The executive officers of the Company, and their ages as of March 30,
2000, are as follows:
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Junaid Sheikh.................... 46 Chairman of the Board, President and Chief Executive
Officer
Phillip Bennett.................. 46 Executive Vice President, Technology and Engineering
Donald K. McCauley............... 59 Senior Vice President, Finance, and Chief Financial
Officer
Ian Craven....................... 45 Senior Vice President, Engineering
William T. Ludwig................ 52 Vice President, Sales
William Harris Rogers............ 52 Vice President, Marketing
Donald W. Petersen............... 55 Vice President, Manufacturing
</TABLE>
Junaid Sheikh has served as the Chairman of the Company's Board of
Directors since June 1988, and as the Company's President and Chief Executive
Officer since November 1991.
Phillip Bennett has served as Executive Vice President, Technology and
Engineering, since December 1998. 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 has served as Senior Vice President, Finance, and
Chief Financial Officer since December 1998. Prior to joining the Company, Mr.
McCauley served as the Senior Vice President of Finance and
19
<PAGE>
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 has served as Vice President, Sales, since December
1998. From July 1996 to December 1998, Mr. Ludwig served as Vice President of
Sales for Americas/Far East (AMFE) for Pinnacle Systems. From January 1996 to
July 1996, he was the Director of Sales for FAST Electronics. From 1985 to 1995,
he served in various sales capacities for Abekas Video Systems.
William Harris Rogers has served as Vice President, Marketing, since
December 1998. From May 1998 to December 1998, he served as Vice President,
Sales and Marketing, of the Company. 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.
20
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
<TABLE>
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.
<CAPTION>
High Low
<S> <C> <C>
Fiscal Year ended September 30, 1997:
First Quarter............................................................. $2.63 $0.91
Second Quarter............................................................ $2.00 $1.00
Third Quarter............................................................. $2.25 $1.00
Fourth Quarter............................................................ $2.88 $1.56
Fiscal Year ended September 30, 1998:
First Quarter............................................................. $2.63 $1.06
Second Quarter............................................................ $1.44 $0.81
Third Quarter............................................................. $1.16 $0.50
Fourth Quarter............................................................ $0.69 $0.22
For the Three Months ended December 31, 1998.................................. $0.86 $0.19
Fiscal Year ended December 31, 1999:
First Quarter............................................................. $1.25 $0.66
Second Quarter............................................................ $1.56 $0.81
Third Quarter............................................................. $0.97 $0.38
Fourth Quarter............................................................ $1.00 $0.44
</TABLE>
On March 15, 2000, the closing sale price of the Company's common stock
as reported on the OTC Bulletin Board was $ 2.25.
The Company had 96 stockholders of record as of March 15, 2000,
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.
21
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
The following table presents selected consolidated financial data of
the Company. This historical data should be read in conjunction with the
attached consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Form 10-K.
<CAPTION>
Selected Consolidated Financial Data
(in thousands, except per share data)
Three Months Ended Twelve Months Ended
Consolidated Statement of Operations Data: Fiscal Year Ended September 30, December 31, December 31,
------------------------------- ------------ ------------
1995 1996 1997 1998 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................................... $21,312 $21,408 $17,627 $12,617 $4,133 $ 3,363 $11,847 $32,969
Gross profit................................. 11,175 10,398 6,593 6,439 2,387 1,389 5,441 17,401
Operating income (loss)...................... (10,792) (1,621) (4,657) (3,042) 90 (3,882) (7,014) (2,169)
Net income (loss)............................ (10,840) (916) (4,490) (2,881) 142 (3,896) (6,919) (2,595)
Basic net income (loss) per share(1)......... (2.47) (0.14) (0.68) (0.43) 0.02 (0.52) (1.00) (0.26)
Diluted net income (loss) per shar(1)........ (2.47) (0.14) (0.68) (0.43) 0.02 (0.52) (1.00) (0.26)
Shares used in computing:
Basic net income (loss) per share(1)....... 4,397 6,439 6,587 6,662 6,638 7,552 6,891 10,124
Diluted net income (loss) per share(1)..... 4,397 6,439 6,587 6,662 7,034 7,552 6,891 10,124
Balance Sheet Data: As of September 30, As of December 31, As of December 31,
-------------------- ------------------- ------------------
1995 1996 1997 1998 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------
(Unaudited) (Unaudited)
Working capital (deficit)........... $12,220 11,171 7,550 4,633 7,492 (2,661) (2,661) 200
Total assets........................ 19,712 17,279 11,545 8,093 12,447 17,213 17,213 12,035
Long-term notes payable............. 83 24 - - - 1,165 1,165 3,261
Total stockholders' equity.......... $13,679 $12,952 $ 8,566 $ 5,720 $8,734 $ 3,929 $ 3,929 $ 1,338
<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, 1999 and 1998 and
as of September 30, 1998 and 1997 and for the twelve months ended December 31,
1999 and 1998, the three months ended December 31, 1998 and 1997 and for the two
fiscal years ended September 30, 1998 and 1997, 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.
22
<PAGE>
Overview
Accom designs, manufactures, sells, and supports a complete line of
digital video signal processing, editing, and disk recording tools, primarily
for the professional worldwide video post-production and distribution
marketplaces. The Company had previously offered products, including the ELSET
Virtual Set, in the video and computer graphics production marketplace.
The following table summarizes the Company's products and the primary
markets they address.
- --------------------------------------------------------------------------------
Primary Markets / Products
--------------------------
Post-Production:
Editing:
Digital Video Editors:
Axial(R)3000 on-line editor
Sphere(TM)non-linear editor
AFFINITY(TM)
Digital Disk Recorders:
Work Station Disk ("WSD(R)") 2Xtreme(TM)Computer Graphics Digital Disk
Recorder
Accom Professional Recorder ("APR(TM)") Attache(TM)
Digital Switcher:
8150 switcher
Distribution:
Axess(TM) Digital News Graphic and Clip Server
Dveous(TM) and Brutus digital video effects systems
Abekas(R) 6000
- --------------------------------------------------------------------------------
The Company's revenues are currently derived primarily from product
sales. The Company generally recognizes revenue upon product shipment. If
obligations exist at the time of shipment, revenue recognition is deferred until
obligations are met. The Company's gross margin has historically fluctuated from
quarter to quarter and declined on an annual basis. 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.
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 included 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."
On January 21, 2000, Accom and certain of its subsidiaries sold
substantially all of their respective assets related to the ELSET virtual set
product line to IMadGINE. IMadGINE also purchased the stock of Accom's
subsidiary, Accom Poland. The Company and its subsidiaries also sold to IMadGINE
certain intellectual property related to the ELSET business. ELSET products
consist of virtual sets for high-end video content creation in real time. The
Company's first shipment of ELSET virtual set tools occurred in March 1996, with
the final shipment occurring in December 1999. With the sale of ELSET to
IMadGINE, Accom reduced its headcount of full-time
23
<PAGE>
employees by 13. The positions eliminated consisted of 9 software engineers and
1 administrative aide in the employment of Accom Poland and 3 marketing and
sales employees operating out of the Menlo Park office.
Results of Operations
Twelve Months Ended December 31, 1999 vs. Twelve Months Ended December 31, 1998
<TABLE>
The following table presents the Company's Consolidated Statements of
Operations (dollar amounts in thousands) for the twelve months ended December
31, 1999 and 1998:
<CAPTION>
For the Twelve Months Ended
December 31, Increase (Decrease)
-------------------------- ----------------------
1999 1998 Amount Percent
-------- -------- -------- -----
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 32,969 $ 11,847 $ 21,122 178.3%
Cost of sales 15,568 6,406 9,162 143.0%
-------- -------- -------- -----
Gross profit 17,401 5,441 11,960 219.8%
-------- -------- -------- -----
Operating expenses:
Research and development 7,340 3,721 3,619 97.3%
Marketing and sales 9,158 4,916 4,242 86.3%
General and administrative 3,072 1,623 1,449 89.3%
Charge for acquired in-process technology -- 2,195 (2,195) (100.0)%
-------- -------- -------- -----
Total operating expenses 19,570 12,455 7,115 57.1%
-------- -------- -------- -----
Operating loss (2,169) (7,014) 4,845 69.1%
Interest and other income (expense), net (414) 114 (528) (463.2)%
-------- -------- -------- -----
Loss before provision for income taxes (2,583) (6,900) 4,317 62.6%
Provision for income taxes 12 19 (7) (36.8)%
-------- -------- -------- -----
Net loss $ (2,595) $ (6,919) $ 4,324 62.5%
======== ======== ======== =====
</TABLE>
<TABLE>
The following table presents the Company's Consolidated Statements of
Operations as a percentage of net sales for the twelve months ended December 31,
1999 and 1998:
<CAPTION>
For the Twelve Months
Ended December 31,
---------------------- Increase
1999 1998 (Decrease)
---- ---- ----------
(Unaudited)
<S> <C> <C> <C>
Net sales 100.0% 100.0% -
Cost of sales 47.2% 54.1% (6.9)%
-------------------------------------
Gross margin 52.8% 45.9% 6.9%
-------------------------------------
Operating expenses:
Research and development 22.3% 31.4% (9.1)%
Marketing and sales 27.8% 41.5% (13.7)%
General and administrative 9.3% 13.7% (4.4)%
Charge for acquired in-process technology - 18.5% (18.5)%
-------------------------------------
Total operating expenses 59.4% 105.1% (45.7)%
-------------------------------------
Operating loss (6.6)% (59.2)% 52.6%
Interest and other income (loss), net (1.3)% 1.0% 2.3%
-------------------------------------
Loss before provision for income taxes (7.9)% (58.2)% 50.3%
Provision for income taxes - 0.2% (0.2)%
-------------------------------------
Net loss (7.9)% (58.4)% 50.5%
=====================================
</TABLE>
The following is a discussion comparing the results of operations for
the twelve months ending December 31, 1999 and 1998:
24
<PAGE>
Net sales. The increase in net sales during the twelve months ended
December 31, 1999, from levels for the twelve months ended December 31, 1998,
was primarily due to increased sales in the post-production and distribution
marketplaces as well as increased customer service revenues. The increased sales
resulted largely from sales from product lines acquired in the acquisition of
the Scitex Digital Video assets and business in December, 1998.
International sales in the twelve months ended December 31, 1999 and
1998, represented 35% and 43% of net sales, respectively, as export sales to
Europe decreased, as a percentage of total sales, from 15% to 14% and export
sales to the Pacific Rim decreased, as a percentage of total sales, from 23% to
18%.
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 December 31, 1999 and 1998:
For the Twelve Months Ended For the Twelve Months Ended
December 31, 1999 December 31, 1998
---------------------- --------------------
Market Amount Percent Amount Percent
------ ------ ------- ------ -------
Production $ 3,840 11.7% $ 5,275 44.5%
Post-Production 15,879 48.2% 4,046 34.2%
Distribution 8,813 26.7% 1,640 13.8%
Other 4,437 13.4% 886 7.5%
------- ----- ------- -----
$32,969 100.0% $11,847 100.0%
======= ===== ======= =====
Cost of sales. Cost of sales, as a percentage of sales, decreased for
the twelve months ended December 31, 1999, from levels for the twelve months
ended December 31, 1998, as a result of increased overall sales and a higher
proportion of higher margin, customer service sales.
Research and development. Research and development expenses for the
twelve months ended December 31, 1999, increased over levels for the twelve
months ended December 31, 1998, due to increases in headcount and related
overhead expenses, consultant expenses, and materials and services related to
specific project development. The increase in headcount was primarily a result
of the acquisition of the Scitex Digital Video assets and business in December
1998.
Marketing and sales. Marketing and sales expenses for the twelve months
ended December 31, 1999, increased over levels for the twelve months ended
December 31, 1998, primarily due to increases in headcount and related overhead
expenses, expenses for consultants and temporary employees, sales commission
expenses, travel expenses, trade show expenses, and advertising expenses. The
increase in headcount was primarily a result of the acquisition of the Scitex
Digital Video assets and business in December 1998.
General and administrative. The increase in general and administrative
expenses for the twelve months ended December 31, 1999, from levels for the
twelve months ended December 31, 1998, was primarily due to increases in
headcount and related overhead expenses, expenses for consultants and temporary
employees, fees for professional services, bank charges and amortization of
intangibles. The increase in headcount was primarily a result of the acquisition
of the Scitex Digital Video assets and business in December 1998.
Interest and other income, net. Interest and other income, net, for the
twelve months ended December 31, 1999, decreased over levels for the twelve
months ended December 31, 1998, due to a decrease in the levels of
interest-paying investments as well as an increase in debt taken on, in part, to
fund the acquisition of the Scitex Digital Video assets and business in December
1998.
25
<PAGE>
Provision for income taxes. For the twelve months ended December 31,
1999, the provision for income taxes represents an estimate of the current
foreign tax liability. No benefit related to U.S. losses incurred for the twelve
months ended December 31, 1999, has been recognized by the Company due to the
inability to carry back 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 year ended December 31, 1998, the provision for income taxes
represents an estimate of foreign tax liability.
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 1997:
<CAPTION>
For the Three Months
Ended
December 31, Increase (Decrease)
------------------------ ------------------------
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 1997:
<CAPTION>
For the Three Months
Ended
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 1.3% (1.7)%
(0.4)%
-------------------------------------
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>
26
<PAGE>
The following is a discussion comparing the results of operations for
the three months ending December 31, 1998 and 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.
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 Ended For the Three Months Ended
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 carry back net operating losses and a lack of earnings history. The
deferred tax asset on the balance sheet has been fully offset by
27
<PAGE>
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 September 30, 1997.
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.
<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, 1998 and 1997:
<CAPTION>
Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 0.0%
Cost of sales 49.0% 62.6% (13.6)%
---------------------------------
Gross margin 51.0% 37.4% 13.6%
---------------------------------
Operating expenses:
Research and development 26.1% 19.0% 7.1%
Marketing and sales 39.3% 33.9% 5.4%
General and administrative 9.7% 10.9% (1.2)%
---------------------------------
Total operating expenses 75.1% 63.8% 11.3%
---------------------------------
Operating loss (24.1)% (26.4)% 2.3%
Interest and other income (loss), net 1.4% 1.0% 0.4%
---------------------------------
Loss before provision for income taxes (22.7)% (25.4)% 2.7%
Provision for income taxes 0.1% 0.1% -
---------------------------------
Net loss (22.8)% (25.5)% 2.7%
=================================
</TABLE>
Note: In 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:
28
<PAGE>
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.
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 carry
back 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.
29
<PAGE>
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.
Liquidity and Capital Resources
Since inception, the Company has financed its operations and
expenditures for property and equipment through the sale of capital stock and
convertible debt, 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, 1999, the Company had $328,000 of cash. Operating
activities provided $87,000 in net cash in the twelve months ended December 31,
1999 and used $1.8 million in net cash in the twelve months ended December 31,
1998. Net cash provided by operating activities in the twelve months ended
December 31, 1999, was due primarily to decreases in accounts receivable and
inventories partially offset by the net loss and an increase in accrued
liabilities and customer deposits. Net cash used by operating activities in the
twelve months ended December 31, 1998, was due primarily to the net loss and an
increase in accounts payable partially offset by an increase in accounts
receivable. 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.
On December 10, 1998, the Company signed an agreement with LaSalle
Business Credit, Inc. ("LBC"), a member of the ABN AMRO group, for a $7.5
million revolving line of credit. The agreement was amended on March 11, 1999,
July 23, 1999, and November 3, 1999. In addition, a waiver was granted on
December 17, 1999, for the breach of a financial covenant as of October 31,
1999. On January 21, 2000, the agreement between the Company and LBC was
terminated. The credit line was secured by all the assets of the Company. The
availability under this line was calculated based on eligible accounts
receivable . Borrowings under the line were subject to certain financial
covenants and, as of December 31, 1999, the Company was not in compliance with
these covenants. As of December 31, 1999, the Company had an outstanding balance
borrowed under the line of $559,000. The balance paid by the Company to LBC at
the time of termination was $1.5 million. The final payment to LBC was funded
from the proceeds of the sale of the ELSET product line to IMadGINE.
On February 10, 2000, the Company signed an agreement with The
Provident Bank ("Provident"), an Ohio chartered bank, for a $2,000,000 revolving
line of credit. Interest accrues on outstanding borrowings at the bank's prime
rate plus 125 basis points. The credit line is secured by all assets of the
Company. Availability under the line is calculated based on eligible accounts
receivable. Borrowings under the line are subject to certain financial
covenants. Borrowings are limited to a maximum of $1,500,000 until March 31,
2000. Removal of this borrowing limit is dependent on meeting a certain
financial covenant.
On March 12, 1999, the Company completed a private placement of $3.5
million in senior subordinated convertible notes with a group of investors led
by the American Bankers Insurance Group, Inc. ("ABIG"). The agreement between
the Company and the holders of the convertible notes was amended and certain
waivers granted on November 3, 1999, and February 10, 2000. As part of its
agreement to grant certain waivers on February 10, 2000, ABIG stipulated that
the Company use the proceeds from sale of the ELSET virtual set product line to
IMadGINE to (a) pay or reserve funds to pay for all debt owed to Scitex Digital
Video and (b) reserve funds for the payment of all transaction fees relating to
the sale of the ELSET product line. The notes currently have a coupon rate of 8%
per year, mature in 2004, and are convertible into shares of Accom common
30
<PAGE>
stock at a price of $1.30 per share. Proceeds from the private placement were
used to pay the balance on the revolving line of credit with LaSalle Business
Credit that was outstanding at the time the proceeds were received.
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. The Company believes that its operating plans are
reasonable and can be achieved. In the event that results from operations and
cash flows generated are less than planned, the Company will reevaluate its
operating plans and believes it will have the ability to delay or reduce
expenditures so as to not breach the covenants of its credit facilities or
require additional resources to ensure that the Company continues as a going
concern at least through December 31, 2000.
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-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 The Provident Bank ("Provident") is equal to the bank's
prime rate plus 125 basis points. The interest rate on a $750,000 note payable
to Scitex Digital Video is equal to the Merrill Lynch Money Market Rate. As
Provident's prime rate or the Merrill Lynch Money Market Rate fluctuate, the
interest expense incurred by the Company on the aforementioned debt will
fluctuate. If Provident's 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 $13,000 (based on debt balances at December 31,
1999).
The Company does not currently hold interest bearing investments which
would be affected by interest rate fluctuations.
All of the Company's sales are transacted in U.S. dollars. In addition,
most of the Company's purchases are transacted in U.S. dollars. As a result, the
Company's operations would not be affected by exchange rate fluctuations except
to the extent that sales in certain countries might decease if the U.S. dollar
became substantially stronger than the currency of the countries in question and
purchases denominated in U.S. dollars became prohibitively expensive.
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.
31
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement")
for its annual meeting of stockholders to be held June 15, 2000 and the
information included therein is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of the Company is incorporated by
reference from the information under the caption "Election of
Directors-Nominees" in the Company's Proxy Statement.
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 is incorporated by reference from the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement.
Item 11. Executive Compensation
Information with respect to executive compensation and related
information is incorporated by reference from the information under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management is incorporated by reference from the information under
the caption "Common Stock Ownership of Certain Beneficial Owners and Management"
in the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions is incorporated by reference from the information under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement.
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, 1999 and 1998
and September 30, 1998 and 1997.
Consolidated Statements of Operations - For the twelve months
ended December 31, 1999 and 1998, the three months
32
<PAGE>
ended December 31, 1998 and 1997 and for the Fiscal Years
ended September 30, 1998 and 1997.
Consolidated Statement of Shareholders' Equity - For the
twelve months ended December 31, 1999, for the three months
ended December 31, 1998 and for the Fiscal Years ended
September 30, 1998 and 1997.
Consolidated Statements of Cash Flows - For the twelve months
ended December 31, 1999 and 1998, the three months ended
December 31, 1998 and 1997 and for the Fiscal Years ended
September 30, 1998 and 1997.
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.
3.1.1(2) Certificate of Amendment of Bylaws, dated as of May 26, 1999.
3.1.2(2) Certificate of Amendment of Bylaws, dated as of July 20, 1999.
3.2(3) 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.
3.2.1(2) Certificate of Amendment of Certificate of Incorporation of
the Company filed with the Delaware Secretary of State on July
20, 1999.
3.3 Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock.
Reference is made to Exhibits 4.3, 4.4 and 4.5.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 4.3, 4.4 and 4.5.
4.2(1) Specimen Common Stock Certificate.
4.3(4) 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(5) Amendment No. 1 to Preferred Shares Rights Agreement, dated as
of July 14, 1998, between the Company and U.S. Stock Transfer
Corporation.
33
<PAGE>
4.5(6) 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(7) 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 Lease, dated November 19, 1999, by and between Menlo Business
Park LLC and the Company.
10.1.1 Addendum to Lease, dated March 25, 1999, by and between
Whispering Pines Associates II 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 Loan and Security Agreement, dated February 10, 2000, between
the Company and The Provident Bank, including Revolving Loan
Promissory Note.
10.6(10) Restricted Stock Purchase Agreement and Non-Recourse
Promissory Note, each dated December 4, 1998, between Phillip
Bennett and the Company.
10.6.2(2) Amended and Restated Secured Promissory Note, dated as of June
20, 1999, issued to Phillip Bennett in the principal amount of
$500,000.
10.7(10) Restricted Stock Purchase Agreement and Non-Recourse
Promissory Note, each dated December 7, 1998, between Lionel
M. Allan and the Company.
10.7.1(2) Amendment to Restricted Stock Purchase Agreement, dated as of
June 20, 1999, between the Company and Lionel M. Allan and
Amended and Restated Secured Promissory Note, issued to Lionel
M. Allan in the principal amount of $65,000, each dated as of
June 20, 1999.
10.8(10) 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(10) Stock Purchase Agreement, dated December 10, 1998, between
Michael Luckwell and the Company.
10.10(10) 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.
10.14(12) Asset Purchase Agreement, dated as of January 21, 2000, by and
among the Company, Accom Virtual Studio, Inc., Accom Virtual
Studio (Germany) GmbH, Elset Electronic Set GmbH, IMadGINE
Video Systems Marketing, B.V. and Orad Hi-Tec Systems Ltd.
34
<PAGE>
10.15(12) Conditional Contract for Sale of Share, dated as of January
21, 2000, by and between Accom Virtual Studio Inc. and
IMadGINE Video Systems Marketing, B.V.
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 36 of this
Report).
27.1 Financial Data Schedule. (EDGAR filed version only)
(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
Quarterly Report on 10-Q for the quarter ended June 30, 1999 (File No.
0-26620).
(3) 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).
(4) 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.
(5) 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.
(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 December 23, 1998.
(7) 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.
(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 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).
(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 the Company's Current
Report on Form 8-K (File No. 0-26620), filed on February 4, 2000 (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.
("SDV") and certain of SDV'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 reviewing the audited financials of SDV and will file the
financial statements required by such Form 8-K as soon as practicable after the
review is complete.
35
<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 30th day of March, 2000.
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, March 30, 2000
----------------- President and Chief Executive Officer
(Junaid Sheikh) (Principal Executive Officer)
/s/ DONALD K. MCCAULEY Senior Vice President and Chief March 30, 2000
---------------------- Financial Officer (Principal Financial
(Donald K. McCauley) and Accounting Officer)
/s/ LIONEL M. ALLAN Director March 30, 2000
-------------------
(Lionel M. Allan)
/s/ THOMAS FANELLA Director March 30, 2000
-------------------
(Thomas E. Fanella)
Director March 30, 2000
------------------
(David A. Lahar)
Director March 30, 2000
--------------------
(Michael Luckwell)
/s/ EUGENE M. MATALENE, JR. Director March 30, 2000
---------------------------
(Eugene M. Matalene, Jr.)
</TABLE>
36
<PAGE>
Accom, Inc.
Consolidated Financial Statements
As of December 31, 1999 and 1998 and
September 30, 1998 and 1997
And
For the twelve months ended December 31, 1999 and 1998,
For the three months ended December 31, 1999 and 1998 and
For the two fiscal years ended September 30, 1998 and 1997
with Report of Independent Auditors
<PAGE>
Accom, Inc.
Consolidated Financial Statements
As of December 31, 1999 and 1998 and
September 30, 1998 and 1997
And
For the twelve months ended December 31, 1999 and 1998,
For the three months ended December 31, 1999 and 1998 and
For the two fiscal years ended September 30, 1998 and 1997
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, 1999 and 1998 and September 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the twelve months ended December 31, 1999, the three months ended
December 31, 1998 and for both of the 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998 and September 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the twelve
months ended December 31, 1999, the three months ended December 31, 1998 and for
both of the fiscal years in the period ended September 30, 1998, in conformity
with accounting principles generally accepted in the United States. 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
January 22, 2000
F-2
<PAGE>
<TABLE>
Accom, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
<CAPTION>
As of December 31, As of September 30,
----------------------- -----------------------
1999 1998 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 328 $ -- $ 3,231 $ 5,317
Accounts receivable, net of allowance for doubtful
accounts of $2,163 and $2,896 as of December 31, 1999
and 1998, respectively, and $237 and $401 as of
September 30, 1998 and 1997, respectively 1,616 3,578 1,903 3,123
Inventories 5,112 5,345 1,527 980
Income tax refunds receivable -- -- -- 621
Prepaid expenses and other current assets 580 535 345 488
-------- -------- -------- --------
Total current assets 7,636 9,458 7,006 10,529
Property and equipment, net 2,343 3,299 1,038 967
Intangible assets 1,986 3,247 -- --
Restricted cash -- 1,132 -- --
Other assets 70 77 49 49
-------- -------- -------- --------
$ 12,035 $ 17,213 $ 8,093 $ 11,545
======== ======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Bank borrowings-line of credit $ 559 $ 3,916 $ -- $ --
Current portion of notes payable 1,315 900 -- 24
Accounts payable 2,560 2,108 1,276 1,476
Accrued liabilities 2,037 3,823 973 1,313
Customer deposits 965 1,285 37 25
Deferred revenue -- 87 87 141
-------- -------- -------- --------
Total current liabilities 7,436 12,119 2,373 2,979
Long-term portion of notes payable 3,261 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;
40,000 shares authorized as of December 31, 1999
and 20,233 shares authorized as of December 31, 1998
and September 30, 1998 and 1997; 10,133 and 10,121
shares issued and outstanding as of December 31, 1999
and 1998, respectively, and 6,671 and 6,627 shares
issued and outstanding as of September 30, 1998 and 1997,
respectively 24,201 24,197 21,462 21,427
Notes receivable from stockholders (630) (630) -- --
Accumulated deficit (22,233) (19,638) (15,742) (12,861)
-------- -------- -------- --------
Total stockholders' equity 1,338 3,929 5,720 8,566
-------- -------- -------- --------
$ 12,035 $ 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>
Twelve Months Ended, Three Months Ended Fiscal Year Ended,
December 31, December 31, September 30,
--------------------- --------------------- ---------------------
1999 1998 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Sales
Product $ 28,532 $ 10,961 $ 3,030 $ 4,060 $ 11,991 $ 17,201
Service 4,437 886 333 73 626 426
-------- -------- -------- -------- -------- --------
32,969 11,847 3,363 4,133 12,617 17,627
Cost of sales
Product 14,417 6,286 1,924 1,721 6,083 10,952
Service 1,151 120 50 25 95 82
-------- -------- -------- -------- -------- --------
15,568 6,406 1,974 1,746 6,178 11,034
Gross profit 17,401 5,441 1,389 2,387 6,439 6,593
-------- -------- -------- -------- -------- --------
Operating expenses:
Research and development 7,340 3,721 1,210 784 3,295 3,344
Marketing and sales 9,158 4,916 1,163 1,214 4,967 5,981
General and administrative 3,072 1,623 703 299 1,219 1,925
Charge for acquired in-process
technology -- 2,195 2,195 -- -- --
-------- -------- -------- -------- -------- --------
Total operating expenses 19,570 12,455 5,271 2,297 9,481 11,250
-------- -------- -------- -------- -------- --------
Operating income (loss) (2,169) (7,014) (3,882) 90 (3,042) (4,657)
Interest and other income 93 153 22 54 185 183
Interest and other expense (507) (39) (35) (1) (5) (7)
-------- -------- -------- -------- -------- --------
Income (loss) before provision for
income taxes (2,583) (6,900) (3,895) 143 (2,862) (4,481)
-------- -------- -------- -------- -------- --------
Provision for income taxes 12 19 1 1 19 9
-------- -------- -------- -------- -------- --------
Net income (loss) $ (2,595) $ (6,919) $ (3,896) $ 142 $ (2,881) $ (4,490)
======== ======== ======== ======== ======== ========
Basic net income (loss) per share $ (0.26) $ (1.00) $ (0.52) $ 0.02 $ (0.43) $ (0.68)
======== ======== ======== ======== ======== ========
Diluted net income (loss) per share $ (0.26) $ (1.00) $ (0.52) $ 0.02 $ (0.43) $ (0.68)
======== ======== ======== ======== ======== ========
Shares used in computing basic net income
(loss) per share 10,124 6,891 7,552 6,638 6,662 6,587
======== ======== ======== ======== ======== ========
Shares used in computing diluted net
income (loss) per share 10,124 6,891 7,552 7,034 6,662 6,587
======== ======== ======== ======== ======== ========
<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, 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
Issuance of common stock upon exercise of
stock options 12 4 -- -- 4
Net loss and comprehensive loss -- -- -- (2,595) (2,595)
-------- -------- -------- -------- --------
Balances, December 31, 1999 10,133 $ 24,201 $ (630) $(22,233) $ 1,338
======== ======== ======== ======== ========
<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>
Twelve Months Ended Three Months Ended Twelve Months Ended
December 31, December 31, September 30,
------------------ ------------------ ------------------
1999 1998 1998 1997 1998 1997
------- ------- ------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $(2,595) $(6,919) $(3,896) $ 142 $(2,881) $(4,490)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Charge for acquired in-process technology -- 2,195 2,195 -- -- --
Depreciation and amortization of goodwill and
other acquisition-related intangibles 1,408 707 275 118 550 528
Non-cash charge to record required reductions in accounts
receivable, inventories, and property and
equipment, and accruals for streamlining
operations -- -- -- -- -- 3,995
Changes in operating assets and liabilities, net
of effects of reserves to streamline
operations:
Accounts receivable 1,962 2,494 950 (325) 1,219 1,300
Inventories 632 561 799 (309) (547) 1,967
Income tax refunds receivable -- 243 -- 378 621 (426)
Prepaid expenses and other current assets (45) 277 36 (97) 144 410
Other assets 7 -- -- -- -- 93
Accounts payable 464 (884) (114) 570 (200) (766)
Accrued liabilities and customer deposits (1,659) (383) 131 187 (327) (611)
Deferred revenue (87) (45) -- (9) (54) (387)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating activities
87 (1,754) 376 655 (1,475) 1,613
------- ------- ------- ------- ------- -------
Cash Flows From Investing Activities
Expenditures for property and equipment (400) (326) (48) (344) (622) (563)
Proceeds from the sale of property and equipment 351 -- -- -- -- --
Acquisition of Scitex Digital Video business -- (7,893) (7,893) -- -- --
------- ------- ------- ------- ------- -------
Net cash used in investing activities (49) (8,219) (7,941) (344) (622) (563)
------- ------- ------- ------- ------- -------
Cash Flows from Financing Activities
Borrowings and payments on line of credit, net (3,357) 3,916 3,916 -- -- --
Repayments on notes payable (750) (10) -- (14) (24) (58)
Proceeds from long-term notes 3,261 -- -- -- -- --
Issuance of common stock 4 1,563 1,550 26 39 104
Repurchase of common stock -- (4) -- -- (4) --
Restricted cash 1,132 (1,132) (1,132) -- -- --
------- ------- ------- ------- ------- -------
Net cash provided by financing activities 290 4,333 4,334 12 11 46
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 328 (5,640) (3,231) 323 (2,086) 1,096
Cash and cash equivalents at beginning of the period -- 5,640 3,231 5,317 5,317 4,221
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end of the period $ 328 $ -- $ -- $ 5,640 $ 3,231 $ 5,317
======= ======= ======= ======= ======= =======
-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>
Twelve Months Ended Three Months Ended, Twelve Months Ended
December 31, December 31, September 30,
----------------- ------------- --------------
1999 1998 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Interest paid $ 374 $ 22 $ 22 $ 1 $ 1 $ 6
======== ====== ====== ======= ======= ======
Income taxes paid $ 7 $ 17 $ 1 $ 1 $ 17 $ 2
======== ====== ====== ======= ======= ======
Noncash investing and financing activities:
Issuance of common stock in exchange for notes
receivable $ -- $ 630 $ 630 $ -- $ -- $ --
======== ====== ====== ======= ======= ======
Issuance of warrants as partial consideration for
acquisition of Scitex Digital Video business $ -- $ 555 $ 555 $ -- $ -- $ --
======== ====== ====== ======= ======= ======
Issuance of notes payable as partial consideration
for Scitex Digital Video business $ -- $2,065 $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, primarily for the professional, worldwide video 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 $2.6 million in the twelve months ended
December 31, 1999. The Company also incurred a net loss of $3.9 million in the
three months ended December 31, 1998 and a net loss of $2.9 million and $4.5
million in the twelve months ended September 30, 1998 and 1997, 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 financing executed in February 2000 (see Note 7)
that the Company will have sufficient financial resources to continue its
operations through December 31, 2000. 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.
No customer accounted for 10% or more of net sales for the twelve months ended
December 31, 1999. One customer accounted for 14%, 16% and 13% of net sales for
the three months ended December 31, 1998, and for the twelve months ended
September 30, 1998 and 1997, respectively. Export sales for the twelve months
ended December 31, 1999, the three months ended December 31, 1998 and for the
twelve months ended September 30, 1998 and 1997, were approximately 35%, 45%,
45% and 42%, respectively. Export sales to Europe and the Pacific Rim as a
percentage of total sales were 14% and 18%, respectively, for the twelve months
ended December 31, 1999, 17% and 21%, respectively, for the three months ended
December 31, 1998, 19% and 22%, respectively for the twelve months ended
September 30, 1998 and 10% and 27%, respectively, for the twelve months ended
September 30, 1997.
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 twelve months ended December 31, 1999.
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. Under the terms of its agreement with The Provident Bank
("Provident") (see Note 7), cash received by the Company is "swept" into
accounts controlled by Provident. Cash for operations is
F-9
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
provided by borrowing from Provident under the terms of the agreement with
Provident establishing a line of credit.
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, 1999, 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. If post-
F-10
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
shipment obligations exist or there are concerns about collection at the time of
shipment, revenue is deferred until obligations are met or collection occurs.
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 revenues are deferred and recognized on a
straight-line basis 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.
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
F-11
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
to determine if the carrying value of the assets is 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. Based on a review
of the accruals recorded in December 1998 in connection with the SDV
acquisition, accruals and related intangibles acquired in the SDV acquistion
were reduced by $858,000 as of December 31, 1999. 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 December 31,
Useful -----------------------
Life 1999 1998
---- ---- ----
(In years) (In thousands)
Core technology 8 $ 642 $ 869
Developed technology 5 1,281 1,732
Other intangibles 3-15 512 692
-------- --------
2,435 3,293
Less: Accumulated amortization 449 46
-------- --------
$ 1,986 $ 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.
F-12
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
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 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 183,000 and 29,000 for
the twelve months ended December 31, 1999 and 1998, respectively, 12,000 for the
three months ended December 31, 1997 and 77,000 and 268,000 for the fiscal years
ended September 30, 1998 and 1997, 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 Twelve Months For the Three Months Ended Fiscal Year Ended,
Ended December 31 December 31, September 30,
---------------------- ----------------------- ----------------------
1999 1998 1998 1997 1998 1997
-------- -------- ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (2,595) $ (6,919) $ (3,896) $ 142 $ (2,881) $(4,490)
======== ======== ========== ======= ========= =======
Shares used in computing
basic net income (loss) per share 10,124 6,891 7,552 6,638 6,662 6,587
======== ======== ========== ======= ========= =======
Basic net income (loss) per
share $ (0.26) $ (1.00) $ (0.52) $ 0.02 $ (0.43) $ (0.68)
======== ======== ========== ======= ========= =======
Calculation of shares outstanding
for computing diluted net income
(loss) per share:
Shares used in computing basic
net income (loss) per share 10,124 6,891 7,552 6,638 6,662 6,587
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 10,124 6,891 7,552 7,034 6,662 6,587
======== ======== ========== ======= ========= =======
Diluted net income (loss) per
share $ (0.26) $ (1.00) $ (0.52) $ 0.02 $ (0.43) $ (0.68)
======== ======== ========== ======= ========= =======
</TABLE>
Comprehensive Income
Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." There are no material components of other comprehensive
F-13
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
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 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 revenue by market:
<CAPTION>
For the Twelve Months For the Three Months For the Year
Ending December 31, Ending December 31, Ended September 30,
----------------------- ----------------------- -----------------------
Market 1999 1998 1998 1997 1998 1997
------ ------- ------- ------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Production $ 3,840 $ 5,275 $ 1,113 $ 2,389 $ 6,551 $ 8,259
Post Production 15,879 4,046 1,493 1,040 3,593 6,534
Distribution 8,813 1,640 424 631 1,847 2,408
Other 4,437 886 333 73 626 426
------- ------- ------- ------- ------- -------
$32,969 $11,847 $ 3,363 $ 4,133 $12,617 $17,627
</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.
F-14
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
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.
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.
F-15
<PAGE>
3. Business Combinations (continued)
(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. As of December 31, 1999, $750,000 had been paid on the
second note. The remaining balance of $565,000 was paid in January 2000
utilizing the proceeds of the sale of ELSET product line (see Note 13).
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.
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
Net 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
F-16
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
3. Business Combinations (continued)
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.
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 SDV.
Unaudited Pro Forma
The following summary unaudited pro forma information shows the pro forma
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 pro forma information has been prepared from unaudited
information and is subject to change as a result of additional procedures that
are currently being reviewed by management. Accordingly, the results are not
necessarily indicative of those which would have occurred 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 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.
F-17
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
3. Business Combinations (continued)
The following unaudited pro forma results include the straight-line amortization
of intangibles assets:
Three Months Ended Twelve Months Ended
(In Thousands, Except Per Share Data) December 31, September 30,
------------ ----------------------
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)
4. Inventories
Inventories consist of the following:
As of December 31, As of September 30,
------------------ -------------------
1999 1998 1998 1997
------ ------ ------ ------
(in thousands) (in thousands)
Purchased parts and materials $1,656 $2,399 $ 256 $ 225
Work-in-process 1,634 394 445 204
Finished goods 369 151 181 182
Demonstration inventory 1,453 2,401 645 369
------ ------ ------ ------
$5,112 $5,345 $1,527 $ 980
------ ------ ------ ------
5. Property and Equipment
Property and equipment consist of the following:
As of December 31, As of September 30,
------------------ ------------------
1999 1998 1998 1997
------- ------- ------- -------
(in thousands) (in thousands)
Machinery and equipment $ 3,399 $ 2,488 $ 2,038 $ 1,768
Furniture and fixtures 367 505 219 207
Computer equipment 1,422 1,661 1,409 1,070
Service inventory 1,214 1,505 -- --
------- ------- ------- -------
6,402 6,159 3,666 3,045
Less: accumulated depreciation (4,059) (2,860) (2,628) (2,078)
------- ------- ------- -------
Net property and equipment $ 2,343 $ 3,299 $ 1,038 $ 967
------- ------- ------- -------
Depreciation expense for the twelve months ended December 31, 1999, the three
months ended December 31, 1998, and the fiscal years ended September 30, 1998
and 1997 was $1.0 million, $229,000, $550,000, and $528,000.
F-18
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
6. Accrued Liabilities
Accrued liabilities consist of the following:
As of December 31, As of September 30,
------------------ -------------------
1999 1998 1998 1997
------ ------ ------ ------
(in thousands) (in thousands)
Accrued compensation $ 317 $ 167 $ 150 $ 228
Accrued outside sales commissions 534 655 149 90
Accrued acquisition liabilities 45 1,589 126 208
Accrued streamlining expenses -- -- 305 379
Other 1,141 1,412 243 408
------ ------ ------ ------
$2,037 $3,823 $ 973 $1,313
====== ====== ====== ======
7. Bank Borrowings
On December 10, 1998, the Company entered into an agreement with LaSalle
Business Credit, Inc. ("LBC"), a subsidiary of ABN AMRO Bank, N.V., for a
revolving line of credit ("line"). The agreement was amended on March 11, 1999,
July 23, 1999, and November 3, 1999. In addition, a waiver was granted on
December 17, 1999, for the breach of a financial covenant as of October 31,
1999. The line of credit provided for borrowings subject to the level of
eligible accounts receivable and required compliance with certain financial
covenants. The Company was not in compliance with the financial covenants as of
December 31, 1999. As of December 31, 1999, the Company had outstanding
borrowings against the line of $559,000. An additional $1.4 million was
available for borrowing under the terms of the agreement in place with LBC at
the time. The Company continued to utilize the LBC line until its termination in
January 2000.
In conjunction with the Company's sale of the ELSET virtual set product line
(see Note 13) on January 21, 2000, the Company's agreement with LBC was
terminated. Proceeds from the sale were used to pay the outstanding liability
with LBC of $1.5 million.
On February 10, 2000, the Company entered into an agreement with The Provident
Bank ("Provident"), an Ohio chartered bank, for a revolving line of credit.
Borrowings against the line are subject to levels of eligible accounts
receivable and compliance with certain financial covenants, including interest
coverage, tangible net worth, and EBITDA covenants. At inception, the line
allowed for borrowings up to $1,500,000 with a provision for increasing
borrowings up to $2,000,000 after March 31, 2000, if certain financial
performance covenants were met.
Interest accrues on outstanding borrowings at the bank's prime rate plus 125
basis points. All sums due under the agreement are due on March 1, 2003.
Borrowings are secured by all assets of the Company.
F-19
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
7. Bank Borrowings (continued)
As part of its agreement with Provident, the Company agreed to turn all of its
incoming cash deposits over to Provident. As deposits are received by the
Company, the funds are "swept" into accounts controlled by Provident. The
deposits are used to reduce outstanding balances with Provident. To fund
operations, the Company requests cash advances by Provident, the availability of
which is determined by the factors discussed above.
To the extent that the Company does not fully utilize the line of credit,
Provident charges a "commitment fee," which is equal to 0.5% per year of the
portion of the credit line not utilized.
The Company may terminate the line before March 1, 2003, only if it has no
outstanding balance with Provident and has made no borrowings against the line
for six consecutive months. In addition, there is a termination fee of $20,000.
8. Long-Term Debt
On March 12, 1999, the Company completed a private placement of $3.5 million in
senior subordinated convertible notes with a group of investors led by the
American Bankers Insurance Group, Inc. ("ABIG"). The agreement between the
Company and the holders of the convertible notes was amended and certain waivers
granted on November 3, 1999, and February 10, 2000. As part of its agreement to
grant certain waivers on February 10, 2000, ABIG stipulated that the Company use
the proceeds from sale of the ELSET virtual set product line to IMadGINE Video
Systems Marketing B.V. (see Note 13) to (a) pay or reserve funds to pay for all
debt owed to Scitex Digital Video and (b) reserve funds for the payment of all
transaction fees relating to the sale of the ELSET product line.
The notes currently have a coupon rate of 8% per year, mature in 2004, and are
convertible into shares of Accom common stock at a price of $1.30 per share. If
the Company fails to meet certain covenants specified in the agreement between
the Company and ABIG, ABIG has the right to declare the notes immediately due.
As of December 31, 1999, the Company was not in compliance with the covenants.
ABIG issued a waiver of compliance until March 31, 2000.
The proceeds from the private placement were used to partially pay the balance
on the revolving line of credit with LaSalle Business Credit that was
outstanding at the time the proceeds were received.
F-20
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
9. Commitments
Leasing Arrangements
The Company leases its primary office and manufacturing facility under an
operating lease which expires in June 2005. The Company leases another office in
Grass Valley, California, under an operating lease which expires in April 2004.
In addition, the Company leases office space in Hong Kong under a lease which
expires in January 2001. Rent expense for the twelve months ended December 31,
1999, the three months ended December 31, 1998 and for fiscal years 1998 and
1997 was approximately $628,000, $131,000, $465,000 and $448,000, respectively.
Future minimum rental payments under noncancelable leases at December 31, 1999,
are as follows (in thousands):
2000 $ 1,219
2001 1,110
2002 1,001
2003 1,009
2004 922
2005 443
-------------
Total $ 5,704
=============
The Company was a sublessor for a portion of its primary office and
manufacturing facility. Sublease rental income for the twelve months ended
December 31, 1999, the three months ended December 31, 1998 and for fiscal 1998
and 1997 was approximately $86,000, $27,000, $175,000 and $84,000, respectively.
10. Stockholders' Equity
Warrants
In December, 1998, the Company issued to Scitex Digital Video ("SDV") as part of
the acquisition of the assets and business of SDV 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, SDV has an option to exchange
their 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
F-21
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
10. Stockholders' Equity (continued)
Warrants (continued)
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.
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-22
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
10. 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, 1996 849,161 1,167,816 $0.48-$5.88 $2.78
Shares authorized 565,689 - - -
Options granted (1,719,894) 1,719,894 $1.25-$1.69 $1.31
Options exercised - (103,613) $0.48-$1.31 $0.56
Options cancelled 1,253,676 (1,253,676) $0.48-$5.88 $2.78
--------------------------------------------------------------------
Balances at September 30, 1997 948,772 1,530,421 $0.48-$5.88 $1.27
Shares authorized 66,597 - - -
Options granted (1,456,920) 1,456,920 $0.81-$1.63 $1.01
Options exercised - (33,109) $0.48-$1.31 $0.76
Options cancelled 1,702,899 (1,702,899) $0.48-$1.69 $1.26
--------------------------------------------------------------------
Balances at September 30, 1998 1,261,348 1,251,333 $0.48-$5.88 $1.00
Shares authorized - - -
Options granted (804,000) 804,000 $0.31-$0.65 $0.63
Options exercised - - - -
Options cancelled 40,615 (40,615) $0.81-$1.03 $0.98
--------------------------------------------------------------------
Balances at December 31, 1998 497,963 2,014,718 $0.31-$5.88 $0.85
Shares authorized - - -
Options granted (121,400) 121,400 $0.41-$1.25 $0.71
Options exercised - (12,083) $0.31-$0.48 $0.34
Options cancelled 195,583 (195,583) $0.48-$1.03 $0.82
--------------------------------------------------------------------
Balances at December 31, 1999 572,146 1,928,452 $0.31-$5.88 $0.85
====================================================================
</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-23
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
10. 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, 1999 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 - $0.63 149,694 7.22 $0.43 54,626 $0.45
$0.65 662,000 8.95 $0.65 165,500 $0.65
$0.84 - $1.00 227,400 8.40 $0.88 114,932 $0.88
$1.03 861,855 6.52 $1.03 716,136 $1.03
$1.25 - $5.88 27,500 7.78 $2.10 27,500 $2.10
-------------------------------------------------------------------------------------
$0.31 - $5.88 1,928,449 7.65 $0.85 1,078,694 $0.95
=====================================================================================
</TABLE>
As of December 31, 1999, the Company has reserved 2,500,598 shares of common
stock for issuance upon the exercise of stock options under all of its plans.
Employee Stock Purchase Plan
The Company instituted an Employee Stock Purchase Plan ("the Purchase Plan") in
1995. Under the provisions of the Purchase Plan, 250,000 shares were authorized
for the issuance of common stock. Shares could be purchased under the Purchase
Plan at 85% of the lesser of the fair market value of the common stock on the
entry date into the offering period or the purchase date.
The Purchase Plan was discontinued in 1998. As of December 31, 1999, the
Purchase Plan has not been reinstated.
F-24
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
10. Stockholders' Equity (continued)
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 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 Twelve For the Three For the Fiscal Years,
Months Ended Months Ended Ended September 30,
December 31, December 31, -------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Risk-free interest rates 6.5% 5.1% 4.7% 6.0%
Dividends paid - - - -
Volatility factors - Company's common
stock expected market price 1.00 0.80 0.80 0.80
Expected option life 3.00 years 4.00 years 4.00 years 4.83 years
</TABLE>
The weighted average "fair value" of stock options granted for the twelve months
ended December 31, 1999, the three months ended December 31, 1998 and for the
fiscal years ended September 30, 1998 and 1997 was $0.54, $0.87, $0.55 and
$0.56, respectively.
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:
F-25
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
10. Stockholders' Equity (continued)
Pro Forma Disclosure of Employee Stock-Based Compensation (continued)
Fiscal years ended,
September 30,
---------------------
1998 1997
---- ----
Risk-free interest rates 4.7% 6.0%
Dividends paid - -
Volatility factors - Company's common
stock expected market price 0.80 0.80
Expected option life 0.50 years 0.50 years
The weighted average "fair value" of employee purchase rights issued under the
Employee Stock Purchase Plan during the fiscal years ended September 30, 1998
and 1997 was $1.47 and $0.85, respectively. No purchase rights were issued under
the Employee Stock Purchase Plan during the twelve months ended December 31,
1999 and 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>
For the Twelve For the Three For the Fiscal Years Ended
Months Ended Months Ended September 30,
December 31, December 31, ------------------------------
1999 1998 1998 1997
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Pro forma net loss (in thousands): $ (2,865) $ (3,979) $ (3,477) $ (5,753)
Pro forma net loss per share: $ (0.28) $ (0.53) $ (0.14) $ (0.87)
</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.
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.
F-26
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
11. Income Taxes
The Company's provision for income taxes for the years ended December 31, 1999
and 1998 consists entirely of foreign taxes.
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $4,700,000. The Company also had federal research
and development tax credit carryforwards of approximately $300,000. If not
utilized, the net operating loss and credit carryforwards will expire at various
dates beginning in 2007 and continuing through 2019.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to ownership change provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are:
As of December 31,
----------------------
1999 1998
------- -------
Deferred tax assets:
Net operating loss carryforwards $ 1,511 $ 1,804
Research credit carryforwards 431 373
Acquired intangibles 927 988
Capitalized R&D 2,750 3,152
Nondeductible reserves and accruals 1,183 900
Inventory valuation 2,128 1,108
Other 62 55
------- -------
Total deferred tax assets 8,992 8,380
Valuation allowance (8,992) 8,380
------- -------
Net deferred tax assets $ -- $ --
======= =======
The valuation allowance for deferred tax assets increased by approximately
$1,810,000 for the period ended December 31, 1998 and $1,130,000 for the year
ended September 30, 1998.
F-27
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
12. 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 Allan and David Lahar, and
an officer of the Company, Phillip Bennett, in exchange for full recourse
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 shares
were issued at a price of $1.00 per share. The shares were issued in exchange
for full recourse promissory notes totaling $630,000.
Mr. Allan's note accrues interest at the prime rate. The note is due December
2003. No payments of principal had been made as of December 31, 1999.
Mr. Lahar's note accrues interest at the prime rate. The note was due on
September 1, 1999. The principal was paid in full on January 21, 2000.
Mr. Bennett's note accrues interest at 5.5% per year. The note is due on
December 7, 2001. No payments of principal had been made as of December 31,
1999.
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. An additional $87,500 was paid to the same company in March
1999, for services provided by Mr. Lahar in arranging the debt placement by the
American Bankers Insurance Group in the same month.
In February 2000, $87,500 was paid to Eugene Matalene, Jr., a director of the
Company, for services provided in arranging the debt placement by the American
Bankers Insurance Group in March, 1999. Such amount is included in the accrued
liabilities of the Company as of December 31, 1999.
13. Subsequent Event
On January 21, 2000, Accom, Inc., and certain of its subsidiaries, sold
substantially all of their respective assets related to the ELSET virtual set
product line to IMadGINE Video Systems Marketing, B.V. ("IMadGINE"), a Dutch
company that is a wholly owned subsidiary of Orad Hi-Tec Systems Ltd. ("Orad"),
an Israeli corporation. IMadGINE also purchased the stock of Accom's subsidiary,
Accom Poland z o.o., a Polish corporation ("Accom Poland"). The Company and its
subsidiaries also sold certain intellectual property related to the ELSET
business. The net book value of the assets sold by the Company was approximately
$87,000.
F-28
<PAGE>
Accom, Inc.
Notes to Consolidated Financial Statements
13. Subsequent Event (continued)
The Company sold these assets in exchange for: (i) $4,000,000 in cash and (ii) a
warrant to purchase 70,423 shares of Orad.
The Company used the cash proceeds of the sale to: (a) pay the $1.5 million
balance outstanding on the line of credit with LaSalle Business Credit, Inc.;
(b) pay off the $565,000 balance remaining on one of the notes payable to Scitex
Digital Video; (c) according to an agreement with the American Bankers Insurance
Group, set aside sufficient funds to: (1) pay the second note payable to Scitex
Digital Video in the amount of $750,000 when it comes due in April 2000, and (2)
pay transaction expenses associated with the sale of ELSET.
F-29
Exhibit 10.1
LEASE
BY AND BETWEEN
MENLO BUSINESS PARK, LLC, LESSOR
AND
ACCOM, INC., LESSEE
Menlo Business Park
1490 O'Brien Drive
Menlo Park, California
November 19, 1999
<PAGE>
TABLE OF CONTENTS
- -----------------
Paragraph Page
- --------- ----
1. Lease.....................................................................1
2. Term......................................................................1
3. Monthly Base Rent.........................................................2
4. Additional Rent; Operating Expenses and Taxes.............................3
5. Payment of Rent...........................................................7
6. Security Deposit..........................................................8
7. Use.......................................................................8
8. Hazardous Materials.......................................................8
9. Taxes on Lessee's Property...............................................11
10. Insurance................................................................11
11. Indemnification..........................................................12
12. Tenant Improvement Work..................................................14
13. Maintenance and Repairs; Alterations; Surrender and Restoration..........14
14. Utilities and Services...................................................16
15. Liens....................................................................17
16. Assignment and Subletting................................................17
17. Waiver...................................................................20
18. Holding Over.............................................................20
19. Damage or Destruction....................................................21
20. Eminent Domain...........................................................23
21. Remedies.................................................................23
22. Lessee's Personal Property...............................................25
23. Notices..................................................................25
24. Estoppel Certificate.....................................................25
25. Signage..................................................................26
26. Real Estate Brokers......................................................26
27. Subordination; Attornment................................................26
28. No Termination Right.....................................................27
29. Lessor's Entry...........................................................27
30. Attorneys' Fees..........................................................27
31. Compliance with CC&R's...................................................27
32. Quiet Enjoyment..........................................................28
33. General Provisions.......................................................28
<PAGE>
SCHEDULE OF EXHIBITS
- --------------------
EXHIBIT "A" Legal Description
EXHIBIT "B" Menlo Business Park Master Plan
EXHIBIT "C" Floor Plan
EXHIBIT "D" Commencement Memorandum
EXHIBIT "E" Cost Estimate for Tenant Improvement Work
EXHIBIT "F" Lessee Estoppel Certificate
<PAGE>
L E A S E
---------
Menlo Business Park
1490 O'Brien Drive
Menlo Park, California
THIS LEASE, referred to herein as "this Lease," is made and entered
into as of November 19, 1999 by and between MENLO BUSINESS PARK, LLC, a
California limited liability company, hereafter referred to as "Lessor," and
ACCOM, INC., a Delaware corporation, hereafter referred to as "Lessee" or
"Accom."
RECITALS:
A. Lessor is the owner of the real property located in Menlo Business
Park, Menlo Park, California, commonly referred to as 1490 O'Brien Drive, Menlo
Park, California, more particularly described on Exhibit "A" attached hereto and
incorporated by reference herein, consisting of a parcel of land containing
approximately 1.68 acres, together with all easements and appurtenances thereto
(the "Land") and the existing building thereon, referred to as Building #10,
1490 O'Brien Drive, containing approximately 30,623 rentable square feet, and
all other improvements located thereon (collectively, the "Improvements"). The
Land and Improvements are referred to herein collectively as the "Premises." The
Premises are shown on the Menlo Business Park Master Plan attached hereto as
Exhibit "B." Building #10 is sometimes referred to herein as "the Building." The
floor plan of Building #10 is attached hereto as Exhibit "C."
B. Lessor and Lessee wish to enter into this Lease of the Premises upon
the terms and conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. Lease. Lessor hereby leases to Lessee, and Lessee leases from Lessor
the Premises at the rental and upon all of the terms and conditions set forth
herein.
2. Term.
(a) Accom is currently in possession of the Premises pursuant
to an existing Lease between Lessor and Accom dated January 28, 1992 (the
"Original Lease"), the term of which expires on February 26, 2000. The term of
this Lease (the "term") and Lessee's obligation to pay rent pursuant to this
Lease shall commence at 12:01 A.M. on February 27, 2000 (the "Commencement
Date").
<PAGE>
The term of this Lease shall expire, unless sooner terminated in accordance with
the provisions hereof, on August 31, 2005. Upon the Commencement Date, Lessor
and Lessee shall confirm in writing the expiration of the term of the Original
Lease, the Commencement Date of this Lease, and the expiration date of the term
of this Lease by executing and delivering the Commencement Memorandum in the
form attached hereto as Exhibit "D."
3. Monthly Base Rent.
(a) Lessee shall pay to Lessor for each full calendar month
during the first twelve (12) full calendar months of the term of this Lease,
plus the partial month if any at the commencement of the lease term, Monthly
Base Rent of Sixty-Four Thousand Three Hundred Eight and Thirty One Hundredths
Dollars ($64,308.30) per 1
1month ($2.10/rentable square foot/month). Upon the execution
and delivery of this Lease by Lessor and Lessee, Lessee shall pay to Lessor the
sum of Sixty-Four Thousand Three Hundred Eight and Thirty One Hundredths Dollars
($64,308.30) representing the Monthly Base Rent for the first full month of the
lease term. Monthly Base Rent for any partial calendar month at the commencement
of the lease term shall 0be prorated on the basis of a thirty (30) day month.
(b) The Monthly Base Rent shall be adjusted as of the first
day of the calendar month immediately following the first anniversary of the
Commencement Date and annually on the first day of the calendar month
immediately following each anniversary of the Commencement Date thereafter
during the entire lease term (the "Rental Adjustment Date") to reflect any
increases in the cost of living. The adjustment shall be calculated upon the
basis of the United States Department of Labor, Bureau of Labor Statistics
Consumer Price Index, all items, for all Urban Consumers - San
Francisco-Oakland-San Jose (1982-84=100), hereafter referred to as the "Index."
The Index for said subgroup published most recently as of the end of the
calendar month immediately preceding the month in which the Commencement Date
occurs shall be considered the "base Index."
(c) The Monthly Base Rent shall be adjusted as of each Rental
Adjustment Date to an amount equal to the product obtained by multiplying the
initial Monthly Base Rent referred to in Paragraph 3(a) by a fraction, the
numerator of which is the Index most recently published as of the end of the
calendar month immediately preceding each Rental Adjustment Date and the
denominator of which is the base Index; provided that in no event shall the
Monthly Base Rent be increased on any Rental Adjustment Date to an amount less
than three percent (3%) per annum or more than eight percent (8%) per annum,
calculated for each individual year from the previous Rental Adjustment Date, of
the Monthly Base Rent payable before such Rental Adjustment Date.
<PAGE>
(d) When the new Monthly Base Rent is determined for each
Rental Adjustment Date, Lessor shall give Lessee written notice to that effect
indicating how the new Monthly Base Rent figure was computed in accordance with
subparagraph (c). If the Index does not exist on any Rental Adjustment Date in
the same format as referred to in subparagraph (b), Lessor shall substitute in
lieu thereof an index reasonably comparable to the Index referred to above which
is acceptable to Lessee and which is then published by the Bureau of Labor
Statistics, or successor or similar governmental agency, or if no governmental
agency then publishes an index, Lessor shall substitute therefor any index
commonly accepted which is published by a reputable private organization.
4. Additional Rent; Operating Expenses and Taxes.
(a) In addition to the Monthly Base Rent payable by Lessee
pursuant to Paragraph 4, Lessee shall pay to Lessor, as "Additional Rent," the
Operating Expenses of the Premises in accordance with Paragraph 4(b) hereof and
real property taxes and assessments levied or assessed against the Premises in
accordance with Paragraph 5(c) hereof. Monthly Base Rent and Additional Rent are
referred to herein collectively as "rent."
(b) "Operating Expenses," as used herein, shall include all
direct costs of management, operation, maintenance, repair and replacement of
the Premises as determined by standard accounting practices (unless excluded by
this Lease), including, but not limited to:
Personal property taxes related to the Premises; any parking
taxes or parking levies imposed on the Premises in the future by any
governmental agency; a pro rata portion of the management fee charged for the
management and operation of Menlo Business Park, in an amount equal to four
percent (4%) of the total gross income received by Lessor from the operation of
Menlo Business Park (including Monthly Base Rent and Additional Rent received
from tenants); water and sewer charges; waste disposal; insurance premiums for
insurance coverages maintained by Lessor pursuant to Paragraph 11(b) hereof;
license, permit, and inspection fees; charges for electricity, heating, air
conditioning, gas, and any other utilities (including, without limitation, any
temporary or permanent utility surcharge or other exaction); security; painting
and repairing, interior and exterior; maintenance and replacement of floor and
window coverings; repair, maintenance, and replacement of air-conditioning,
heating, mechanical and electrical systems, elevators, plumbing and sewage
systems; landscaping and gardening of Outside Areas; glazing; repair,
maintenance, cleaning, sweeping, striping, and resurfacing of the parking area;
supplies, materials, equipment and tools in the maintenance of the Premises;
costs for accounting services incurred in the calculation of Operating Expenses
and Taxes as defined herein; and the cost of any other capital expenditures for
any improvements or changes to the Buildings which are
<PAGE>
required by laws, ordinances, or other governmental regulations adopted after
the Commencement Date, or for any items or capital expenditures voluntarily made
by Lessor which are intended to and have the effect of reducing Operating
Expenses; provided, however, that except for capital improvements required
because of Lessee's specific use of the Premises, if Lessor is required to or
voluntarily makes such capital improvements, Lessor shall amortize the cost of
said improvements over the useful life of said improvements (together with
interest on the unamortized balance at the rate equal to the effective rate of
interest on Lessor's bank line of credit at the time of completion of said
improvements, but in no event in excess of twelve percent (12%) per annum) as an
Operating Expense in accordance with standard accounting practices, except that
with respect to capital improvements made to save Operating Expenses such
amortization shall not be at a rate greater than the anticipated savings in
Operating Expenses. Operating Expenses shall also include any other expense or
charge, whether or not described herein not specifically excluded by other
provisions of this Lease, which in accordance with generally accepted accounting
and management practices would be considered an expense of managing, operating,
maintaining, and repairing the Premises.
(c) Real property taxes and assessments upon the Premises,
during each lease year or partial lease year during the term of this Lease are
referred to herein as "Taxes."
As used herein, "Taxes" shall mean:
(1) all real estate taxes, assessments and any other
taxes levied or assessed against the Premises including the underlying land, the
Buildings, all improvements located thereon, including any increase in Taxes
resulting from a reassessment following any transfer of ownership of the
Premises or any interest therein; and
(2) all other taxes which may be levied in lieu of
real estate taxes, assessments, and other fees, charges, and levies, general and
special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind
and nature by any authority having the direct or indirect power to tax,
including without limitation any governmental authority or any improvement or
other district or division thereof, for public improvements, services, benefits,
or environmental matters which are assessed, levied, confirmed, imposed, or
become a lien (i) upon the Premises, and/or any legal or equitable interest of
Lessor in any part thereof; or (ii) upon this transaction or any document to
which Lessee is a party creating or transferring any interest in the Premises;
and (iii) any tax or excise, however described, imposed in addition to, or in
substitution partially or totally of, any tax previously included within the
definition of "Taxes" or any tax the nature of which was previously included in
the definition "Taxes."
<PAGE>
Not included within the definition of "Taxes" are any
net income, profits, transfer, franchise, estate or inheritance taxes imposed by
any governmental authority; late payment penalties or interest, provided that
Lessee is not in default in the payment of Monthly Base Rent or Additional Rent.
With respect to any assessments which may be levied
against or upon the Premises, or the underlying land, which under the laws then
in force may be evidenced by improvement or other bonds, or may be paid in
annual installments, only the amount of such annual installment (with
appropriate proration of any partial year) and statutory interest shall be
included within the computation of the annual Taxes levied against the Premises,
the Buildings and improvements thereon, and the underlying land.
(d) The following costs ("Costs") shall be excluded from the
definition of Operating Expenses:
(1) Costs occasioned by the act, omission or
violation of law by Lessor, or its respective agents, employees or contractors;
(2) Costs for which Lessor receives reimbursement
from others, including reimbursement from insurance;
(3) Interest, charges and fees incurred on debt or
payments on any deed of trust on the Property;
(4) Advertising or promotional costs or other costs
incurred by Lessor in procuring tenants for the Premises or other portions of
Menlo Business Park;
(5) Costs incurred in repairing, maintaining or
replacing any structural elements of the Buildings for which Lessor is
responsible pursuant to Paragraph 13(a) hereof;
(6) Any wages, bonuses or other compensation of
employees above the grade of building manager and any executive salary of any
officer or employee of Lessor, including fringe benefits other than insurance
plans and tax-qualified benefit plans, or any fee, profit or compensation
retained by Lessor or its affiliates for management and administration of the
Premises in excess of the maximum sum specified in Paragraph 4(b) of this Lease;
(7) General office overhead and general and
administrative expenses of Lessor, except as specifically provided in Paragraph
4(b); and
(8) Leasing expenses and broker commissions payable
by Lessor.
<PAGE>
Lessor shall at all times use its best efforts to operate the
Buildings in an economically reasonable manner at costs not disproportionately
higher than those experienced by other comparable buildings in the market area
in which the Premises are located (Menlo Park).
(e) At the Commencement Date, and as close as reasonably
possible to the end of each calendar year thereafter, Lessor shall notify Lessee
of the Operating Expenses estimated by Lessor for the calendar year 2000, and
for each following calendar year. Concurrent with such notice, Lessor shall
provide a description of such Operating Expenses and Taxes. Commencing on the
Commencement Date, and on the first day of every month thereafter, Lessee shall
pay to Lessor, as Additional Rent, one-twelfth (1/12th) of the estimated
Operating Expenses and Taxes. If at any time during any such calendar year, it
appears to Lessor that the Operating Expenses or Taxes for such year will vary
from Lessor's estimate, Lessor may, by written notice to Lessee, revise Lessor's
estimate for such year and the Additional Rent and Taxes payments by Lessee for
such year shall thereafter be based upon such revised estimate. Lessor shall
furnish to Lessee with such revised estimate written verification showing that
the actual Operating Expenses or Taxes are greater than Lessor's estimate. The
increase in the monthly installments of Additional Rent and Taxes resulting from
Lessor's revised estimate shall not be retroactive, but the Additional Rent and
Taxes for each calendar year shall be subject to adjustment between Lessor and
Lessee after the close of the calendar year, as provided below.
Not later than ninety (90) days after the expiration of each
calendar year of the term, Lessor shall furnish Lessee a statement certified by
a responsible employee or agent of Lessor (the "Operating Statement") with
respect to such year, prepared by an employee or agent of Lessor, showing
Operating Expenses and Taxes broken down by component expenses, Base Taxes and
Base Operating Expenses of the Premises broken down by component expenses, and
the total payments made by Lessee on the basis of any previous estimate of such
Operating Expenses and Taxes, all in sufficient detail for verification by
Lessee. Unless Lessee raises any objections to the Operating Statement within
ninety (90) days after receipt of the same, such statement shall conclusively be
deemed correct and Lessee shall have no right thereafter to dispute such
statement or any item therein or the computation of Operating Expenses and/or
Taxes. Lessee or its accountants shall have the right to inspect and audit
Lessor's books and records with respect to this Lease once each Lease Year to
verify actual Operating Expenses and/or Taxes. Lessor's books and records shall
be kept in accord with generally accepted accounting principles. If Lessee's
audit of the Operating Expenses and/or Taxes for any year reveals a net
overcharge of more than five percent (5%), Lessor promptly shall reimburse
Lessee for the cost of the audit; otherwise, Lessee shall bear the cost of
Lessee's audit. If Lessee objects to Lessor's Operating Statement, Lessee shall
continue to pay on a monthly basis the Operating Expenses
<PAGE>
and/or Taxes based upon the prior year's Operating Statement until the dispute
is resolved.
If the Operating Expenses and Taxes for the year as finally
determined exceeds the total payments made by Lessee based on Lessor's
estimates, Lessee shall pay to Lessor the deficiency, within thirty (30) days
after the receipt of Lessor's Operating Statement. If the total payments made by
Lessee based on Lessor's estimate of the Operating Expenses and/or Taxes exceed
the Operating Expenses and/or Taxes, Lessee's extra payment, plus the cost of
the audit if charged to Lessor, shall be credited against payments of Additional
Rent next due hereunder.
Notwithstanding the termination of this Lease, within thirty
(30) days after Lessee's receipt of Lessor's Operating Statement or the
completion of Lessee's audit regarding the Operating Expenses and/or Taxes for
the calendar year in which this Lease terminates, Lessee shall pay to Lessor or
shall receive from Lessor, as the case may be, an amount equal to the difference
between the Operating Expenses and/or Taxes for such year, as finally
determined, and the amount previously paid by Lessee on account thereof
(prorated to the expiration date or the termination date of this Lease).
5. Payment of Rent.
(a) All rent shall be due and payable in lawful money of the
United States of America at the address of Lessor set forth in Paragraph 23,
"Notices," without deduction or offset and without prior demand or notice,
unless otherwise specified herein. Monthly Base Rent and Additional Rent shall
be payable monthly, in advance, on the first day of each calendar month.
Lessee's obligation to pay rent for any partial month at the commencement of the
lease term shall be as provided in Paragraph 3(a) hereof and rent for any
partial month at the expiration or termination of the lease term shall be
prorated on the basis of a thirty (30) day month.
(b) If any installment of Monthly Base Rent, Additional Rent
or any other sum due from Lessee is not received by Lessor within five (5) days
after the same is due, Lessee shall pay to Lessor an additional sum equal to
five percent (5%) of the amount overdue as a late charge. The parties agree that
this late charge represents a fair and reasonable estimate of the costs that
Lessor will incur by reason of the late payment by Lessee. Acceptance of any
late charge shall not constitute a waiver of Lessee's default with respect to
the overdue amount. Any amount not paid within ten (10) days after Lessee's
receipt of written notice that such amount is due shall bear interest from the
date due until paid at the lesser rate of (1) the prime rate of interest plus
five percent (5%) or (2) the maximum rate allowed by law, in addition to the
late payment charge.
Initials: Lessor_________ Lessee_________
<PAGE>
6. Security Deposit. Lessee shall deposit with Lessor upon execution
hereof the sum of Sixty-Four Thousand Three Hundred Eight and Thirty One
Hundredths Dollars ($64,308.30) (the "Security Deposit") as security for
Lessee's faithful performance of Lessee's obligations under this Lease. If
Lessee fails to pay Monthly Base Rent or Additional Rent or charges due
hereunder, or otherwise defaults under this Lease (as defined in Paragraph 21),
Lessor may use, apply or retain all or any portion of said Security Deposit for
the payment of any amount due Lessor or to reimburse or compensate Lessor for
any liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or
any portion of said Security Deposit, Lessee shall within ten (10) days after
written request therefor deposit moneys with Lessor sufficient to restore said
Security Deposit to the full amount required by this Lease. Lessor shall not be
required to keep all or any part of the Security Deposit separate from its
general accounts. Lessor shall, at the expiration or earlier termination of the
term hereof and after Lessee has vacated the Premises, return to Lessee (or, at
Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. No part of
the Security Deposit shall be considered to be held in trust, to bear interest
or other increment for its use, or to be prepayment for any moneys to be paid by
Lessee under this Lease.
7. Use. Lessee shall use and occupy the Premises only for general
offices, research and development, and electronic assembly/testing, and for no
other use or purpose without Lessor's prior written consent. Use of the Premises
for the manufacture of integrated circuits or the manufacture of other
electronic components is expressly prohibited. Any use of the Premises by Lessee
or by any sublessee or assignee approved by Lessor pursuant to Paragraph 16
shall comply with the provisions of this Paragraph 7.
8. Hazardous Materials.
(a) The term "Hazardous Materials" as used in this Lease shall
mean any product, substance, or waste whose presence, use, manufacture,
disposal, transportation, or release, either by itself or in combination with
other materials expected to be on the Premises, is either: (i) potentially
injurious to the public health, safety or welfare, the environment or the
Premises, (ii) regulated or monitored by any governmental authority, or (iii) a
basis for potential liability of Lessor to any governmental agency or third
party under any applicable statute or common law theory. Hazardous Materials
shall include, but not be limited to hydrocarbons, petroleum, gasoline, and/or
crude oil or any products, by-products or fractions thereof. Lessee shall not
engage in any activity in or on the Premises which constitutes a Reportable Use
of Hazardous Materials without the express prior written consent of Lessor and
timely compliance (at Lessee's expense) with all Environmental Laws. "Reportable
Use" shall mean (i) the installation or use of any above or below ground storage
tank,
<PAGE>
(ii) the generation, possession, storage, use, transportation, or disposal of
Hazardous Materials that require a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority, and/or (iii) the presence at the Premises of Hazardous
Materials with respect to which any Environmental Law requires that a notice be
given to persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may use any ordinary and customary
materials reasonably required to be used in the normal course of Lessee's agreed
use of the Premises, so long as such use is in compliance with all Environmental
Laws, is not a Reportable Use, and does not expose the Premises or neighboring
property to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may condition its consent to any
Reportable Use upon receiving such additional assurances as Lessor reasonably
deems necessary to protect itself, the public, the Premises and/or the
environment against damage, contamination, injury and/or liability, including,
but not limited to, the installation (and removal on or before Lease expiration
or termination) of protective modifications (such as concrete encasements)
and/or increasing the Security Deposit.
(b) "Environmental Laws" shall mean and include any Federal,
State, or local statute, law, ordinance, code, rule, regulation, order, or
decree regulating, relating to, or imposing liability or standards of conduct
concerning, any hazardous, toxic, or dangerous waste, substance, element,
compound, mixture or material, as now or at any time hereafter in effect
including, without limitation, California Health and Safety Codes ss.25100 et
seq., ss.25300 et seq., Sections 25281(f) and 25501 of the California Health and
Safety Code, Section 13050 of the Water Code, the Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss.9601 et seq., the Superfund Amendments and Reauthorization Act, 42 U.S.C.
ss.ss.9601 et seq., the Federal Toxic Substances Control Act, 15 U.S.C. ss.2601
et seq., the Federal Resource Conservation and Recovery Act as amended, 42
U.S.C. ss.6901 et seq., the Federal Hazardous Material Transportation Act, 49
U.S.C. ss.1801 et seq., the Federal Clean Air Act, 42 U.S.C. ss.7401 et seq.,
the Federal Water Pollution Control Act, 33 U.S.C.ss.1251 et seq., the River and
Harbors Act of 1899, 33 U.S.C. ss.401 et seq., and all rules and regulations of
the EPA, the California Environmental Protection Agency, or any other state or
federal department, board or any other agency or governmental board or entity
having jurisdiction over the Security, as any of the foregoing have been, or are
hereafter amended.
(c) If Lessee knows, or has reasonable cause to believe, that
Hazardous Materials have come to be located in, on, under or about the Premises,
other than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor and provide Lessor with a copy of any
report, notice, claim or other documentation which it has concerning the
presence of such Hazardous Materials.
<PAGE>
(d) Lessee and Lessee's agents, employees, and contractors
shall not cause any Hazardous Materials to be discharged into the plumbing or
sewage system of the Buildings or into or onto the Land underlying or adjacent
to the Buildings in violation of any Environmental Laws. Lessee shall promptly,
at Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination, and for the maintenance, security and/or monitoring of the
Premises or neighboring properties, that was caused or materially contributed to
by Lessee, or pertaining to or involving any Hazardous Materials brought onto
the Premises during the term of this Lease, by or for Lessee, or any third
party.
(e) Lessee shall indemnify, defend and hold Lessor harmless
from any and all claims, damages, fines, judgments, penalties, costs,
liabilities or losses (including, without limitation, any and all sums paid for
settlement of claims, attorneys' fees, consultant and expert fees) arising
during or after the term (as such may be extended) from or in connection with
the presence of Hazardous Materials in or on the Premises, the Buildings or
Menlo Business Park as a result of Lessee's breach of the foregoing covenant, or
as a result of the negligence, willful misconduct or other acts of Lessee,
Lessee's agents, employees, and contractors or invitees. Without limitation of
the foregoing, this indemnification shall include any and all costs incurred due
to any investigation of the site or any cleanup, removal or restoration mandated
by a federal, state or local agency or political subdivision. The foregoing
indemnity shall survive the expiration or earlier termination of this Lease.
(f) Lessor shall indemnify, defend and hold Lessee harmless
from any and all claims, damages, fines, judgments, penalties, costs,
liabilities or losses (including, without limitation, any and all sums paid for
settlement of claims, attorneys' fees, consultant and expert fees) arising
before, during or after the term (as such may be extended) from or in connection
with the presence of Hazardous Materials in or on the Premises, the Buildings or
Menlo Business Park, unless the (1) Hazardous Materials are present in whole or
in part as a result of the breach of this Lease by Lessee, or the negligence,
willful misconduct, or other acts of Lessee, Lessee's agents, employees,
contractors or invitees; or (2) such Hazardous Materials have flowed, diffused,
migrated, or percolated into, onto, or under the Premises, the Buildings, or
Menlo Business Park from other property, unless such other property is owned or
controlled by Lessor. Without limitation of the foregoing, this indemnification
shall include any and all costs incurred due to any investigation of the site or
any cleanup, removal or restoration mandated by a federal, state or local agency
or political subdivision, unless the Hazardous Materials are present solely as a
result of the negligence, willful misconduct or other acts of Lessee, Lessee's
agents, employees, contractors or invitees. The foregoing indemnity shall
survive the expiration or earlier termination of this Lease.
<PAGE>
9. Taxes on Lessee's Property. Lessee shall pay before delinquency any
and all taxes, assessments, license fees, and public charges levied, assessed,
or imposed and which become payable during the initial lease term and any
extension thereof upon Lessee's equipment, fixtures, furniture, and personal
property installed or located in the Premises.
10. Insurance.
(a) Lessee shall, at Lessee's sole cost and expense, provide
and keep in force during the lease term and any extension thereof, and for the
benefit of Lessee, Lessor, and Lessor's property manager, a general commercial
liability insurance policy with a recognized casualty insurance company
qualified to do business in California, insuring Lessor and Lessee against any
and all liability occasioned by any occurrence in, on, about, or related to the
Premises, or arising out of the condition, use, occupancy, alteration or
maintenance of the Premises, and shall provide for contractual liability assumed
in Paragraph 11(a) of this Lease, having a combined single limit for both bodily
injury and property damage in an amount not less than Five Million Dollars
($5,000,000). Prior to the Commencement Date, Lessee agrees to furnish to Lessor
certificates of insurance confirming such coverage naming Lessor and Lessor's
property manager as additional insureds.
(b) Lessor shall obtain and carry in Lessor's name, as
insured, as an Operating Expense of the Premises as provided in Paragraph 4(b),
during the lease term, standard fire and extended coverage insurance (with
rental loss insurance coverage for a period of one year), public liability and
property damage insurance, and insurance against such other risks or casualties
as Lessor shall determine, including, but not limited to, insurance coverages
required of Lessor by the beneficiary of any deed of trust which encumbers the
Property, and earthquake insurance, insuring Lessor's interest in the Premises
(including leasehold improvements installed at Lessor's expense) in an amount
not less than the full replacement cost of the Buildings and other Improvements
from time to time. The proceeds of any such insurance shall be payable solely to
Lessor and Lessee shall have no right or interest therein. Lessor shall have no
obligation to insure against loss by Lessee to Lessee's leasehold improvements
installed at Lessee's expense, or Lessee's equipment, fixtures, furniture, or
other personal property of Lessee in or about the Premises occurring from any
cause whatsoever. Lessor's public liability insurance shall provide for
contractual liability assumed in Paragraph 11(b) of this Lease.
(c) The parties release each other, and their respective
authorized representatives, from any claims for damage to any person or to the
Premises and to the fixtures, personal property, leasehold improvements and
alterations of either Lessor or Lessee in or on the Premises that are caused by
or result from risks required by this Lease to be insured against or actually
insured against under any insurance policies
<PAGE>
carried by the parties and in force at the time of any such damage, whichever is
greater. This waiver applies whether or not the loss is due to the negligent
acts or omissions of Lessor or Lessee or their respective officers, directors,
employees, agents, contractors, or invitees.
(d) Each party shall cause each insurance policy obtained by
it to provide that the insurance company waives all right of recovery by way of
subrogation against either party in connection with the above waiver and any
damage covered by any policy; provided, however, that such provision or
endorsement shall not be required if the applicable policy of insurance permits
the named insured to waive rights of subrogation on a blanket basis, in which
case the blanket waiver shall be acceptable. Neither party shall be liable to
the other for any damage caused by fire or any of the risks insured against
under any insurance policy required by this Lease.
11. Indemnification.
(a) Lessee waives all claims against Lessor for damages to
property, or to goods, wares, and merchandise stored in, upon, or about the
Premises, and for injuries to persons in, upon, or about the Premises from any
cause arising at any time, except as may be caused by the negligence or willful
misconduct of Lessor or its employees, agents or contractors. Lessee shall
indemnify, defend, and hold harmless Lessor from claims, suits, actions, or
liabilities for personal injury, death or for loss or damage to property that
arise from (1) any activity, work, or thing done, permitted or suffered by
Lessee in or about the Premises, (2) for bodily injury or damage to property
which arises in or about the Buildings or the Outside Areas to the extent the
injury or damage to property results from the negligent acts or omissions of
Lessee, its employees, agents or contractors, and (3) based on any breach or
default by Lessee in the performance of any obligation on Lessee's part to be
performed under this Lease.
(b) Lessor shall indemnify, defend, and hold harmless Lessee
from claims, suits, actions, or liabilities for personal injury, death or for
loss or damage to property that arise from (1) any activity, work, or thing
done, permitted or suffered by Lessor in or about the Premises, (2) for bodily
injury or damage to property which arises in or about the Buildings or the
Outside Areas to the extent the injury or damage to property results from the
negligent acts or omissions of Lessor, its employees, agents or contractors, and
(3) based on any breach or default by Lessor in the performance of any
obligation on Lessor's part to be performed under this Lease.
(c) In the absence of comparative or concurrent negligence on
the part of Lessee or Lessor, their respective agents, affiliates, and
subsidiaries, or their respective officers, directors, members, employees or
contractors, the foregoing indemnities by Lessee and Lessor shall also include
reasonable costs, expenses and attorneys' fees incurred in connection with any
indemnified claim or incurred by the
<PAGE>
indemnitee in successfully establishing the right to indemnity. The indemnitor
shall have the right to assume the defense of any claim subject to the foregoing
indemnities with counsel reasonably satisfactory to the indemnitee. The
indemnitee agrees to cooperate fully with the indemnitor and its counsel in any
matter where the indemnitor elects to defend, provided the indemnitor shall
promptly reimburse the indemnitee for reasonable costs and expenses incurred in
connection with its duty to cooperate.
The foregoing indemnities are conditioned upon the indemnitee
providing prompt notice to the indemnitor of any claim or occurrence that is
likely to give rise to a claim, suit, action or liability that will fall within
the scope of the foregoing indemnities, along with sufficient details that will
enable the indemnitor to make a reasonable investigation of the claim.
When the claim is caused by the joint negligence or willful
misconduct of Lessee and Lessor or by the indemnitor party and a third party
unrelated to the indemnitor party (except indemnitor's agents, officers,
employees or invitees), the indemnitor's duty to indemnify and defend shall be
proportionate to the indemnitor's allocable share of joint negligence or willful
misconduct.
(d) Lessor shall not be liable to Lessee for any damage
because of any act or negligence of any other owner or occupant of adjoining or
contiguous property, nor for overflow, breakage, or leakage of water, steam,
gas, or electricity from pipes, wires, or otherwise in the Premises or the
Buildings. Except as otherwise herein provided, Lessee will pay for damage to
the Premises caused by the misuse or neglect of the Premises by Lessee or its
employees, agents, or contractors, including, but not limited to, the breakage
of glass in the Premises. Any damage to the Premises caused by other tenants of
Menlo Business Park shall be paid for by such other tenants or by Lessor.
12. Tenant Improvement Work.
(a) Lessor shall enter into a contract with a licensed general
contractor selected by Lessor for the construction of the Tenant Improvement
Work listed on the Cost Estimate set forth on Exhibit "E" attached hereto. The
Tenant Improvement Work shall be performed pursuant to the plans and
specifications prepared by Lessor and the Work Letter Agreement attached hereto
as Exhibit "F." Said plans and specifications shall be subject to Lessee's
written approval prior to commencement of construction of the Tenant Improvement
Work, which approval shall not be unreasonably withheld. Lessor shall contribute
the sum of Two Hundred Thousand Dollars ($200,000) to the cost of the Tenant
Improvement Work as Lessor's Tenant Improvement Allowance. Any cost of the
Tenant Improvement Work in excess of Lessor's Tenant Improvement Allowance shall
be paid by Lessee.
<PAGE>
(b) The Tenant Improvement Work shall be constructed under the
direct supervision of Tarlton Properties, Inc., as construction manager, at a
fee of five percent (5%) of hard construction costs. The general contractor
shall perform the work pursuant to a negotiated fixed fee guaranteed maximum
price contract. The work shall be performed on an "open book" basis with a
post-job audit of all costs by a representative from both Lessee and Tarlton
Properties, Inc.
(c) Subject to completion of the Tenant Improvement Work,
Lessee waives all right to make repairs at the expense of Lessor, or to deduct
the costs thereof from the rent, and Lessee waives all rights under Section 1941
and 1942 of the Civil Code of the State of California. At the termination of
this Lease, Lessee shall surrender the Premises in a clean and good condition,
except for ordinary wear and tear and except for damage caused by casualty, the
elements, acts of God, a partial taking by eminent domain, or latent defects in
the Premises existing as of the Commencement Date.
13. Maintenance and Repairs; Alterations; Surrender and Restoration.
(a) Lessor shall, at Lessor's sole expense, keep in good
order, condition, and repair and replace when necessary, the structural elements
of the roof (excluding the roof membrane) , and the structural elements of the
foundation and exterior walls (except the interior faces thereof), of the
Buildings, and other structural elements of the Buildings and the Premises as
"structural elements" are defined in building codes applicable to the Buildings,
excluding any alterations, structural or otherwise, made by Lessee to the
Buildings which are not approved in writing by Lessor prior to the construction
or installation thereof by Lessee.
(b) Lessor shall repair, maintain, and replace as needed, as
an Operating Expense pursuant to Paragraph 4 hereof, the roof membrane, the
Outside Areas, including the landscaping, tree trimming, resurfacing and
restriping of the parking lot and walkways, exterior building painting, exterior
building lighting, parking lot lighting, and exterior security patrol. In the
event Lessee provides Lessor with written notice of the need for any repairs,
Lessor shall commence any such repairs promptly following receipt by Lessor of
such notice and Lessor shall diligently prosecute such repairs to completion.
(c) Subject to the foregoing and except as provided elsewhere
in this Lease, Lessee shall at all times at Lessee's expense keep the Premises
in good and safe order, condition, and repair. Lessee shall execute and maintain
in full force and effect throughout the term at Lessee's expense a service
contract with an authorized air conditioning service company. Lessee shall
submit a copy of said contract and any amendments thereto to Lessor for Lessor's
review and approval, which approval shall not be unreasonably withheld. Lessor
shall have the right to obtain on a semi-annual
<PAGE>
basis an inspection report of the HVAC system from an HVAC service firm
designated by Lessor for the purpose of monitoring the performance of the HVAC
maintenance and repair work performed by Lessee's HVAC service firm. The cost of
such inspection report shall be an Operating Expense pursuant to Paragraph 4.
Subject to the release of claims and waiver of subrogation contained in
Paragraphs 10(c) and 10(d), if Lessor is required to make any repairs by reason
of Lessee's negligent acts or omission to act, Lessor may add the cost of such
repairs to the next installment of rent which shall thereafter become due, and
Lessee shall promptly pay the same upon receipt of an invoice therefor.
(d) Lessee may, from time to time, at its own cost and expense
and without the consent of Lessor make nonstructural alterations to the interior
of the Premises the cost of which in any one instance is Ten Thousand Dollars
($10,000) or less, and the aggregate cost of all such work during the term of
this Lease does not exceed Fifty Thousand Dollars ($50,000), provided Lessee
first notifies Lessor in writing of any such nonstructural alterations.
Otherwise, Lessee shall not make any additional alterations, improvements, or
additions to the Premises without delivering to Lessor a complete set of plans
and specifications for such work and obtaining Lessor's prior written consent
thereto. If any nonstructural alterations to the interior of the Premises exceed
Ten Thousand Dollars ($10,000) in cost in any one instance, or exceed the
aggregate cost of Fifty Thousand Dollars ($50,000) during the term of this
Lease, Lessee shall employ, at Lessee's expense, Tarlton Properties, Inc. as
construction manager for such alterations at a fee equal to five percent (5%) of
hard construction costs. Lessor may condition its consent to Lessee agreeing in
writing to remove any such alterations prior to the expiration of the lease term
and Lessee agreeing to restore the Premises to its condition prior to such
alterations at Lessee's expense. Lessor shall advise Lessee in writing at the
time consent is granted whether Lessor reserves the right to require Lessee to
remove any alterations from the Premises prior to the termination of this Lease.
All alterations, trade fixtures and personal property
installed in the Premises solely at Lessee's expense ("Lessee's Property) shall
during the term of this Lease remain Lessee's property and Lessee shall be
entitled to all depreciation, amortization and other tax benefits with respect
thereto. Upon the expiration or sooner termination of this Lease all
alterations, fixtures and improvements to the Premises, whether made by Lessor
or installed by Lessee at Lessee's expense, shall be surrendered by Lessee with
the Premises and shall become the property of Lessor.
(e) Lessee, at Lessee's sole cost and expense, shall promptly
and properly observe and comply with all present and future orders, regulations,
rules, laws, and ordinances of all governmental agencies or authorities, and the
Board of Fire Underwriters. Any structural changes or repairs or other repairs
or changes of any nature which would be considered a capital expenditure under
generally accepted
<PAGE>
accounting principles to the Premises shall be made by Lessor at Lessee's
expense if such structural repairs or changes are required by reason of the
specific nature of the use of the Premises by Lessee. If such structural changes
or repairs are not required by reason of the specific nature of Lessee's use of
the Premises, the cost of such structural changes or repairs shall be treated as
an Operating Expense and amortized in accordance with the provisions of
Paragraph 4(b).
(f) Lessee shall surrender the Premises by the last day of the
lease term or any earlier termination date, with all of the improvements to the
Premises, parts, and surfaces thereof clean and free of debris and in good
operating order, condition, and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. The obligations of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance, or removal of Lessee's trade fixtures, furnishings, equipment, and
alterations, and the restoration by Lessee of the Premises to its condition
prior to any alterations, additions, or improvements (1) if Lessor's consent
thereto was conditioned upon such removal and restoration upon expiration or
sooner termination of the Lease term pursuant to Paragraph 13(d), or (2) if
Lessee made any such alterations, additions, or improvements without obtaining
Lessor's prior written consent in breach of Paragraph 13(d) and within a
reasonable time after the expiration or sooner termination of the Lease term
Lessor gives written notice to Lessee requiring Lessee to perform such removal
and restoration. Any removal and remediation of Hazardous Materials by Lessee
shall be certified by the San Mateo County Health Department and a copy of such
certification shall be delivered to Lessor.
14. Utilities and Services.
(a) Lessee shall contract for and pay for all electricity,
telephone, gas, water, heat and air conditioning service, janitorial service,
refuse pick-up, sewer charges, and all other utilities or services supplied to
or consumed by Lessee, its agents, employees, contractors, and invitees on or
about the Premises.
(b) Lessor shall not be liable to Lessee for any interruption
or failure of any utility services to the Buildings or the Premises which is not
caused by the negligence or willful acts of Lessor, or Lessor's employees,
agents, or contractors. Lessee shall not be relieved from the performance of any
covenant or agreement in this Lease because of any such failure. Unless such
failure is caused by the negligence or willful acts of Lessor or Lessor's
employees, agents, or contractors, Lessee shall be responsible for and shall
make all repairs to the Premises required to restore such services to the
Premises.
<PAGE>
15. Liens. Lessee agrees to keep the Premises free from all liens
arising out of any work performed, materials furnished, or obligations incurred
by Lessee. Lessee shall give Lessor at least ten (10) days prior written notice
before commencing any work of improvement on the Premises, the contract price
for which exceeds Ten Thousand Dollars ($10,000). Lessor shall have the right to
post notices of non-responsibility with respect to any such work. If Lessee
shall, in good faith, contest the validity of any such lien, claim or demand,
then Lessee shall, at its sole expense, defend and protect itself, Lessor and
the Premises against the same, and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises free
from the effect of such lien or claim.
16. Assignment and Subletting.
(a) Except as otherwise provided in this Paragraph 16, Lessee
shall not assign this Lease, or any interest, voluntarily or involuntarily, and
shall not sublet the Premises or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person (the agents and servants of
Lessee excepted) to occupy or use the Premises, or any portion thereof, without
the prior written consent of Lessor in each instance pursuant to the terms and
conditions set forth below, which consent shall not be unreasonably withheld,
subject to the following provisions.
(b) Prior to any assignment or sublease which Lessee desires
to make, Lessee shall provide to Lessor the name and address of the proposed
assignee or sublessee, and true and complete copies of all documents relating to
Lessee's prospective agreement to assign or sublease, a copy of a current
financial statement for such proposed assignee or sublessee, and shall specify
all consideration to be received by Lessee for such assignment or sublease in
the form of lump sum payments, installments of rent, or otherwise. For purposes
of this Paragraph 16, the term "consideration" shall include all money or other
consideration to be received by Lessee for such assignment or sublease. Within
fifteen (15) days after the receipt of such documentation and other information,
Lessor shall (1) notify Lessee in writing that Lessor elects to consent to the
proposed assignment or sublease subject to the terms and conditions hereinafter
set forth; or (2) notify Lessee in writing that Lessor refuses such consent,
specifying reasonable grounds for such refusal; or (3) notify Lessee that Lessor
elects to terminate this Lease as to the entire Premises, or as to the portion
of the Premises which Lessee proposes to sublease, as the case may be, and
specifying the effective date of termination. If Lessor elects to terminate this
Lease as to the entire Premises, or as to the portion of the Premises which
Lessee proposes to sublease, as the case may be, as of the effective date of
termination Lessor and Lessee shall each be
<PAGE>
released and discharged from any liability or obligation to the other under this
Lease accruing thereafter, and Lessee agrees that Lessor may enter into a direct
lease with such proposed assignee or sublessee without any obligation or
liability to Lessee.
In deciding whether to consent to any proposed assignment or
sublease, Lessor may take into account whether or not reasonable conditions,
including, but not limited to, the following, have been satisfied:
(1) In Lessor's reasonable judgment, the proposed
assignee or subtenant is engaged in such a business, that the Premises, or the
relevant part thereof, will be used in such a manner which complies with
Paragraph 7 hereof entitled "Use" and Lessee or the proposed assignee or
sublessee submits to Lessor documentary evidence reasonably satisfactory to
Lessor that such proposed use constitutes a permitted use of the Premises
pursuant to the ordinances and regulations of the City of Menlo Park;
(2) The proposed assignee or subtenant is a reputable
entity or individual with sufficient financial net worth so as to reasonably
indicate that it will be able to meet its obligations under this Lease or the
sublease in a timely manner;
(3) The proposed assignment or sublease is of the
entire Premises and not a portion thereof;
(4) The proposed assignment or sublease is approved
by Lessor's mortgage lender if such lender has the right to approve or
disapprove proposed assignments or subleases; and
(5) The proposed assignment or sublease shall
expressly prohibit further assignment or subletting of all or any part of the
Premises by the assignee or sublessee and shall otherwise be in form reasonably
satisfactory to Lessor and Lessor's counsel.
(c) As a condition to Lessor's granting its consent to any
assignment or sublease, (1) Lessor may require that Lessee pay to Lessor, as and
when received by Lessee, one hundred percent (100%) of the amount of any excess
of the consideration to be received by Lessee in connection with said assignment
or sublease over and above the rental amount fixed by this Lease and payable by
Lessee to Lessor, after deducting only reasonable marketing costs incurred by
Lessee in consummating such assignment or sublease which are approved in writing
by Lessor; and (2) Lessee and the proposed assignee or sublessee shall
demonstrate to Lessor's reasonable satisfaction that each of the criteria
referred to in subparagraph (b) above is satisfied.
(d) Each assignment or sublease agreement to which Lessor has
consented shall be an instrument in writing in form satisfactory to Lessor, and
shall be
<PAGE>
executed by both Lessee and the assignee or sublessee, as the case may be. Each
such assignment or sublease agreement shall recite that it is and shall be
subject and subordinate to the provisions of this Lease, that the assignee or
sublessee accepts such assignment or sublease, that Lessor's consent thereto
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or the assignee or sublessee, and, except as otherwise set forth in a
sublease approved by Lessor, agrees to perform all of the obligations of Lessee
hereunder (to the extent such obligations relate to the portion of the Premises
assigned or subleased), and that the termination of this Lease shall, at
Lessor's sole election, constitute a termination of every such assignment or
sublease.
(e) In the event Lessor shall consent to an assignment or
sublease, Lessee shall nonetheless remain primarily liable for all obligations
and liabilities of Lessee under this Lease, including but not limited to the
payment of rent.
(f) Lessee hereby stipulates that the foregoing terms and
conditions are reasonable and comply with the California Civil Code Section
1951.4.
(g) Notwithstanding the foregoing, Lessee may, without
Lessor's prior written consent and without any participation by Lessor in
assignment and subletting proceeds, sublet the entire Premises or assign this
Lease to a subsidiary, affiliate, division or corporation controlled or under
common control with Lessee ("affiliate"), or to a successor corporation related
to Lessee by merger, consolidation or reorganization, provided that any such
assignee or sublessee shall have a current verifiable net worth at least equal
to that of Lessee as of the date of the execution of this Lease. Lessee's
foregoing rights to assign this Lease shall be subject to the following
conditions: (1) Lessee shall not be in default hereunder past any applicable
cure period; (2) in the case of an assignment or subletting to an affiliate,
Lessee shall remain liable to Lessor hereunder; and (3) the transferee or
successor entity shall expressly assume in writing Lessee's obligations
hereunder.
(h) Subject to the provisions of this Paragraph 16 any
assignment or sublease without Lessor's prior written consent shall at Lessor's
election be void. The consent by Lessor to any assignment or sublease shall not
constitute a waiver of the provisions of this Paragraph 16, including the
requirement of Lessor's prior written consent, with respect to any subsequent
assignment or sublease. If Lessee shall purport to assign this Lease, or
sublease all or any portion of the Premises, or permit any person or persons
other than Lessee to occupy the Premises, without Lessor's prior written consent
(if such consent is required hereunder), Lessor may collect rent from the person
or persons then or thereafter occupying the Premises and apply the net amount
collected to the rent reserved herein, but no such collection shall be deemed a
waiver of Lessor's rights and remedies under this Paragraph 16, or the
acceptance of any such purported assignee, sublessee, or occupant, or a release
of Lessee from the further performance by Lessee of covenants on the part of
Lessee herein contained.
<PAGE>
(i) Lessee shall not hypothecate or encumber its interest
under this Lease or any rights of Lessee hereunder, or enter into any license or
concession agreement respecting all or any portion of the Premises, without
Lessor's prior written consent which consent Lessor may grant or withhold in
Lessor's absolute discretion without any liability to Lessee. Lessee's granting
of any such encumbrance, license, or concession agreement shall constitute an
assignment for purposes of this Paragraph 16.
(j) In the event of any sale or exchange of the Premises by
Lessor and assignment of this Lease by Lessor, Lessor shall, upon providing
Lessee with written confirmation that Lessor has delivered any security deposit
held by Lessor to Lessor's successor in interest, be and hereby is entirely
relieved of all liability under any and all of Lessor's covenants and
obligations contained in or derived from this Lease with respect to the period
commencing with the consummation of the sale or exchange and assignment.
(k) The parties acknowledge that Lessor has the remedy
described in California Civil Code Section 1951.4 (Lessor may continue the Lease
in effect after Lessee's breach and abandonment and recover rent as it becomes
due, if Lessee has right to sublet or assign, subject only to reasonable
limitations).
17. Waiver. The waiver by Lessor or Lessee of any breach of any term,
covenant, or condition contained herein shall not be deemed to be a waiver of
such term, covenant, or condition of any subsequent breach of the same or any
other term, covenant, or condition contained herein. The subsequent acceptance
of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding
breach by Lessee of any term, covenant, or condition of this Lease, other than
the failure of Lessee to pay the particular rent so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
18. Holding Over. Lessee shall vacate the Premises and deliver the same
to Lessor upon the expiration or sooner termination of this Lease. In the event
of holding over by Lessee after the expiration or termination of this Lease,
such holding over shall be on a month-to-month tenancy and all of the terms and
provisions of this Lease shall be applicable during such period, except that
Lessee shall pay Lessor as Monthly Base Rent during such holdover an amount
equal to the greater of (i) one hundred fifty percent (150%) of the Monthly Base
Rent in effect at the expiration of the term, or (ii) the then market rent for
comparable research and development/office space. If such holdover is without
Lessor's written consent, Lessee shall be liable to Lessor for all costs,
expenses, and consequential damages incurred by Lessor as a result of such
holdover. The rental payable during such holdover period shall be payable to
Lessor on demand.
<PAGE>
19. Damage or Destruction.
(a) In the event of a total destruction of the Buildings and
improvements during the lease term from any cause, either party may elect to
terminate this Lease by giving written notice of termination to the other party
within thirty (30) days after the casualty occurs. A total destruction shall be
deemed to have occurred for this purpose if the Buildings or the Premises are
destroyed to the extent of seventy-five percent (75%) or more of the replacement
cost thereof. If the Lease is not terminated, Lessor shall repair and restore
the Premises in a diligent manner and this Lease shall continue in full force
and effect, except that Monthly Base Rent and Additional Rent shall be abated in
accordance with Paragraph 19(d) below.
(b) In the event of a partial destruction of the Buildings or
the Premises to an extent not exceeding twenty-five percent (25%) of the
replacement cost thereof and if the damage thereto can be repaired,
reconstructed, or restored within a period of one hundred twenty (120) days from
the date of such casualty, and if the casualty is from a cause which is required
to be insured under Lessor's fire and extended coverage insurance, or is insured
under any other coverage then carried by Lessor, and Lessor receives proceeds of
insurance sufficient to repair and restore the Buildings and improvements,
Lessor shall forthwith repair the same, and this Lease shall continue in full
force and effect, except that Monthly Base Rent and Additional Rent shall be
abated in accordance with Paragraph 19(d) below. If any of the foregoing
conditions is not met, Lessor shall have the option of either repairing and
restoring the Buildings and improvements, or terminating this Lease by giving
written notice of termination to Lessee within thirty (30) days after the
casualty, subject to the provisions of Paragraph 19(c).
(c) In the event of a partial destruction of the Buildings and
improvements of the Premises to an extent equal to or exceeding twenty-five
percent (25%) but less than seventy-five percent (75%) of the replacement cost
thereof, or if the damage thereto cannot be repaired, reconstructed, or restored
within a period of one hundred twenty (120) days from the date of such casualty,
either Lessor or Lessee may terminate this Lease by giving written notice of
termination to the other within thirty (30) days after the casualty.
Furthermore, if such casualty is from a cause which is not
required to be insured under Lessor's fire and extended coverage insurance, or
is not insured under any other insurance carried by Lessor, or if the proceeds
of insurance received by Lessor are not sufficient (or would not have been
sufficient if required insurance were carried) to repair and restore the
Buildings and improvements, Lessor may elect to repair and restore the Buildings
and improvements (provided that Lessee has not elected to terminate this Lease
pursuant to the first sentence of this Paragraph 19(c)), or Lessor may terminate
this Lease by giving written notice of termination to Lessee.
<PAGE>
Lessor's election to repair and restore the Buildings and improvements or to
terminate this Lease, shall be made and written notice thereof shall be given to
Lessee within thirty (30) days after the casualty. Notwithstanding the
foregoing, (1) if Lessor has not obtained all necessary governmental permits for
the restoration and commenced construction of the restoration within one hundred
twenty (120) days after the casualty, Lessee may terminate this Lease by written
notice to Lessor given at any time prior to the actual commencement of
construction of the restoration; or (2) if Lessor elects to repair and restore
the Buildings and improvements under subparagraph (b) or (c) above, but the
repairs and restoration are not substantially completed within one hundred
eighty (180) days after the casualty, Lessee may terminate this Lease by written
notice to Lessor given within thirty (30) days after the expiration of said
period of one hundred eighty (180) days after the casualty.
If this Lease is not terminated by Lessor or Lessee pursuant
to the foregoing provisions, Lessor shall complete the repairs in a diligent
manner and this Lease shall continue in full force and effect, except that
Monthly Base Rent and Additional Rent shall be abated in accordance with
Paragraph 19(d) below.
(d) In the event of repair, reconstruction, or restoration as
provided herein, the Monthly Base Rent and Additional Rent shall be abated
proportionally in the ratio which the Lessee's use of the Premises is impaired
during the period of such repair, reconstruction, or restoration, from the date
of the casualty until such repair, reconstruction or restoration is completed.
(e) With respect to any destruction of the Premises which
Lessor is obligated to repair, or may elect to repair, under the terms of this
Paragraph 19, the provisions of Section 1932, Subdivision 2, and of Section
1933, Subdivision 4, of the Civil Code of the State of California are waived by
the parties. Lessor's obligation to repair and restore the Premises shall be
limited to the improvements originally constructed by Lessor at Lessor's
expense. Lessee shall repair or replace, at Lessee's expense, all leasehold
improvements, fixtures, and equipment installed by Lessee or paid for by Lessee.
Lessor's time for completion of the repairs and restoration of the Premises
shall be extended by a period equal to any delays caused by strikes, labor
disputes, unavailability of materials, inclement weather, acts of God, or other
causes beyond Lessor's control.
(f) In the event of termination of this Lease pursuant to any
of the provisions of this Paragraph 19, the monthly rent shall be apportioned on
a per diem basis and shall be paid to the date of the casualty. In no event
shall Lessor be liable to Lessee for any damages resulting to Lessee from the
occurrence of such casualty, or from the repairing or restoration of the
Buildings and improvements, or from the termination of this Lease as provided
herein, nor shall Lessee be relieved thereby from
<PAGE>
any of Lessee's obligations hereunder, except to the extent and upon the
conditions expressly set forth in this Paragraph 19.
20. Eminent Domain.
(a) If the whole or any substantial part of the Buildings or
appurtenant real property owned by Lessor shall be taken or condemned by any
competent public authority for any public use or purpose, the term of this Lease
shall end upon the earlier to occur of the date when the possession of the part
so taken shall be required for such use or purpose or the vesting of title in
such public authority. Rent shall be apportioned as of the date of such
termination. Lessee shall be entitled to receive any damages awarded by the
court for (i) leasehold improvements installed at Lessee's expense or other
property owned by Lessee, and (ii) reasonable costs of moving by Lessee to
another location in San Mateo County. The entire balance of the award shall be
the property of Lessor.
(b) If there is a partial taking of the Premises by eminent
domain which is not a substantial part of the Buildings and the balance of the
Premises remains reasonably suitable for continued use and occupancy by Lessee
in Lessee's reasonable judgment for the purposes referred to in Paragraph 7,
Lessor shall complete any necessary repairs in a diligent manner and this Lease
shall remain in full force and effect with a just and proportionate abatement of
the Monthly Base Rent and Additional Rent, to reflect the number of square feet
of the Premises taken and the number of square feet remaining. If after a
partial taking, the Premises and parking are not reasonably suitable for
Lessee's continued use and occupancy for the uses permitted herein, Lessee may
terminate this Lease effective on the earlier of the date title vests in the
public authority or the date possession is taken. Subject to the provisions of
Paragraph 20(a), the entire award for such taking shall be the property of
Lessor.
21. Remedies. If Lessee fails to make any payment of rent or any other
sum due under this Lease for ten (10) days after receipt by Lessee of written
notice from Lessor; or if Lessee breaches any other term of this Lease for
thirty (30) days after receipt by Lessee of written notice from Lessor (unless
such default is incapable of cure within thirty (30) days and Lessee commences
cure within thirty (30) days and diligently prosecutes the cure to completion
within a reasonable time); or if Lessee's interest herein, or any part thereof,
is assigned or transferred, either voluntarily or by operation of law (except as
expressly permitted by other provisions of this Lease); or if Lessee makes a
general assignment for the benefit of its creditors; or if this Lease is
rejected (i) by a bankruptcy trustee for Lessee, (ii) by Lessee as debtor in
possession, or (iii) by failure of Lessee as a bankrupt debtor to act timely in
assuming or rejecting this Lease; then any of such events shall constitute an
event of default and breach of this Lease by Lessee and Lessor may, at its
option, elect the remedies specified in either subparagraph (a) or (b) below.
Any such rejection of this Lease referred to above shall
<PAGE>
not cause an automatic termination of this Lease. Whenever in this Lease
reference is made to a default by Lessee, such reference shall refer to an event
of default as defined in this Paragraph 21.
(a) Lessor may repossess the Premises and remove all persons
and property therefrom. If Lessor repossesses the Premises because of a breach
of this Lease, this Lease shall terminate and Lessor may recover from Lessee:
(1) the worth at the time of award of the unpaid rent
which had been earned at the time of termination including interest thereon at a
rate equal to the Federal discount rate plus one percent (1%) per annum, or the
maximum legal rate of interest, whichever is less, from the time of termination
until paid;
(2) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Lessee proves could
have been reasonably avoided, including interest thereon at a rate equal to the
Federal discount rate plus one percent (1%) per annum, or the maximum legal rate
of interest, whichever is less, from the time of termination until paid;
(3) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss for the same period that Lessee proves
could be reasonably avoided; and
(4) any other amount necessary to compensate Lessor
for all the detriment proximately caused by Lessee's breach or by Lessee's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom.
(b) If Lessor does not repossess the Premises, then this Lease
shall continue in effect for so long as Lessor does not terminate Lessee's right
to possession and Lessor may enforce all of its rights and remedies under this
Lease, including the right to recover the rent and other sums due from Lessee
hereunder. For the purposes of this Paragraph 21, the following do not
constitute a repossession of the Premises by Lessor or a termination of the
Lease by Lessor:
(1) Acts of maintenance or preservation by Lessor or
efforts by Lessor to relet the Premises; or
(2) The appointment of a receiver by Lessor to
protect Lessor's interests under this Lease.
<PAGE>
(c) Lessor's failure to perform or observe any of its
obligations under this Lease or to correct a breach of any warranty or
representation made in this Lease within thirty (30) days after receipt of
written notice from Lessee setting forth in reasonable detail the nature and
extent of the failure referencing pertinent Lease provisions or if more than
thirty (30) days is required to cure the breach, Lessor's failure to begin
curing within the thirty (30) day period and diligently prosecute the cure to
completion, shall constitute a default. If Lessor commits a default, Lessee's
sole remedy shall be to institute an action against Lessor for damages, without
rent abatement or offset against rent.
22. Lessee's Personal Property. If any personal property of Lessee
remains on the Premises after (1) Lessor terminates this Lease pursuant to
Paragraph 21 above following an event of default by Lessee, or (2) after the
expiration of the Lease term or after the termination of this Lease pursuant to
any other provisions hereof, Lessor shall give written notice thereof to Lessee
pursuant to applicable law. Lessor shall thereafter release, store, and dispose
of any such personal property of Lessee in accordance with the provisions of
applicable law.
23. Notices. All notices, statements, demands, requests, or consents
given hereunder by either party to the other shall be in writing and shall be
personally delivered or sent by United States mail, registered or certified,
return receipt requested, postage prepaid, and addressed to the parties as
follows:
Lessor: Menlo Business Park, LLC
c/o Tarlton Properties, Inc.
955 Alma Street
Palo Alto, California 94301
Lessee: Accom, Inc.
1490 O'Brien Drive
Menlo Park, California 94025
Attention: Junaid Sheikh
President and CEO
or to such other address as either party may have furnished to the other as a
place for the service of notice. Notices shall be deemed given upon receipt or
attempted delivery where delivery is not accepted.
24. Estoppel Certificate. Lessee and Lessor shall within fifteen (15)
days following request by the other party (the "Requesting Party"), execute and
deliver to the Requesting Party a Lessee Estoppel Certificate substantially in
the form attached hereto as Exhibit "G" (1) certifying that this Lease has not
been modified and certifying that
<PAGE>
this Lease is in full force and effect, or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect; (2) stating the date to which the rent and other charges are
paid in advance, if at all; (3) stating the amount of any security deposit held
by Lessor; and (4) acknowledging that there are not, to the responding party's
knowledge, any uncured defaults on the part of the Requesting Party hereunder,
or if there are uncured defaults on the part of the Requesting Party, stating
the nature of such uncured defaults.
25. Signage. Lessor shall provide to Lessee space for Lessee's signs on
the monument signs for the Buildings located in the landscaped median in front
of the Buildings. Lessee may also place Lessee's vinyl lettering signage at the
glass door entrances to the Buildings. All of Lessee's signage shall comply with
the Menlo Park sign ordinances and regulations and shall be subject to Lessor's
approval as to the location, size and design thereof. The cost of the
installation of the vinyl lettering on the monument signs and at the glass door
entrances shall be paid by Lessee. Any additional signage shall be subject to
Lessor's prior approval and, if approved, shall be installed at Lessee's
expense.
26. Real Estate Brokers. Lessor shall pay a leasing commission to
Tarlton Properties, Inc., Lessor's broker, pursuant to a separate agreement
between Lessor and said broker. Each party represents that it has not had any
dealings with any real estate broker, finder, or other person with respect to
this Lease other than Tarlton Properties, Inc. who has acted as exclusive
leasing agent for Lessor, and each party shall hold harmless the other party
from all damages, expenses, and liabilities resulting from any claims that may
be asserted against the other party by an other broker, finder, or other person
with whom the other party has or purportedly has dealt.
27. Subordination; Attornment.
(a) This Lease, without any further instrument, shall at all
times be subject and subordinate to any and all mortgages and deeds of trust
which may now or hereafter affect Lessor's estate in the real property of which
the Premises form a part, and to all advances made or hereafter to be made upon
the security thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof. Lessor shall use reasonable efforts to
cause the beneficiary of any deed of trust executed by Lessor as trustor after
the date hereof to execute a recognition and non-disturbance agreement in a form
reasonably satisfactory to Lessor, Lessee and such beneficiary which (i)
provides that this Lease shall not be terminated so long as Lessee is not in
default under this Lease, and (ii) that upon acquiring title to the Premises by
foreclosure or otherwise such holder shall recognize all of Lessee's rights
hereunder which accrue thereafter.
<PAGE>
(b) In confirmation of such subordination, Lessee shall
promptly execute any certificate or other instrument which Lessor may deem
proper to evidence such subordination, without expense to Lessor; provided,
however, that if any person or persons purchasing or otherwise acquiring the
real property of which the Premises form a part by any sale, sales and/or other
proceedings under such mortgages and/or deeds of trust, shall elect to continue
this Lease in full force and effect in the same manner and with like effect as
if such person or persons had been named as Lessor herein, then this Lease shall
continue in full force and effect as aforesaid, and Lessee hereby attorns and
agrees to attorn to such person or persons.
(c) If Lessee is notified in writing of Lessor's default under
any deed of trust affecting the Premises and if Lessee is instructed in writing
by the party giving notice to make Lessee's rental payments to beneficiary
Lessee shall comply with such request without liability to Lessor until Lessee
receives written confirmation that such default has been cured by Lessor and
that the deed of trust has been reinstated.
28. No Termination Right. Lessee shall not have the right to terminate
this Lease as a result of any default by Lessor and Lessee's remedies in the
event of a default by Lessor shall be limited to the remedy set forth in
Paragraph 21(c). Lessee expressly waives the defense of constructive eviction.
29. Lessor's Entry. Except in the case of an emergency and except for
permitted entry during Lessee's normal working hours, Lessor and Lessor's agents
shall provide Lessee with at least twenty-four (24) hours' notice prior to entry
of the Premises. Such entry by Lessor and Lessor's agents shall not impair
Lessee's operations more than reasonably necessary. Lessor and Lessor's agents
shall at all times be accompanied by Lessee during any such entry except in case
of emergency and except for janitorial work. Lessor may enter the Premises
without prior notice to Lessee if Lessee has vacated the Premises.
30. Attorneys' Fees. If any action at law or in equity shall be brought
to recover any rent under this Lease, or for or on account of any breach of or
to enforce or interpret any of the provisions of this Lease or for recovery of
the possession of the Premises, the prevailing party shall be entitled to
recover from the other party costs of suit and reasonable attorneys' fees, the
amount of which shall be fixed by the court and shall be made a part of any
judgment rendered.
31. Compliance with CC&R's. During the term of this Lease and any
option extension period, Lessee shall comply, at Lessee's expense, with all of
the covenants, conditions, and restrictions affecting the Premises which are
recorded in the Official Records of San Mateo County, California, and which are
in effect as of the date of this Lease.
<PAGE>
32. Quiet Enjoyment. Upon payment by Lessee of the rent for the
Premises and the observance and performance of all of the covenants, conditions,
and provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet enjoyment and possession of the Premises for the entire
term hereof subject to all of the provisions of this Lease.
33. General Provisions.
(a) During the term of this Lease and any option extension
period, Lessee and its employees and agents shall comply with the Rules and
Regulations attached hereto as Exhibit "H."
(b) Nothing contained in this Lease shall be deemed or
construed by the parties hereto or by any third person to create the
relationship of principal and agent or of partnership or of joint venture of any
association between Lessor and Lessee, and neither the method of computation of
rent nor any other provisions contained in this Lease nor any acts of the
parties hereto shall be deemed to create any relationship between Lessor and
Lessee other than the relationship of landlord and tenant.
(c) Each and all of the provisions of this Lease shall be
binding upon and inure to the benefit of the parties hereto, and except as
otherwise specifically provided elsewhere in this Lease, their respective heirs,
executors, administrators, successors, and assigns, subject at all times,
nevertheless, to all agreements and restrictions contained elsewhere in this
Lease with respect to the assignment, transfer, encumbering, or subletting of
all or any part of Lessee's interest in this Lease.
(d) The captions of the paragraphs of this Lease are for
convenience only and shall not be considered or referred to in resolving
questions of interpretation or construction.
(e) This Lease is and shall be considered to be the only
agreement between the parties hereto and their representatives and agents. All
negotiations and oral agreements acceptable to both parties have been merged
into and are included herein. There are no other representations or warranties
between the parties and all reliance with respect to representations is solely
upon the representations and agreements contained in this instrument.
(f) The laws of the State of California shall govern the
validity, performance, and enforcement of this Lease. Notwithstanding which of
the parties may be deemed to have prepared this Lease, this Lease shall not be
interpreted either for or against Lessor or Lessee, but this Lease shall be
interpreted in accordance with the general tenor of the language in an effort to
reach an equitable result.
<PAGE>
(g) Time is of the essence with respect to the performance of
each of the covenants and agreements contained in this Lease.
(h) Lessee hereby expressly waives any and all rights of
redemption granted by or under any present or future law in the event of Lessee
being evicted or dispossessed for any cause, or in the event of Lessor obtaining
possession of the Premises by reason of the breach by Lessee of any of the
covenants and conditions of the Lease or otherwise. The rights given to Lessor
herein are in addition to any rights that may be given to Lessor by any statute
or otherwise.
(i) Recourse by Lessee for breach of this Lease by Lessor
shall be expressly limited to Lessor's interest in the Premises and the rents,
issues and profits therefrom, and in the event of any such breach or default by
Lessor Lessee hereby waives the right to proceed against any other assets of
Lessor or against any other assets of any manager or member of Lessor.
(j) Any provision or provisions of this Lease which shall be
found to be invalid, void or illegal by a court of competent jurisdiction, shall
in no way affect, impair, or invalidate any other provisions hereof, and the
remaining provisions hereof shall nevertheless remain in full force and effect.
(k) This Lease may be modified in writing only, signed by the
parties in interest at the time of such modification.
(l) Each party represents to the other that the person signing
this Lease on its behalf is properly authorized to do so, and in the event this
Lease is signed by an agent or other third party on behalf of either Lessor or
Lessee, written authority to sign on behalf of such party in favor of the agent
or third party shall be provided to the other party hereto either prior to or
simultaneously with the return to such other party of a fully executed copy of
this Lease.
(m) No binding agreement between the parties with respect to
the Premises shall arise or become effective until this Lease has been duly
executed by both Lessee and Lessor and a fully executed copy of this Lease has
been delivered to both Lessee and Lessor.
(n) Lessor and Lessee acknowledge that the terms and
conditions of this Lease constitute confidential information of Lessor and
Lessee. Neither party shall disseminate orally or in written form a copy of this
Lease, lease proposals, lease drafts, or other documentation containing the
terms, details or conditions contained herein to any third party without
obtaining the prior written consent of the other party, except to the attorneys,
accountants, or other authorized business representatives or agents of the
parties. Neither Lessor nor Lessee shall make any public announcement of the
consummation of this Lease transaction without the prior approval of the other
party.
<PAGE>
(o) The rights and remedies that either party may have under
this Lease or at law or in equity, upon any breach, are distinct, separate and
cumulative and shall not be deemed inconsistent with each other, and no one of
them shall be deemed to be exclusive of any other.
(p) Lessor and Lessee waive any claim for consequential
damages which one may have against the other for breach of or failure to perform
or observe the requirements and obligations created by this Lease.
(q) Lessor and Lessee each agree to and they hereby do waive
trial by jury in any action, proceeding or counterclaim brought by either of the
parties hereto against the other on any matters whatsoever arising out of or in
any way connected with this Lease, the relationship of Lessor and Lessee,
Lessee's use or occupancy of the Premises and/or any claim of injury or damage,
and any statutory remedy.
(r) This Lease shall not be recorded.
<PAGE>
IN WITNESS WHEREOF, the Lessor and Lessee have duly executed this Lease
as of the date first set forth herein.
"Lessor"
MENLO BUSINESS PARK, LLC
a California limited liability company
By: /s/ JOHN O. LEWIS
-----------------------------------
John O. Lewis, Manager
By: /s/ J. O. OLTMANS, II
-----------------------------------
J. O. Oltmans, II, Manager
"Lessee"
ACCOM, INC.,
a Delaware corporation
By: /s/ JUNAID SHEIKH
-----------------------------------
Junaid Sheikh, President
By: /s/ DONALD PETERSEN
-----------------------------------
Don Petersen, Vice President
EXHIBIT 10.1.1
ADDENDUM TO LEASE
March 25, 1999
Further terms and conditions to that certain lease dated May 1, 1994 by and
between Whispering Pines Associates II, Landlord and Carlton International
Corporation through its ImMIX Division (subsequently assigned to Scitex IM
Acquisition Corp.), Tenant.
The parties further agree as follows:
Section 1.03 Tenant: shall be amended to read Accom, Inc. a Delaware
corporation.
Section 1.04 Property shall be amended to read 431 Crown Point Circle, Suites
100, 150, 125 & 175 and G, Grass Valley, CA 95945 consisting of 14,635 square
feet on the upper and lower level.
Section 1.05 Lease Term shall be amended to read five (5) years zero (0) months
beginning on May 1, 1999 and ending on April 30, 2004.
Section 1.10 Initial Security Deposit shall be amended to read $13,317.85.
Section 1.11 Vehicle Parking Spaces Allocated to Tenant shall be amended to read
58.
Section 1.12 Rent and Other Charges Payable by Tenant shall be amended as
follows:
(a) Base Rent: Thirteen thousand three hundred seventeen and 85/100
($13,317.85) for months 1-12, Thirteen thousand seven hundred fifty-six and
90/100 ($13,756.90) for months 13-48, Fourteen thousand three hundred forty-two
and 30/100 ($14,342.30) for months 49-60.
(b) Other Periodic Payments shall be amended to read 62.62%.
Section 1.14 Riders shall be amended to read Exhibits A (two parts), addendum
paragraphs 15-27 and this addendum to lease dated March 25, 1999.
Landlord agrees to make the following improvements to the property:
a) Recarpet upstairs corridor, suites 100, 125 & 175 and G
b) Clean carpet in all other areas
c) Replace VCT bathroom floors in suite G
d) Replace carpet with VCT in front portion of suite G
e) Remodel bathroom into kitchen in front portion of suite G
f) Remodel office into shower in front portion of suite G
g) Repaint / touch-up walls throughout
h) Replace all damaged ceiling tiles
<PAGE>
Addendum to Lease
March 25, 1999
Page 2
i) Relamp light fixtures so that bulb type is consistent in each area
j) Upgrade lighting in upstairs corridor
k) Install stainless steel panels behind upstairs restroom trash receptacles
l) Replace toilet seats as needed m) Clean and seal entry decks
Tenant shall be relieved from its current lease obligations (prior to April 30,
1999) for the space that Tenant will be vacating when and if the space is leased
to new tenants.
Landlord shall use its best efforts to make space available in the building as
required for tenant's future expansion.
All other terms and conditions of the herein mentioned lease are incorporated by
reference.
Landlord: Tenant:
Whispering Pines Associates II Accom, Inc.
By: /s/ RAY JOHNSON By: /s/ DONALD K. MCCAULEY
---------------- -----------------------
Date: April 5, 1999 Date: April 1, 1999
By: /s/ G. NATE BALL
------------
Date: April 20, 1999
EXHIBIT 10.5
LOAN AND SECURITY AGREEMENT
between
ACCOM, INC.,
A Delaware Corporation
Borrower
and
THE PROVIDENT BANK,
An Ohio Banking Institution
Lender
$2,000,000.00 REVOLVING LINE OF CREDIT
Dated: February 10, 2000
<PAGE>
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TABLE OF CONTENTS
ARTICLE 1
DEFINITIONS....................................................................1
Section 1.1. Account Debtor.............................................1
Section 1.2. Accounts, Chattel Paper, Documents, Equipment, Fixtures,
General Intangibles, Goods, Instruments and Investment
Property...................................................1
Section 1.3. Affiliate. ................................................2
Section 1.4. Agreement. ................................................2
Section 1.5. Borrowing Base.............................................2
Section 1.6. Business Day. .............................................2
Section 1.7. Capital Adequacy Requirement. .............................2
Section 1.8. Capital Expenditures.......................................2
Section 1.9. Capital Lease. ............................................3
Section 1.10. Capital Lease Obligations. ................................3
Section 1.11. Closing. ..................................................3
Section 1.12. Code. .....................................................3
Section 1.13. Collateral. ...............................................3
Section 1.14. Collection Account. .......................................3
Section 1.15. Commercial Account. .......................................3
Section 1.16. Default. ..................................................3
Section 1.17. Dollar Cap. ...............................................4
Section 1.18. EBITDA.....................................................4
Section 1.19. Eligible Accounts. ........................................4
Section 1.20. Employee Benefit Plan. ....................................5
Section 1.21. Environmental Laws. .......................................5
Section 1.22. EPA Permit. ...............................................6
Section 1.23. ERISA. ....................................................6
Section 1.24. ERISA Affiliate. ..........................................6
Section 1.25. ERISA Liabilities. ........................................6
Section 1.26. Event Of Default. .........................................6
Section 1.27. Facilities. ...............................................6
Section 1.28. Fiscal Year. ..............................................6
Section 1.29. G.A.A.P. ..................................................6
Section 1.30. Guaranteed Pension Plan. ..................................6
Section 1.31. Indebtedness. .............................................7
Section 1.32. Insolvency Proceedings. ...................................7
Section 1.33. Interest Rate Protection Agreement. .......................7
Section 1.34. Interest Coverage Ratio....................................7
Section 1.35. Interest Expense...........................................7
Section 1.36. Inventory. ................................................7
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Section 1.37. Laws. .....................................................8
Section 1.38. Lender Expenses. ..........................................8
Section 1.39. Letters Of Credit. ........................................8
Section 1.40. Loan. .....................................................8
Section 1.41. Loan Documents. ...........................................8
Section 1.42. Lock Box. .................................................9
Section 1.43. Material Adverse Event. ...................................9
Section 1.44. Maximum Revolving Loan Amount. ............................9
Section 1.45. Multiemployer Plan. .......................................9
Section 1.46. Note. .....................................................9
Section 1.47. Obligations. ..............................................9
Section 1.48. Permitted Liens. .........................................10
Section 1.49. Person. ..................................................10
Section 1.50. Receivables. .............................................10
Section 1.51. Records. .................................................10
Section 1.52. Regulated Substance. .....................................10
Section 1.53. Release. .................................................10
Section 1.54. Restricted Payment. ......................................11
Section 1.55. Revolving Loan. ..........................................11
Section 1.56. Revolving Loan Note. .....................................11
Section 1.57. Solvent. .................................................11
Section 1.58. Subordinated Debt.........................................11
Section 1.59. Subsidiary. ..............................................11
Section 1.60. Tangible Net Worth........................................12
Section 1.61. Termination Event. .......................................12
ARTICLE 2
TERMS OF LOAN.................................................................12
Section 2.1. Agreement To Extend Revolving Loan........................12
Section 2.1.1. Conditions Precedent To Each Advance....................13
Section 2.1.2. Interest And Lender's Records...........................13
Section 2.1.3. Commitment Fee..........................................14
Section 2.1.4. Facility Fee............................................14
Section 2.1.5. Monitoring Fee. ........................................14
Section 2.1.6. Term....................................................14
Section 2.1.7. Purpose.................................................14
Section 2.2. Letters Of Credit.........................................14
Section 2.2.1. Issuance Of Letters Of Credit. .........................14
Section 2.2.2. Rights And Remedies Of The Lender. .....................15
Section 2.2.3. Indemnification. .......................................15
Section 2.2.4. Reimbursement Obligations. .............................15
Section 2.2.5. Fees, Charges And Other Terms. .........................16
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Section 2.3. Capital Adequacy. ........................................16
Section 2.4. Payments. ................................................16
Section 2.5. Advancements. ............................................16
Section 2.6. Termination. .............................................17
ARTICLE 3
SECURITY FOR THE OBLIGATIONS..................................................17
Section 3.1. Grant Of Security Interest. ..............................17
Section 3.2. Proceeds And Products. ...................................18
Section 3.3. Priority Of Security Interests. ..........................18
Section 3.4. Future Advances. .........................................18
Section 3.5. Receivable Collections. ..................................18
Section 3.6. Collection Of Receivables By Lender. .....................18
Section 3.7. Maintenance Of Principal Accounts.........................19
Section 3.8. Further Assurances. ......................................19
Section 3.9. Fair Labor Standards Act. ................................20
ARTICLE 4
REPRESENTATIONS AND WARRANTIES................................................20
Section 4.1. Accuracy Of Information. .................................20
Section 4.2. No Litigation. ...........................................20
Section 4.3. No Liability Or Adverse Change. ..........................20
Section 4.4. Title To Collateral. .....................................21
Section 4.5. Authority; Approvals And Consents.........................21
Section 4.5.1. Authority. .............................................21
Section 4.5.2. Approvals. .............................................21
Section 4.5.3. Consents. ..............................................21
Section 4.6. Binding Effect Of Documents, Etc. ........................21
Section 4.7. Other Names. .............................................22
Section 4.8. No Events Of Default. ....................................22
Section 4.9. Taxes. ...................................................22
Section 4.10. Compliance With Laws. ....................................22
Section 4.11. Chief Place Of Business. .................................22
Section 4.12. Location Of Inventory. ...................................22
Section 4.13. No Subsidiaries. .........................................22
Section 4.14. No Labor Agreements. .....................................22
Section 4.15. Eligible Accounts. .......................................23
Section 4.16. Approvals. ...............................................23
Section 4.17. Financial Statements. ....................................23
Section 4.18. Solvency. ................................................23
Section 4.19. Fair Labor Standards Act. ................................23
<PAGE>
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Section 4.20. Employee Benefit Plans....................................23
Section 4.20.1. Compliance. ............................................23
Section 4.20.2. Absence Of Termination Event. ..........................23
Section 4.20.3. Actuarial Value. .......................................24
Section 4.20.4. No Withdrawal Liability. ...............................24
Section 4.21. Environmental Conditions..................................24
Section 4.21.1. Existence Of Permits. ..................................24
Section 4.21.2. Compliance With Permits. ...............................24
Section 4.21.3. No Litigation. .........................................24
Section 4.21.4. No Releases. ...........................................24
Section 4.21.5. Transportation. ........................................24
Section 4.21.6. No Violation Notices. ..................................25
Section 4.21.7. No Notice Of Violations. ...............................25
ARTICLE 5
AFFIRMATIVE COVENANTS.........................................................25
Section 5.1. Payment. .................................................25
Section 5.2. Insurance. ...............................................25
Section 5.3. Books And Records. .......................................25
Section 5.4. Collection Of Accounts; Sale Of Inventory. ...............26
Section 5.5. Notice Of Litigation And Proceedings. ....................26
Section 5.6. Payment Of Liabilities To Third Persons. .................26
Section 5.7. Notice Of Change Of Business Location.....................26
Section 5.8. Payment Of Taxes. ........................................26
Section 5.9. Inspections Of Records. ..................................27
Section 5.10. Notice Of Events Affecting Collateral; Compromise Of
Receivables; Returned Or Repossessed Goods. ..............27
Section 5.11. Documentation Of Collateral. .............................27
Section 5.12. Reporting Requirements. ..................................28
Section 5.12.1. Receivables And Accounts Payable Reports. ..............28
Section 5.12.2. Borrowing Base Report. .................................28
Section 5.12.3. Quarterly Financial Statements. ........................28
Section 5.12.4. Monthly Financial Statements. ..........................28
Section 5.12.5. Annual Financial Statements. ...........................28
Section 5.12.6. SEC And Other Filings...................................29
Section 5.12.7. Management Letters. ....................................29
Section 5.12.8. Certificates Of No Default. ............................29
Section 5.12.9. Reports To Other Creditors. ............................29
Section 5.12.10. Management Changes. ....................................30
Section 5.12.11. General Information.....................................30
Section 5.13. Employee Benefit Plans And Guaranteed Pension Plans. .....30
Section 5.14. Maintenance Of Fixed Assets. .............................30
Section 5.15. Consignments. ............................................30
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Section 5.16. Federal Assignment Of Claims Act. ........................31
Section 5.17. Compliance With Laws. ....................................31
Section 5.18. Tangible Net Worth........................................32
Section 5.19. EBITDA....................................................32
Section 5.20. Interest Coverage Ratio...................................32
ARTICLE 6
NEGATIVE COVENANTS............................................................32
Section 6.1. No Change Of Name, Merger, Etc. ..........................32
Section 6.2. No Sale Or Transfer Of Assets. ...........................33
Section 6.3. No Encumbrance Of Assets. ................................33
Section 6.4. No Indebtedness. .........................................33
Section 6.5. Restricted Payments. .....................................33
Section 6.6. Transactions With Affiliates. ............................33
Section 6.7. Loans, Investments And Sale-Leasebacks. ..................33
Section 6.8. No Acquisition Of Equity In Or Assets Of Third Persons. ..33
Section 6.9. No Assignment. ...........................................33
Section 6.10. No Alteration Of Structure Or Operations..................33
Section 6.11. Unpermitted Uses Of Loan Proceeds. .......................33
Section 6.12. Long Term Contracts. .....................................34
Section 6.13. Changes In Fiscal Year. ..................................34
Section 6.14. Limitation On Issuance Of Equity Interests. ..............34
Section 6.15. Capital Expenditures......................................34
ARTICLE 7
EVENTS OF DEFAULT.............................................................34
Section 7.1. Failure To Pay. ..........................................34
Section 7.2. Violation Of Covenants. ..................................34
Section 7.3. Representation Or Warranty. ..............................35
Section 7.4. Default Under Loan Documents. ............................35
Section 7.5. Cross-Default. ...........................................35
Section 7.6. Judgments.................................................35
Section 7.7. Levy By Judgment Creditor. ...............................35
Section 7.8. Failure To Pay Liabilities................................35
Section 7.9. Involuntary Insolvency Proceedings. ......................35
Section 7.10. Voluntary Insolvency Proceedings. ........................35
Section 7.11. Material Adverse Event. ..................................35
Section 7.12. ERISA. ...................................................35
Section 7.13. Transfer Of Equity Interests. ............................36
Section 7.14. Indictment Of Borrower. ..................................36
Section 7.15. Injunction. ..............................................36
Section 7.16. Notice And Cure Rights. ..................................36
<PAGE>
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ARTICLE 8
RIGHTS AND REMEDIES ON THE OCCURRENCEOF AN EVENT OF DEFAULT...................36
Section 8.1. Lender's Specific Rights And Remedies. ...................36
Section 8.2. Automatic Acceleration. ..................................37
Section 8.3. Sale Of Collateral. ......................................37
Section 8.4. Letters Of Credit. .......................................38
Section 8.5. Remedies Cumulative. .....................................38
ARTICLE 9
GENERAL CONDITIONS AND TERMS..................................................38
Section 9.1. Obligations Are Unconditional. ...........................38
Section 9.2. Indemnity. ...............................................38
Section 9.3. Lender Expenses. .........................................39
Section 9.4. Authorization To Obtain Financial Information. ...........39
Section 9.5. Incorporation; Construction Of Inconsistent Provisions. ..39
Section 9.6. Waivers. .................................................39
Section 9.7. Continuing Obligation Of Borrower. .......................39
Section 9.8. Choice Of Law. ...........................................39
Section 9.9. Submission To Jurisdiction; Venue; Actions Against Lender.39
Section 9.9.1. Jurisdiction. ..........................................40
Section 9.9.2. Venue. 40
Section 9.9.3. Waiver Of Objections To Venue. .........................40
Section 9.10. Notices. .................................................40
Section 9.11. Participations. ..........................................41
Section 9.12. Miscellaneous Provisions. ................................41
Section 9.13. Waiver Of Trial By Jury. .................................42
Schedules
- ---------
Schedule 1.48 Permitted Liens
Schedule 4.2 Pending Litigation
Schedule 4.7 Other Names
Schedule 4.11 Chief Place Of Business
Schedule 4.12 Location Of Inventory
Schedule 4.13 No Subsidiaries
Schedule 4.17 Liabilities And Obligations Not Disclosed In Financial
Statements
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is dated as of February 10, 2000 by
and between ACCOM, INC., a Delaware corporation ("BORROWER") and THE PROVIDENT
BANK, an Ohio chartered banking institution ("LENDER").
RECITALS
The BORROWER has requested that the LENDER extend various credit
accommodations to the BORROWER. The LENDER is willing to provide the requested
credit accommodations upon the terms and conditions of this Loan And Security
Agreement, and upon the granting by the BORROWER to the LENDER of the security
interests, liens, and other assurances of payment provided for in this Loan And
Security Agreement.
NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Loan And Security Agreement, the terms set forth in
this Article 1 have the meanings set forth below, unless the specific context of
this Loan And Security Agreement clearly requires a different meaning. Terms
defined in this Article 1 or elsewhere in this Loan And Security Agreement are
in all capital letters throughout this Loan And Security Agreement. The singular
use of any defined term includes the plural and the plural use includes the
singular.
Section 1.1. Account Debtor. The term "ACCOUNT DEBTOR" means
collectively each PERSON: (a) to or for whom the BORROWER has provided or has
agreed to provide any goods or services; or (b) which owes the BORROWER any sum
of money as a result of goods sold or services provided by the BORROWER; or (c)
which is the maker or endorser on any INSTRUMENT payable to the BORROWER or
otherwise owes the BORROWER any sum of money on account of any loan or other
payment obligation. With respect to each RECEIVABLE which is payable by any
governmental authority, "ACCOUNT DEBTOR" includes, without limitation, the
agency, instrumentality or official which has the duty of remitting or causing
the remittance of the amounts owing on such ACCOUNT or other RECEIVABLE.
Section 1.2. Accounts, Chattel Paper, Documents, Equipment, Fixtures,
General Intangibles, Goods, Instruments and Investment Property. The terms
"ACCOUNTS," "CHATTEL PAPER," "DOCUMENTS," "EQUIPMENT," "GENERAL INTANGIBLES,"
"GOODS," "INSTRUMENTS," and "INVESTMENT PROPERTY" shall have the same respective
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meanings as are given to those terms in the Uniform Commercial Code-Secured
Transactions, Title 9, Commercial Law Article, Annotated Code of Maryland, as
amended. The term "FIXTURES" shall have the meaning provided by the common law
of the state in which the fixtures are located.
Section 1.3. Affiliate. The term "AFFILIATE" means collectively any
PERSON: (a) that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with the BORROWER,
including, without limitation, the officers, managers and directors of the
BORROWER; (b) that directly or beneficially owns or holds ten percent (10%) or
more of any equity interests in the BORROWER; or (c) ten percent (10%) or more
of whose equity interests are owned directly or controlled by the BORROWER. As
used herein, the term "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with") shall mean possession, directly
or indirectly, of the power to direct the management or policies of a PERSON,
whether through ownership of equity interests, by contract or otherwise.
Section 1.4. Agreement. The term "AGREEMENT" means this Loan And
Security Agreement, as amended, extended, or modified from time to time by the
parties hereto, as well as all schedules, exhibits and attachments hereto.
Section 1.5. Borrowing Base. The term "BORROWING BASE" means an amount
equal to: (a) eighty percent (80%) of the face amount (less maximum discounts,
credits and allowances which may be taken by or are granted to ACCOUNT DEBTORS
in connection therewith) of billed ELIGIBLE ACCOUNTS; minus (b) the aggregate
stated amount of all outstanding LETTERS OF CREDIT and unsatisfied reimbursement
obligations of the BORROWER arising out of LETTERS OF CREDIT and such reserves
as the LENDER deems appropriate from time to time, including without limitation,
reserves determined by the LENDER to be appropriate with respect to bankers'
acceptances, GUARANTY INDEBTEDNESS, INTEREST RATE PROTECTION AGREEMENTS, and
other obligations of the BORROWER.
Section 1.6. Business Day. The term "BUSINESS DAY" means any day other
than a Saturday, Sunday, or other day on which commercial banking institutions
in the State of Maryland are required to be closed.
Section 1.7. Capital Adequacy Requirement. The term "CAPITAL ADEQUACY
REQUIREMENT" means any LAW imposing any capital adequacy requirement or any
other similar requirement (including but not limited to the capital adequacy
regulations contained in Parts 3, 208 and 225 of Title 12 of the Code of Federal
Regulations, as amended), any change in such LAWS or in the interpretation or
application thereof, and any request or directive regarding capital adequacy
(whether or not having the force of law) from any central bank or government
authority.
Section 1.8. Capital Expenditures. The term "CAPITAL EXPENDITURES"
means, for any period, the aggregate of all expenditures (whether paid in cash
or accrued as liabilities and including expenditures for CAPITAL LEASE
OBLIGATIONS) by the BORROWER during such period that are required by G.A.A.P. to
be included in or reflected by the property, plant, equipment or similar capital
asset accounts in the consolidated balance sheet of the BORROWER.
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Section 1.9. Capital Lease. The term "CAPITAL LEASE" means a lease with
respect to which the lessee's obligations thereunder should, in accordance with
G.A.A.P., be capitalized and reflected as a liability on the balance sheet of
the lessee.
Section 1.10. Capital Lease Obligations. The term "CAPITAL LEASE
OBLIGATIONS" means any indebtedness incurred as a lessee pursuant to a CAPITAL
LEASE.
Section 1.11. Closing. The term "CLOSING" means the execution and
delivery of this AGREEMENT, the NOTES, and various other LOAN DOCUMENTS. The
date of CLOSING is the date written above as the date of this AGREEMENT.
Section 1.12. Code. The term "CODE" means the Internal Revenue Code of
1986, as amended, and all Treasury regulations, revenue rulings, revenue
procedures or announcements issued thereunder.
Section 1.13. Collateral. The term "COLLATERAL" means all of the
tangible and intangible assets of the BORROWER, wherever located, whether now
owned or hereafter acquired by the BORROWER, together with all substitutions
therefor, and all replacements and renewals thereof, and all accessions,
additions, replacement parts, manuals, warranties and packaging relating
thereto, including but not limited to the following tangible and intangible
assets and property rights of the BORROWER: (a) ACCOUNTS; (b) CHATTEL PAPER; (c)
DOCUMENTS; (d) EQUIPMENT; (e) FIXTURES; (f) GENERAL INTANGIBLES; (g) GOODS; (h)
INSTRUMENTS; (i) INVENTORY, including returned, rejected, or repossessed
INVENTORY and rights of reclamation and stoppage in transit with respect to
INVENTORY; (j) INVESTMENT PROPERTY; (k) RECEIVABLES; (l) deposit accounts; (m)
letter of credit rights; (n) copyrights, trademarks, patents, and all pending
applications thereof; and (o) all RECORDS relating to or pertaining to any of
the above listed COLLATERAL.
Section 1.14. Collection Account. The term "COLLECTION ACCOUNT" means a
bank account designated by the LENDER from which the LENDER alone has power of
access and withdrawal.
Section 1.15. Commercial Account. The term "COMMERCIAL ACCOUNT" means
the commercial checking account to be established and maintained by the BORROWER
with the LENDER and which may be utilized as the means of advancing funds under
the LOAN.
Section 1.16. Default. The term "DEFAULT" means any event, occurrence
or omission which, with the giving of notice, the passage of time, or both,
would constitute an EVENT OF DEFAULT.
Section 1.17. Dollar Cap. The term "DOLLAR CAP" shall mean the sum of
One Million Five Hundred Thousand Dollars ($1,500,000.00); provided that the
DOLLAR CAP shall increase from One Million Five Hundred Thousand Dollars
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($1,500,000.00) to Two Million Dollars ($2,000,000.00) after March 31, 2000, if
the BORROWER'S financial statements for the quarter ending March 31, 2000
submitted pursuant to Section 5.12 demonstrates that the BORROWER'S EBITDA for
the quarter ending March 31, 2000 was not less than One Hundred Thousand Dollars
($100,000.00). The DOLLAR CAP shall not increase until such time after March 31,
000 as the LENDER has received the quarterly financial statements of the
BORROWER, together with any supporting statements and information, as required
by the LENDER to verify that the BORROWER'S EBITDA for the quarter ending March
31, 2000 has not been less than One Hundred Thousand Dollars ($100,000.00), and
the LENDER has confirmed in writing that the condition to the increase in the
DOLLAR CAP has been satisfied.
Section 1.18. EBITDA. The term "EBITDA" means, with respect to any
period of determination, the earnings of the referenced PERSON for such period
of determination before interest, taxes, depreciation, and amortization, and
without regard to gains or losses arising from asset sales not in the ordinary
course of business (including, without limitation, the sale of the virtual
production line in January, 2000), all as determined in accordance with G.A.A.P.
Section 1.19. Eligible Accounts. The term "ELIGIBLE ACCOUNTS" means
those ACCOUNTS which are acceptable to the LENDER. The criteria for eligibility
may be fixed and revised from time to time by the LENDER in its discretion. An
ACCOUNT in no event shall be deemed eligible unless: (a) the ACCOUNT arises from
goods sold or leased or from services performed in the ordinary course of
business of the BORROWER; (b) the delivery of the goods or the performance of
the services has been completed; (c) no return, rejection, or repossession has
occurred; (d) the goods delivered or the services performed have been finally
and unconditionally accepted by the ACCOUNT DEBTOR without dispute, objection,
complaint, offset, defense, counterclaim, adjustment or allowance; (e) the
ACCOUNT DEBTOR'S obligation to pay the ACCOUNT is not subject to any repurchase
obligation or return right, as with sales made on a bill-and-hold, guaranteed
sale, sale-and-return, sale on approval (except with respect to ACCOUNTS in
connection with which ACCOUNT DEBTORS are entitled to return INVENTORY solely on
the basis of the quality of such INVENTORY) or consignment basis; (f) no more
than ninety (90) days have elapsed from the billing or invoice date and no more
than sixty (60) days have elapsed from the due date unless such ACCOUNT has the
benefit of credit insurance and is owed by an ACCOUNT DEBTOR located outside of
the United States of America, in which case the ACCOUNT shall not be more than
one hundred fifty (150) days due from the date of invoice; (g) no prior,
contemporaneous, or subsequent assignment, claim, lien, or security interest,
other than that of the LENDER, applies to the ACCOUNT; (h) no bankruptcy or
insolvency proceedings or payment moratoriums of any kind apply to the ACCOUNT;
(i) the ACCOUNT DEBTOR is not, in the LENDER'S sole opinion, unlikely to pay
because of death, incompetency, disappearance, potential bankruptcy, insolvency,
damage to or disposition of the goods, default, or any other reason whatsoever;
(j) the LENDER has not, by notice to the BORROWER, in the LENDER'S sole
discretion, deemed the ACCOUNT unsatisfactory for any reason; (k) no bonding
company or surety asserts or has the ability to assert any claim based upon the
legal doctrine of equitable subrogation, or under any other right to claim a
lien into or right to payment of the ACCOUNT; (l) the ACCOUNT does not arise
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from or pertain to any transaction with any AFFILIATE; (m) the ACCOUNT is not
payable from any ACCOUNT DEBTOR located outside of the geographic boundaries of
the United States of America (unless or to the extent such ACCOUNT is secured by
a letter of credit or credit insurance acceptable to the LENDER); (n) the
BORROWER is legally empowered to collect the ACCOUNT against the ACCOUNT DEBTOR
in the jurisdiction in which the ACCOUNT DEBTOR is located; (o) the ACCOUNT is
not payable by an ACCOUNT DEBTOR with respect to which more than twenty-five
percent (25%) of the dollar amount of that ACCOUNT DEBTOR'S RECEIVABLES to the
BORROWER fail to comply with Subsection 1.19.(f) above; (p) the ACCOUNT does not
arise from any contract or agreement with any federal, state, local or foreign
government unless such governmental authority is the United States of America or
an agency or representative thereof and the LENDER has obtained full compliance
to its complete satisfaction with all provisions necessary to protect the
LENDER'S interests under The Assignment of Claims Act of 1940, as amended, and
all regulations promulgated thereunder, and all other applicable federal
procurement laws and regulations; and (q) the LENDER has a perfected first
priority security interest therein. An ACCOUNT which otherwise satisfies the
LENDER'S criteria for eligibility shall also be subject to the following
eligibility limitations: (i) if the ACCOUNT is payable by an ACCOUNT DEBTOR to
whom the BORROWER owes money, only the portion of the ACCOUNT in excess of the
amount owed by the BORROWER to the ACCOUNT DEBTOR may be eligible; (ii) if the
ACCOUNT is due from an ACCOUNT DEBTOR whose ACCOUNTS in the aggregate constitute
in excess of ten percent (10%) of all of the ACCOUNTS of the BORROWER, only the
portion of the aggregate amount of the ACCOUNTS from that ACCOUNT DEBTOR which
does not exceed ten percent (10%) of all of the ACCOUNTS of the BORROWER may be
eligible; and (iii) to the extent the ACCOUNT includes a separately billed
finance charges, such finance charges are not eligible.
Section 1.20. Employee Benefit Plan. The term "EMPLOYEE BENEFIT PLAN"
means an "employee benefit plan" as defined in Section 3(3) of ERISA.
Section 1.21. Environmental Laws. The term "ENVIRONMENTAL LAWS" means
individually or collectively any local, state or federal LAW, statute, rule,
regulation, order, ordinance, common law, permit or license term or condition,
or state superlien or environmental clean-up or disclosure statutes pertaining
to the environment or to environmental contamination, regulation, management,
control, treatment, storage, disposal, containment, removal, clean-up,
reporting, or disclosure, including, but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as now or
hereafter amended (including, but not limited to, the Superfund Amendments and
Reauthorization Act); the Resource Conservation and Recovery Act, as now or
hereafter amended (including, but not limited to, the Hazardous and Solid Waste
Amendments of 1984); the Toxic Substances Control Act, as now or hereafter
amended; the Clean Water Act, as now or hereafter amended; the Safe Drinking
Water Act, as now or hereafter amended; or the Clean Air Act, as now or
hereafter amended.
Section 1.22. EPA Permit. The term "EPA PERMIT" has the meaning given
that term in Section 4.21 of this AGREEMENT.
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Section 1.23. ERISA. The term "ERISA" means the Employee Retirement
Income Security Act of 1974 and regulations issued thereunder, as amended from
time to time and any successor statute.
Section 1.24. ERISA Affiliate. The term "ERISA AFFILIATE" means, in
relation to any PERSON, any trade or business (whether or not incorporated)
which is a member of a group of which that PERSON is a member and which is under
common control within the meaning of the regulations promulgated under Section
414 of the CODE.
Section 1.25. ERISA Liabilities. The term "ERISA LIABILITIES" means the
aggregate of all unfunded vested benefits under any employee pension benefit
plan, within the meaning of Section 3(2) of ERISA, of the BORROWER or any ERISA
AFFILIATE of the BORROWER under any plan covered by ERISA that is not a
MULTIEMPLOYER PLAN and all potential withdrawal liabilities of the BORROWER or
any ERISA AFFILIATE under all MULTIEMPLOYER PLANS.
Section 1.26. Event Of Default. The term "EVENT OF DEFAULT" means any
of the events set forth in Article 7 of this AGREEMENT, provided that any
requirement for the giving of notice, the lapse of time, or both, or any other
expressly stated condition, has been satisfied.
Section 1.27. Facilities. The term "FACILITIES" means all real property
and the improvements thereon used or occupied or leased by the BORROWER or
otherwise used at any time by the BORROWER in the operation of its business or
for the manufacture, storage, or location of any of the COLLATERAL.
Section 1.28. Fiscal Year. The term "FISCAL YEAR" means the fiscal year
of the BORROWER which is the twelve (12) month accounting period commencing
January 1 and ending December 31 of each calendar year.
Section 1.29. G.A.A.P. The term "G.A.A.P." means, with respect to any
date of determination, generally accepted accounting principles as used by the
Financial Accounting Standards Board and/or the American Institute of Certified
Public Accountants consistently applied and maintained throughout the periods
indicated.
Section 1.30. Guaranteed Pension Plan. The term "GUARANTEED PENSION
PLAN" means any pension plan maintained by the BORROWER or an ERISA AFFILIATE of
the BORROWER, or to which the BORROWER or an ERISA AFFILIATE contributes, some
or all of the benefits under which are guaranteed by the United States Pension
Benefit Guaranty Corporation.
Section 1.31. Indebtedness. The term "INDEBTEDNESS" means, as to any
referenced PERSON (determined without duplication): (a) indebtedness of such
PERSON for borrowed money (whether by loan or the issuance and sale of debt
securities), or for the deferred purchase or acquisition price of property or
services (other than accounts payable incurred in the ordinary course of
business); (b) obligations of such PERSON in respect of letters of credit or
similar instruments issued or accepted by financial institutions for the account
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of such PERSON (whether or not such obligations are contingent); (c) CAPITAL
LEASE OBLIGATIONS of such PERSON; (d) obligations of such PERSON to redeem or
otherwise retire equity interests in such PERSON; and (e) indebtedness of others
of the type described in clause (a), (b), (c) or (d) above secured by a lien on
any of the property of such PERSON, whether or not the respective obligation so
secured has been assumed by such PERSON.
Section 1.32. Insolvency Proceedings. The term "INSOLVENCY PROCEEDINGS"
means, with respect to any referenced PERSON, any case or proceeding commenced
by or against such PERSON, under any provision of the United States Bankruptcy
Code, as amended, or under any other federal or state bankruptcy or insolvency
law, or any assignments for the benefit of creditors, formal or informal
moratoriums, receiverships, compositions or extensions with some or all
creditors with respect to any indebtedness of such PERSON.
Section 1.33. Interest Rate Protection Agreement. The term "INTEREST
RATE PROTECTION AGREEMENT" means, with respect to any referenced PERSON, an
interest rate swap, hedge, cap or collar agreement or similar arrangement
between such PERSON and one or more financial institutions providing for the
transfer or mitigation of interest risks either generally or under specific
contingencies.
Section 1.34. Interest Coverage Ratio. The term "INTEREST COVERAGE
RATIO" means the ratio of EBITDA to INTEREST EXPENSE.
Section 1.35. Interest Expense. The term "INTEREST EXPENSE" means, as
of any determination date, all interest paid or accrued by the BORROWER and its
SUBSIDIARIES on any INDEBTEDNESS during the fiscal year of the BORROWER through
the fiscal quarter ending on such date.
Section 1.36. Inventory. The term "INVENTORY" shall have the same
meaning as provided to such term in the Uniform Commercial Code - Secured
Transactions, Title 9, Commercial Law Article, Annotated Code of Maryland, as
amended, together with all of the BORROWER'S goods, merchandise, materials, raw
materials, goods in process, finished goods, work in progress, bindings or
component materials, packaging and shipping materials and other tangible or
intangible personal property, now owned or hereafter acquired and held for sale
or lease or furnished or to be furnished under contracts of service or which
contribute to the finished products or the sale, promotion, storage and shipment
thereof, whether located at facilities owned or leased by the BORROWER, in the
course of transport to or from ACCOUNT DEBTORS, used for demonstration, placed
on consignment, or held at storage locations.
Section 1.37. Laws. The term "LAWS" means all ordinances, statutes,
rules, regulations, orders, injunctions, writs or decrees of any government or
political subdivision or agency thereof, or any court or similar entity
established by any thereof.
Section 1.38. Lender Expenses. The term "LENDER EXPENSES" means the
out-of-pocket expenses or costs incurred by the LENDER arising out of,
pertaining to, or in any way connected with this AGREEMENT, any of the other
LOAN DOCUMENTS or the OBLIGATIONS, or any documents executed in connection
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herewith or transactions hereunder. The term "LENDER EXPENSES" shall include,
without limitation: (a) the costs or expenses required to be paid by the
BORROWER pursuant to this AGREEMENT or any of the LOAN DOCUMENTS; (b) taxes and
insurance premiums advanced or otherwise paid by the LENDER in connection with
the COLLATERAL or on behalf of the BORROWER; (c) filing, recording, title
insurance, environmental and consulting fees, audit fees, search fees and other
expenses paid or incurred by the LENDER in connection with the LENDER'S
transactions with the BORROWER; (d) costs and expenses incurred by the LENDER in
the collection of the ACCOUNTS (with or without the institution of legal
action), or to enforce any provision of this AGREEMENT, or in gaining possession
of, maintaining, handling, evaluating, preserving, storing, shipping, selling,
preparing for sale and/or advertising to sell the COLLATERAL or any other
property of the BORROWER whether or not a sale is consummated; (e) costs and
expenses of litigation incurred by the LENDER, or any participant of the LENDER
in any of the OBLIGATIONS, in enforcing or defending this AGREEMENT or any
portion hereof or in collecting any of the OBLIGATIONS; (f) reasonable
attorneys' fees and expenses incurred by the LENDER in obtaining advice or the
services of its attorneys with respect to the structuring, drafting,
negotiating, reviewing, amending, terminating, enforcing or defending of this
AGREEMENT, or any portion hereof or any agreement or matter related hereto,
whether or not litigation is instituted; (g) reasonable travel expenses related
to any of the foregoing; and (h) audit and examination fees and expenses in the
amount of Seven Hundred Fifty Dollars ($750.00) per person per day, plus
reasonable out-of-pocket expenses for travel, hotel costs, and meals.
Section 1.39. Letters Of Credit. The term "LETTERS OF CREDIT" means
collectively letters of credit issued from time to time by the LENDER for the
account or benefit of the BORROWER.
Section 1.40. Loan. The term "LOAN" means the REVOLVING LOAN.
Section 1.41. Loan Documents. The term "LOAN DOCUMENTS" means all
agreements, instruments and documents, including without limitation each
document listed as a "Loan Document" on a Closing Index of even date herewith,
together with all other loan agreements (including without limitation this
AGREEMENT), notes (including without limitation the NOTE), guarantees,
subordination agreements, intercreditor agreements, pledges, affidavits, powers
of attorney, consents, assignments, landlord and mortgage waivers, opinions,
collateral assignments, reimbursement agreements, contracts, notices, leases,
financing statements, mortgages, deeds of trusts, assignments of rents or
contract proceeds, intellectual property security agreements, pledges, letter of
credit applications, INTEREST RATE PROTECTION AGREEMENTS, and all other written
matter, whether heretofore, now or hereafter executed by or on behalf of the
BORROWER, any of the GUARANTORS, or by any other PERSON in connection with any
of the OBLIGATIONS.
Section 1.42. Lock Box. The term "LOCK BOX" has the meaning given that
term in Section 3.5 of this AGREEMENT.
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Section 1.43. Material Adverse Event. The term "MATERIAL ADVERSE EVENT"
means the occurrence of any event, condition, or omission which the LENDER in
the good faith reasonable exercise of the LENDER'S discretion determines could
be expected to have a material adverse effect upon: (a) the condition (financial
or otherwise), results of operations, properties, assets, liabilities
(including, without limitation, tax liabilities, liabilities under ENVIRONMENTAL
LAWS, and ERISA LIABILITIES), businesses, operations, capitalization, equity,
licenses, franchises or prospects of the BORROWER; (b) the ability of the
BORROWER to perform any of the OBLIGATIONS when and as required by the terms of
the LOAN DOCUMENTS; (c) the rights and remedies of the LENDER as provided by the
LOAN DOCUMENTS; or (d) the value, condition, use, or availability of any of the
COLLATERAL or upon any of the LENDER'S liens and security interests securing the
OBLIGATIONS.
Section 1.44. Maximum Revolving Loan Amount. The term "MAXIMUM
REVOLVING LOAN AMOUNT" means the lesser of the BORROWING BASE or the DOLLAR CAP.
Section 1.45. Multiemployer Plan. The term "MULTIEMPLOYER PLAN" means a
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is
maintained for employees of the BORROWER, or any ERISA AFFILIATE of the
BORROWER.
Section 1.46. Note. The term "NOTE" means the REVOLVING LOAN NOTE.
Section 1.47. Obligations. The term "OBLIGATIONS" means collectively
all of the obligations of the BORROWER to pay to the LENDER: (a) sums due to the
LENDER arising out of or in connection with the LOAN or otherwise pursuant to
the terms of the LOAN DOCUMENTS; (b) indemnification obligations owed by the
BORROWER to the LENDER in accordance with the terms of the LOAN DOCUMENTS; (c)
LENDER EXPENSES; (d) overdrafts of the BORROWER upon any accounts with the
LENDER; (e) payments, duties or obligations owed to the LENDER arising from or
with respect to INTEREST RATE PROTECTION AGREEMENTS, foreign exchange facilities
or currency transactions, existing or arising from time to time; (f) any sums
owed to the LENDER arising out of or relating to any LETTERS OF CREDIT
including, without limitation, all reimbursement and indemnification
obligations, and obligations to pay fees; (g) all other indebtedness or
liability of the BORROWER to the LENDER, whether direct or indirect, joint or
several, absolute or contingent, contemplated or not presently contemplated, now
existing or hereafter arising; and (h) any indebtedness or liability which may
exist or arise as a result of any payment made by or for the benefit of the
BORROWER being avoided or set aside for any reason including, without
limitation, any payment being avoided as a preference under Sections 547 and 550
of the United States Bankruptcy Code, as amended, or under any state law
governing insolvency or creditors' rights.
Section 1.48. Permitted Liens. The term "PERMITTED LIENS" means: (a)
liens for taxes, assessments, or similar charges incurred in the ordinary course
of business that are not yet due and payable; (b) liens in favor of the LENDER;
(c) any existing liens specifically described on Schedule 1.48 hereof; (d) any
lien on specifically allocated money or securities to secure payments under
workmen's compensation, unemployment insurance, social security and other
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similar LAWS, or to secure the performance of bids, tenders or contracts (other
than for the repayment of borrowed money) or to secure statutory obligations or
appeal bonds, or to secure indemnity, performance or other similar bonds in the
ordinary course of business; (e) purchase money security interests for EQUIPMENT
not to exceed in aggregate amount outstanding at any one time the sum of Fifty
Thousand Dollars ($50,000.00), provided that such purchase money security
interests do not attach to any assets other than the specific item(s) of
EQUIPMENT acquired with the proceeds of the loan secured by such purchase money
security interests; and (f) subsequently arising liens which are expressly
approved in advance of the creation of any such liens by the LENDER in writing.
Section 1.49. Person. The term "PERSON" means any individual,
corporation, partnership, limited liability company, association, joint-stock
company, trust, estate, unincorporated organization, joint venture, court,
government or political subdivision or agency thereof, or other legal entity.
Section 1.50. Receivables. The term "RECEIVABLES" means all of the
ACCOUNTS, INSTRUMENTS, DOCUMENTS, GENERAL INTANGIBLES, CHATTEL PAPER, notes,
notes receivable, drafts, acceptances, and choses in action, of the BORROWER,
now existing or hereafter created or acquired, and all proceeds and products
thereof, and all rights thereto, arising from the sale or lease of or the
providing of INVENTORY, GOODS, or services by the BORROWER to ACCOUNT DEBTORS,
as well as all other rights, contingent or non-contingent, of any kind of the
BORROWER to receive payment, benefit, or credit from any PERSON.
Section 1.51. Records. The term "RECORDS" means correspondence,
memoranda, tapes, discs, papers, books and other documents, or transcribed
information of any type, whether expressed in ordinary, computer or machine
language.
Section 1.52. Regulated Substance. The term "REGULATED SUBSTANCE" means
any substance which, pursuant to any ENVIRONMENTAL LAW, is identified as a
hazardous substance (or other term having similar import) or is otherwise
subject to special requirements in connection with the use, storage,
transportation, disposition or other handling thereof.
Section 1.53. Release. The term "RELEASE" means a "release" as defined
in Section 101(22) of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as now or hereafter amended.
Section 1.54. Restricted Payment. The term "RESTRICTED PAYMENT" means
collectively: (a) any dividend or other payment or distribution, direct or
indirect, on account of any equity interest in the BORROWER now or hereafter
outstanding, except a dividend or distribution payable solely in the same class
or type of equity interest to the holders of that class or type; (b) any
redemption, conversion, exchange, retirement, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, by the BORROWER of
any equity interest in the BORROWER now or hereafter outstanding; (c) any
payment made by the BORROWER to retire, or to obtain the surrender of, any
outstanding warrants, options or other rights to acquire equity interests in the
BORROWER now or hereafter outstanding; or (d) any payment by the BORROWER of any
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management, consulting or similar fees which are not salary payments in amounts
comparable to sums paid in the marketplace for similar services to unrelated
employees for services actually performed.
Section 1.55. Revolving Loan. The term "REVOLVING LOAN" means the
revolving credit facility extended by the LENDER to the BORROWER in accordance
with the terms set forth in this AGREEMENT.
Section 1.56. Revolving Loan Note. The term "REVOLVING LOAN NOTE"
means, the Revolving Loan Promissory Note of even date herewith from the
BORROWER as maker thereof which is payable to the order of the LENDER in the
stated principal amount of Two Million Dollars ($2,000,000.00).
Section 1.57. Solvent. The term "SOLVENT" means, as to any referenced
PERSON, that as of the date of determination both: (a) (i) the then fair
saleable value of the property of such PERSON is greater than the total amount
of liabilities (including contingent liabilities) of such PERSON and is not less
than the amount that will be required to pay the probable liabilities on such
PERSON'S then existing debts as they become absolute and matured considering all
financing alternatives and potential asset sales reasonably available to such
PERSON; (ii) such PERSON'S capital is not unreasonably small in relation to its
business or any contemplated or undertaken transaction; and (iii) such PERSON
does not intend to incur, or believe (nor should it reasonably believe) that it
will incur, debts beyond its ability to pay such debts as they become due; and
(b) such PERSON is "solvent" within the meaning given that term and similar
terms under applicable laws relating to fraudulent transfers and conveyances.
For purposes of this definition, the amount of any contingent liability at any
time shall be computed as the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.
Section 1.58. Subordinated Debt. The term "SUBORDINATED DEBT" means the
BORROWER'S INDEBTEDNESS which has been subordinated to the OBLIGATIONS pursuant
to a written agreement which has either been executed by the LENDER or approved
by the LENDER in writing.
Section 1.59. Subsidiary. The term "SUBSIDIARY" means, with respect to
any PERSON, any other PERSON of which securities or other ownership interests
representing an aggregate of fifty percent (50%) of more of the equity or the
ordinary voting power are, at the time as of which any determination is being
made, owned or controlled directly, or indirectly through one or more
intermediaries, by such PERSON.
Section 1.60. Tangible Net Worth. The term "TANGIBLE NET WORTH" means,
as of the date of determination, the amount equal to: (a) the BORROWER'S net
worth as of December 31, 1999, as determined in accordance with G.A.A.P. and as
set forth in the BORROWER'S audited fiscal year-end financial statements
delivered to the LENDER; plus (b) ninety percent (90%) of the BORROWER'S pre-tax
income (if such income is positive) for the period between January 1, 2000 and
the date of determination; plus (c) SUBORDINATED DEBT; minus (d) intangible
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assets of the BORROWER; and minus (e) the gain on the sale of assets of the
BORROWER outside of the ordinary course of business at any time after December
31, 1999 (including, but not limited to, the gain from the sale of the virtual
production line in January, 2000).
Section 1.61. Termination Event. The term "TERMINATION EVENT" means:
(a) a "Reportable Event" described in Section 4043 of ERISA and the regulations
issued thereunder, but not including any such event for which the 30-day notice
requirement has been waived by applicable regulation; (b) the withdrawal of the
BORROWER or an ERISA AFFILIATE of the BORROWER from a GUARANTEED PENSION PLAN
during a plan year in which it was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA; (c) the filing of a notice of intent to terminate a
GUARANTEED PENSION PLAN or the treatment of a GUARANTEED PENSION PLAN amendment
as a termination under Section 4041 of ERISA; (d) the institution of proceedings
to terminate a GUARANTEED PENSION PLAN by the Pension Benefit Guaranty
Corporation; (e) the withdrawal or partial withdrawal of the BORROWER or an
ERISA AFFILIATE of the BORROWER from a MULTIEMPLOYER PLAN; or (f) any other
event or condition which might reasonably be expected to constitute grounds
under ERISA for the termination of, or the appointment of a trustee to
administer, any GUARANTEED PENSION PLAN.
ARTICLE 2
TERMS OF LOAN
Section 2.1. Agreement To Extend Revolving Loan. Subject to the terms
and conditions stated herein, the LENDER agrees to extend the REVOLVING LOAN to
the BORROWER. The LENDER shall advance proceeds of the REVOLVING LOAN to the
BORROWER by depositing into the COMMERCIAL ACCOUNT or in accordance with such
other procedures as may be agreed to between the LENDER and the BORROWER, such
sums as the BORROWER may request, provided that the aggregate outstanding
principal balance of the REVOLVING LOAN shall never exceed at any time the
MAXIMUM REVOLVING LOAN AMOUNT. The BORROWER shall not request or permit any
advance of proceeds of the REVOLVING LOAN which would cause the aggregate amount
of advances made to or for the BORROWER and outstanding under the LOAN DOCUMENTS
to exceed the MAXIMUM REVOLVING LOAN AMOUNT. In the event that the principal
balance outstanding under the REVOLVING LOAN ever exceeds the MAXIMUM REVOLVING
LOAN AMOUNT, the BORROWER shall immediately, upon the demand of the LENDER,
reduce the principal balance of the REVOLVING LOAN to an amount which is not in
excess of the MAXIMUM REVOLVING LOAN AMOUNT. Any termination of the REVOLVING
LOAN by the LENDER shall relieve the LENDER of the LENDER'S obligation to lend
money or to make financial accommodations to or for the BORROWER and the
BORROWER'S accounts, and shall in no way release, terminate, discharge or excuse
the BORROWER from its absolute duty to pay or perform the OBLIGATIONS.
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Section 2.1.1. Conditions Precedent To Each Advance. The
obligation of the LENDER to make any advances under the REVOLVING LOAN,
including the initial advance, shall be subject to each of the following
conditions precedent:
a . No Defaults Or Events Of Default. No event shall have
occurred on or prior to such date and be continuing on such date, and no
condition shall exist on such date, which constitutes a DEFAULT or EVENT OF
DEFAULT.
b . Continuing Accuracy Of Representations And Warranties.
Each of the representations and warranties made by or on behalf of the BORROWER
and the GUARANTORS to the LENDER in the LOAN DOCUMENTS shall be true and correct
in all material respects when made and shall be deemed to be repeated as true,
accurate and complete as of the date of the BORROWER'S request for each advance.
c . Receipt Of Reports. The LENDER shall be in receipt of all
reports, financial statements, financial information and financial disclosures
required by the LOAN DOCUMENTS, except to the extent that the LENDER has waived
the receipt thereof.
d . No Illegalities. It shall not be unlawful for the LENDER
to perform any of the agreements or obligations imposed upon the LENDER by any
of the LOAN DOCUMENTS or for the BORROWER to perform any of its agreements or
obligations as provided by the LOAN DOCUMENTS.
e . No Material Adverse Event. No MATERIAL ADVERSE EVENT
shall have occurred and be then continuing.
Section 2.1.2. Interest And Lender's Records. All sums advanced
under the REVOLVING LOAN shall be evidenced by, and shall be repaid with
interest in accordance with, the provisions of the REVOLVING NOTE, the terms and
conditions of which are incorporated herein by reference. The date and amounts
of each advance made by the LENDER and each payment made by the BORROWER shall
be recorded by the LENDER on the books and records of the LENDER, but any
failure to record such dates or amounts shall not relieve the BORROWER of its
duties and obligations under the LOAN DOCUMENTS. Interest accrued upon the
REVOLVING LOAN shall be computed on outstanding balances as reflected on the
LENDER'S books and records.
Section 2.1.3. Commitment Fee. For each calendar year or portion
thereof during which the REVOLVING LOAN is in existence and has not been
terminated, until the termination of the REVOLVING LOAN, the BORROWER shall pay
to the LENDER a commitment fee of one-half of one percent (.5%) per annum on
that sum obtained by subtracting the average daily disbursed principal balance
of the REVOLVING LOAN during such calendar year or portion thereof from the
DOLLAR CAP. The commitment fee shall be payable monthly in arrears, on the first
day of each succeeding month or on the last day of a portion of a month
commencing with the first of such payments to be made on March 1, 2000. The
commitment fee is not to be considered a fee being paid by the BORROWER to the
LENDER as an inducement to the LENDER to make advances, nor shall it be
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considered to modify or limit the ability of the LENDER to terminate in
accordance with the provisions of this AGREEMENT the ability of the BORROWER to
borrow under the REVOLVING LOAN, but is instead intended as part of the
compensation which is earned by the LENDER for agreeing to provide the REVOLVING
LOAN in accordance with the terms of the LOAN DOCUMENTS.
Section 2.1.4. Facility Fee. The BORROWER shall pay to the LENDER
on or before CLOSING a non-refundable and unconditional facility fee of Ten
Thousand Dollars ($10,000.00), which shall be the absolute property of the
LENDER upon payment. The facility fee shall not be considered to be a payment of
any of the LENDER'S expenses incurred in connection with the REVOLVING LOAN and
shall be paid independent of the amount of proceeds of the REVOLVING LOAN
ultimately advanced to the BORROWER, even if that amount is less than the stated
principal amount of the REVOLVING LOAN.
Section 2.1.5. Monitoring Fee. The BORROWER shall pay to the
LENDER a monthly monitoring fee of One Thousand Dollars ($1,000.00) for each
calendar month or portion thereof during which the REVOLVING LOAN is in
existence and has not been terminated, until the termination of the REVOLVING
LOAN. The monitoring fee shall be payable monthly in arrears, on the first day
of each succeeding month or on the last day of a portion of a month commencing
with the first of such payments to be made on March 1, 2000.
Section 2.1.6. Term. All sums due under the REVOLVING LOAN shall
be paid in full on March 1, 2003.
Section 2.1.7. Purpose. The proceeds of the REVOLVING LOAN shall
be used by the BORROWER solely for refinancing existing debt and funding the
general working capital needs of the BORROWER.
Section 2.2. Letters Of Credit.
Section 2.2.1. Issuance Of Letters Of Credit. The LENDER may in
its discretion issue LETTERS OF CREDIT as requested by the BORROWER, provided
that no DEFAULT or EVENT OF DEFAULT has occurred and is continuing and provided
that the aggregate amount of all LETTERS OF CREDIT issued and outstanding and
any reimbursement obligations owed to the LENDER arising out of any LETTERS OF
CREDIT do not exceed Two Hundred Thousand Dollars ($200,000.00). No LETTER OF
CREDIT shall have an expiry date which occurs after the stated maturity date or
termination date of either of the LOANS. Any amounts paid by the LENDER in
connection with any LETTER OF CREDIT shall be treated as an advance of proceeds
of the REVOLVING LOAN, shall be secured by all of the COLLATERAL, and shall bear
interest (including the default rate of interest) and be payable at the same
rate and in the same manner as the REVOLVING LOAN.
Section 2.2.2. Rights And Remedies Of The Lender. In the event
that, coincident with or subsequent to the occurrence of, and during the
continuance of, a DEFAULT or an EVENT OF DEFAULT, the LENDER becomes aware of
the possibility of a draw, or enforcement of the LENDER'S obligations, under a
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LETTER OF CREDIT, the LENDER, at its option, may, but shall not be required to,
pay the BORROWER'S obligations to the beneficiary or holder of such LETTER OF
CREDIT directly to such beneficiary or holder, and, in such event, the amount of
any such payment made by the LENDER shall be treated for all purposes and shall
have the same force and effect as if such amount had been loaned by the LENDER
to the BORROWER as an advance of proceeds of the REVOLVING LOAN, shall be
secured by all of the COLLATERAL and shall bear interest and be payable at the
same rate (including the default rate of interest) and in the same manner as the
REVOLVING LOAN. If any LETTER OF CREDIT is drawn upon to discharge any
obligation of the BORROWER to the beneficiary of such LETTER OF CREDIT, in whole
or in part, the LENDER shall be fully subrogated to the rights of such
beneficiary with respect to the obligations owed by the BORROWER to such
beneficiary discharged with the proceeds of the LETTER OF CREDIT.
Section 2.2.3. Indemnification. The BORROWER unconditionally and
irrevocably agrees to indemnify the LENDER and to hold the LENDER harmless from
any and all losses, claims or liabilities arising from any transactions or
occurrences relating to LETTERS OF CREDIT issued, established, opened or
accepted for the account of the BORROWER, and any drafts or acceptances
thereunder, and all OBLIGATIONS incurred in connection therewith, other than
losses, claims or liabilities arising from the gross negligence or wanton
misconduct of the LENDER.
Section 2.2.4. Reimbursement Obligations. The BORROWER agrees to
reimburse the LENDER on the day of drawing (or upon such later date as the
BORROWER receives notice of the payment of the presented draft by the LENDER)
upon any LETTER OF CREDIT (either with the proceeds of the REVOLVING LOAN
obtained hereunder or otherwise) in same day funds in the amount of the drawing.
If the BORROWER fails to reimburse the LENDER as provided herein or as provided
in any separate letter of credit application agreements or other LOAN DOCUMENTS,
the unreimbursed amount of such drawing shall bear interest at a per annum rate
equal to the highest interest rate (including the default rate of interest)
applicable to the REVOLVING LOAN. The BORROWER'S reimbursement obligations
hereunder shall be absolute and unconditional under all circumstances
irrespective of any rights of set-off, counterclaim or defense to payment the
BORROWER may claim or have against the LENDER, the beneficiary of the LETTER OF
CREDIT or any other PERSON, including, without limitation, any defense based on
any failure of the BORROWER to receive consideration or the legality, validity,
regularity or unenforceability of the LETTER OF CREDIT or any irregularities in
the presentment of the draft presented upon the LETTER OF CREDIT.
Section 2.2.5. Fees, Charges And Other Terms. The BORROWER shall
pay to the LENDER such issuance, amendment, extension and other fees as the
LENDER quotes from time to time with respect to each LETTER OF CREDIT, and shall
execute such applications, reimbursement agreements, or other documents as the
LENDER requires from time to time with respect to the issuance, extension,
amendment, or any other requested or required action concerning a LETTER OF
CREDIT.
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Section 2.3. Capital Adequacy. If the LENDER determines at any time
that the adoption or implementation of any CAPITAL ADEQUACY REQUIREMENT, or the
compliance therewith by the LENDER or any corporation or other PERSON
controlling the LENDER, affects the amount of capital to be maintained by the
LENDER or any PERSON controlling the LENDER as a result of its obligations
hereunder, or reduces the effective rate of return on the LENDER'S or such
controlling PERSON'S capital to a level below that which the LENDER or such
controlling PERSON would have achieved but for such CAPITAL ADEQUACY REQUIREMENT
as a consequence of its obligations hereunder (taking into consideration the
LENDER'S or such controlling PERSON'S policies with respect to capital
adequacy), then after submission by the LENDER to the BORROWER of a written
request therefor and a statement of the basis for such determination, the
BORROWER shall pay to the LENDER such additional amounts as will compensate the
LENDER or the controlling PERSON for the cost of maintaining the increased
capital or for the reduction in the rate of return on capital, together with
interest thereon at the highest rate of interest then in effect under the NOTE
from the date the LENDER requests such additional amounts until those amounts
are paid in full.
Section 2.4. Payments. All payments received by the LENDER which are to
be applied to reduce the OBLIGATIONS shall be credited to the balances due from
the BORROWER pursuant to the normal and customary practices of the LENDER, but
shall be provisional and shall not be considered final unless and until such
payment is not subject to avoidance under any provision of the United States
Bankruptcy Code, as amended, including Sections 547 and 550, or any state law
governing insolvency or creditors' rights. If any payment is avoided or set
aside under any provision of the United States Bankruptcy Code, including
Sections 547 and 550, or any state law governing insolvency or creditors'
rights, the payment shall be considered not to have been made for all purposes
of this AGREEMENT and the LENDER shall adjust its records to reflect the fact
that the avoided payment was not made and has not been credited against the
OBLIGATIONS. The BORROWER irrevocably authorizes the LENDER to automatically
debit from either the COMMERCIAL ACCOUNT or the COLLATERAL ACCOUNT all sums owed
by the BORROWER to the LENDER under the LOAN and the LOAN DOCUMENTS when and as
such sums are due and payable.
Section 2.5. Advancements. If the BORROWER fails to perform any of its
agreements or covenants contained in this AGREEMENT or if the BORROWER fails to
protect or preserve the COLLATERAL or the status and priority of the security
interest of the LENDER in the COLLATERAL, the LENDER may make advances to
perform the same on behalf of the BORROWER to protect or preserve the COLLATERAL
or the status and priority of the security interest of the LENDER in the
COLLATERAL, and all sums so advanced shall immediately upon advance become
secured by the security interests granted in this AGREEMENT, and shall become
part of the principal amount owed to the LENDER with interest to be assessed at
the applicable rate thereon and subject to the terms and provisions of this
AGREEMENT and all of the LOAN DOCUMENTS. The BORROWER shall repay on demand all
sums so advanced on the BORROWER'S behalf, plus all expenses or costs incurred
by the LENDER, including reasonable legal fees, with interest thereon at the
highest rate authorized in the NOTE. The provisions of this Section shall not be
construed to prevent the institution of the rights and remedies of the LENDER
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upon the occurrence of an EVENT OF DEFAULT. The authorization contained in this
Section is not intended to impose any duty or obligation on the LENDER to
perform any action or make any advancement on behalf of the BORROWER and is
intended to be for the sole benefit and protection of the LENDER.
Section 2.6. Termination. In the event the BORROWER repays the
REVOLVING LOAN with the intention of making no further borrowings under the
REVOLVING LOAN (which intention shall be presumed if the BORROWER has not made
any borrowings under the REVOLVING LOAN for six (6) consecutive months) at any
time prior to March 1, 2003, the BORROWER shall pay a termination fee of Twenty
Thousand Dollars ($20,000.00)
ARTICLE 3
SECURITY FOR THE OBLIGATIONS
The payment, performance and satisfaction of the OBLIGATIONS shall be
secured by the following assurances of payment and security.
Section 3.1. Grant Of Security Interest. In order to secure the
repayment and performance of all OBLIGATIONS, both currently existing and
arising in the future, the BORROWER grants to the LENDER an immediate and
continuing security interest in and to the COLLATERAL. The BORROWER further
pledges, hypothecates and grants to the LENDER a continuing security interest in
and to, all amounts that may be owing at any time and from time to time by the
LENDER to the BORROWER in any capacity, including but not limited to any balance
or share belonging to the BORROWER of any deposit or other account with the
LENDER, which security interest shall be independent of and in addition to any
right of set-off to which the LENDER may be entitled. The LENDER shall have the
right to require the BORROWER to pledge and grant a security interest to the
LENDER in such additional security as the LENDER may request from time to time
in the event that the LENDER deems itself to be insecure.
Section 3.2. Proceeds And Products. The LENDER'S security interests
provided for herein shall apply to the proceeds, including but not limited to
insurance proceeds, and the products of the COLLATERAL.
Section 3.3. Priority Of Security Interests. Each of the security
interests, pledges, and liens granted by the BORROWER to the LENDER pursuant to
any of the LOAN DOCUMENTS shall be perfected first priority security interests,
pledges, and liens.
Section 3.4. Future Advances. The security interests, liens, and
pledges granted by the BORROWER to the LENDER pursuant to the LOAN DOCUMENTS
shall secure all current and all future advances made by the LENDER to the
BORROWER, or for the account or benefit of the BORROWER, and the LENDER may
advance or readvance upon repayment by the BORROWER all or any portion of the
sums loaned to the BORROWER and any such advance or readvance shall be fully
secured by the security interests, liens, and pledges created by the LOAN
DOCUMENTS.
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Section 3.5. Receivable Collections. The BORROWER shall deposit into
the COMMERCIAL ACCOUNT, immediately upon receipt thereof, all cash, checks,
drafts, and other instruments for the payment of money, properly endorsed, which
have been received by the BORROWER in full or partial payment of any RECEIVABLE;
provided, the BORROWER shall, if requested in writing by the LENDER at any time,
deposit or cause to be deposited into the COLLECTION ACCOUNT all of such items
of payment immediately upon receipt thereof. Prior to any such deposit by the
BORROWER into either the COMMERCIAL ACCOUNT or the COLLECTION ACCOUNT, as the
case may be, the BORROWER will not commingle such items of payment with any of
its other funds or property but will hold them separate and apart. Upon the
written request of the LENDER the BORROWER shall instruct all of its ACCOUNT
DEBTORS to make all payments on the BORROWER'S RECEIVABLES to a post office box
in which the LENDER alone shall have sole access ("LOCK BOX"). If payment of the
BORROWER'S RECEIVABLES is paid into the LOCK BOX the LENDER shall, on each
BUSINESS DAY, withdraw the items of payment from the LOCK BOX and deposit them
into either the COLLECTION ACCOUNT or the COMMERCIAL ACCOUNT, as determined by
the LENDER. The LENDER, from time to time, shall apply all of the collected
funds held in the COLLECTION ACCOUNT toward payment of all or any part of the
OBLIGATIONS, whether or not then due, in such order of application as the LENDER
may determine. The LENDER shall have no obligation to provide any provisional or
other credit for any deposited funds which are not collected funds free of any
rights of return.
Section 3.6. Collection Of Receivables By Lender. The LENDER shall have
the right during any continuing DEFAULT or EVENT OF DEFAULT to send notices of
assignment or notices of the LENDER'S security interest to any and all ACCOUNT
DEBTORS or any third party holding or otherwise concerned with any of the
COLLATERAL, and thereafter the LENDER shall have the sole right to collect the
RECEIVABLES and to take possession of the COLLATERAL and RECORDS relating
thereto. All of the LENDER'S collection expenses shall be charged to the
BORROWER'S accounts and added to the OBLIGATIONS. During any continuing DEFAULT
or EVENT OF DEFAULT the LENDER shall have the right to receive, indorse, assign
and deliver in the LENDER'S name or the BORROWER'S name any and all checks,
drafts and other instruments for the payment of money relating to the
RECEIVABLES, and the BORROWER hereby waives notice of presentment, protest and
non-payment of any instrument so endorsed. If the LENDER is collecting the
RECEIVABLES, the BORROWER hereby constitutes the LENDER or the LENDER'S designee
as its attorney-in-fact with power with respect to the RECEIVABLES: (a) to
indorse its name upon all notes, acceptances, checks, drafts, money orders or
other evidences of payment of COLLATERAL that may come into the LENDER'S
possession; (b) to sign its name on any invoices relating to any of the
RECEIVABLES, drafts against ACCOUNT DEBTORS, assignments and verifications of
RECEIVABLES and notices to ACCOUNT DEBTORS; (c) to send verifications of
RECEIVABLES to any ACCOUNT DEBTOR; (d) to notify the Post Office to change the
address for delivery of mail addressed to it to such address as the LENDER may
designate; (e) to receive and open all mail addressed to it and to remove
therefrom all cash, checks, drafts and other payments of money; and (f) to do
all other acts and things necessary, proper, or convenient to carry out the
terms and conditions and purposes and intent of this AGREEMENT. All acts of such
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attorney or designee are hereby ratified and approved, and such attorney or
designee shall not be liable for any acts of omission or commission, nor for any
error of judgment or mistake of fact or law in accordance with this AGREEMENT,
with the exception of acts arising from actual fraud or gross and wanton
negligence. The power of attorney hereby granted, being coupled with an
interest, is irrevocable while any of the OBLIGATIONS remain unpaid. The LENDER,
without notice to or consent from the BORROWER, may sue upon or otherwise
collect, extend the time of payment of or compromise or settle for cash, credit
or otherwise upon any terms, any of the RECEIVABLES or any securities,
instruments or insurances applicable thereto or release the obligor thereon. The
LENDER is authorized and empowered to accept the return of the goods represented
by any of the RECEIVABLES, without notice to or consent by the BORROWER, all
without discharging or in any way affecting the liability of the BORROWER under
the LOAN DOCUMENTS. The LENDER does not, by anything herein or in any assignment
or otherwise, assume any of the obligations of the BORROWER under any contract
or agreement assigned to the LENDER, and the LENDER shall not be responsible in
any way for the performance by the BORROWER of any of the terms and conditions
thereof.
Section 3.7. Maintenance Of Principal Accounts. As further security for
the OBLIGATIONS, the BORROWER shall maintain its principal transaction accounts
with the LENDER.
Section 3.8. Further Assurances. The BORROWER will, at its expense,
promptly execute and deliver all further instruments and documents and take all
further action that may be necessary or desirable or that the LENDER may request
from time to time in order: (a) to perfect and protect the security interests to
be created hereby; (b) to enable the LENDER to exercise and enforce its rights
and remedies hereunder in respect of the COLLATERAL; or (c) otherwise to effect
the purposes of this AGREEMENT, including, without limitation: (i) upon the
BORROWER'S acquisition thereof, delivering to the LENDER each item of CHATTEL
PAPER of the BORROWER, (ii) if any RECEIVABLES are evidenced by an INSTRUMENT
delivering and pledging to the LENDER such INSTRUMENT duly endorsed and
accompanied by executed instruments of transfer or assignment, all in form and
substance satisfactory to the LENDER, (iii) executing and filing such financing
statements or amendments thereto as may be necessary or desirable or that the
LENDER may request in order to perfect and preserve the security interests
purported to be created hereby, (iv) upon the acquisition after the date hereof
by the BORROWER of any EQUIPMENT covered by a certificate of title or ownership,
cause the LENDER to be listed as the lienholder on such certificate of title and
within sixty (60) days of the acquisition thereof deliver evidence of the same
to the LENDER, and (v) upon the acquisition after the date hereof of any asset
for which an assignment, pledge, mortgage, or other document is required to be
filed in order to grant or perfect a lien therein for the benefit of the LENDER,
execute and deliver to the LENDER such assignment, pledge, mortgage, or other
INSTRUMENT within thirty (30) days of the acquisition thereof. If the BORROWER
fails to execute any instrument or document described above within five (5)
BUSINESS DAYS of being requested to do so by the LENDER, the BORROWER hereby
appoints the LENDER or any officer of the LENDER as the BORROWER'S attorney in
fact for purposes of executing such instruments or documents in the BORROWER'S
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name, place and stead, which power of attorney shall be considered as coupled
with an interest and irrevocable.
Section 3.9. Fair Labor Standards Act. As further security for the
OBLIGATIONS, the BORROWER shall comply in all material respects with the Fair
Labor Standards Act of 1938, as amended.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
To induce the LENDER to extend the LOAN and to enter into this
AGREEMENT, the BORROWER makes the representations and warranties set forth in
this Article 4. The BORROWER acknowledges the LENDER'S justifiable right to rely
upon these representations and warranties.
Section 4.1. Accuracy Of Information. All information submitted by or
on behalf of the BORROWER in connection with any of the OBLIGATIONS is true,
accurate and complete in all material respects as of the date made and contain
no knowingly false, incomplete or misleading statements.
Section 4.2. No Litigation. There are no actions, suits,
investigations, or proceedings pending or, to the knowledge of the BORROWER,
threatened against the BORROWER or the assets of the BORROWER, except as
specifically disclosed on Schedule 4.2 attached hereto.
Section 4.3. No Liability Or Adverse Change. The BORROWER has no direct
or contingent liability known to the BORROWER and not previously disclosed to
the LENDER, nor does the BORROWER know of or have any reason to expect any
material adverse change in the BORROWER'S assets, liabilities, properties,
business, or condition, financial or otherwise.
Section 4.4. Title To Collateral. The BORROWER has good and marketable
title to the COLLATERAL. The liens granted by the BORROWER to the LENDER in the
COLLATERAL will have the priority required by the LOAN DOCUMENTS.
Section 4.5. Authority; Approvals And Consents.
Section 4.5.1. Authority. The BORROWER has the legal authority to
enter into each of the LOAN DOCUMENTS and to perform, observe and comply with
all of the BORROWER'S agreements and obligations thereunder, including, without
limitation the borrowings contemplated hereby.
Section 4.5.2. Approvals. The execution and delivery by the
BORROWER of each of the LOAN DOCUMENTS, the performance by the BORROWER of all
of its agreements and obligations under the LOAN DOCUMENTS, and the borrowings
contemplated by this AGREEMENT, have been duly authorized by all necessary
action on the part of the BORROWER and do not and will not (i) contravene any
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provision of the organizational documents of the BORROWER; (ii) conflict with,
or result in a breach of the terms, conditions or provisions of, or constitute a
default under, or result in the creation of any lien upon any of the property of
the BORROWER under any agreement, trust deed, indenture, mortgage or other
instrument to which the BORROWER is a party or by which the BORROWER or any
property of the BORROWER is bound or affected (except for liens created for the
benefit of the LENDER); (iii) violate or contravene any provision of any LAW,
rule or regulation (including, without limitation, Regulations G, T, U or X of
the Board of Governors of the Federal Reserve System) or any order, ruling or
interpretation thereunder or any decree, order of judgment of any court or
governmental or regulatory authority, bureau, agency or official (all as from
time to time in effect and applicable to the BORROWER); or (iv) require any
waivers, consents or approvals by any of the creditors of the BORROWER.
Section 4.5.3. Consents. Other than filings and recordings
required to perfect the security interests and liens granted hereunder, no
approval, consent, order, authorization or license by, or giving notice to, or
taking any other action with respect to, any governmental or regulatory
authority or agency is required for the execution and delivery by the BORROWER
of the LOAN DOCUMENTS or for the performance by the BORROWER of any of the
agreements and obligations thereunder.
Section 4.6. Binding Effect Of Documents, Etc. Each of the LOAN
DOCUMENTS which the BORROWER has executed and delivered as contemplated and
required to be executed and delivered as of the date of CLOSING by this
AGREEMENT, has been duly executed and delivered by the BORROWER and is the
legal, valid and binding obligation of the BORROWER and is enforceable against
the BORROWER in accordance with all stated terms.
Section 4.7. Other Names. The BORROWER has not changed its name, been
the surviving entity in a merger, or changed the location of its chief executive
office within the last twelve (12) years, except as is disclosed on Schedule 4.7
attached hereto. The BORROWER does not trade under any trade or fictitious names
except as set forth on Schedule 4.7.
Section 4.8. No Events Of Default. There is not currently existing any
action, event, or condition which presently constitutes a DEFAULT or an EVENT OF
DEFAULT
Section 4.9. Taxes. The BORROWER: (a) has filed all federal, state and
local tax returns and other reports which the BORROWER is required by LAW to
file prior to the date hereof and which are material to the conduct of the
business of the BORROWER; (b) has paid or caused to be paid all taxes,
assessments and other governmental charges that are due and payable prior to the
date hereof; and (c) has made adequate provision for the payment of such taxes,
assessments or other charges accruing but not yet payable. The BORROWER has no
knowledge of any deficiency or additional assessment in connection with any
taxes, assessments or charges not provided for on the BORROWER'S books of
account or reflected in the BORROWER'S financial statements.
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Section 4.10. Compliance With Laws. The BORROWER has complied in all
material respects with all applicable LAWS, including, but not limited to, all
LAWS with respect to: (a) all restrictions, specifications, or other
requirements pertaining to products that it sells or to the services it
performs; (b) the conduct of its business; and (c) the use, maintenance, and
operation of the real and personal properties owned or leased by it in the
conduct of its business.
Section 4.11. Chief Place Of Business. The chief executive office,
chief place of business, and the place where the BORROWER keeps its RECORDS
concerning the COLLATERAL is set forth on Schedule 4.11 attached hereto.
Section 4.12. Location Of Inventory. The INVENTORY is and shall be kept
solely at the BORROWER'S locations set forth on Schedule 4.12 attached hereto,
and shall not be moved, sold or otherwise disposed of without prior notification
to the LENDER, except for sales of INVENTORY to ACCOUNT DEBTORS in the ordinary
course of the BORROWER'S business. None of the INVENTORY is stored with or in
the possession of any bailee, warehouseman, or other similar PERSON, except as
specifically disclosed on Schedule 4.12 attached hereto.
Section 4.13. No Subsidiaries. The BORROWER has no SUBSIDIARIES, except
as specifically disclosed on Schedule 4.13 attached hereto.
Section 4.14. No Labor Agreements. The BORROWER is not subject to any
collective bargaining agreement or any agreement, contract, decree or order
requiring it to recognize, deal with or employ any PERSONS organized as a
collective bargaining unit or other form of organized labor.
Section 4.15. Eligible Accounts. Each ACCOUNT which the BORROWER
contends should be included in the calculation of the BORROWING BASE from time
to time will be an ELIGIBLE ACCOUNT. At the time each ELIGIBLE ACCOUNT is listed
on or included in (whether singularly or in the aggregate with other ELIGIBLE
ACCOUNTS) a schedule or report delivered to the LENDER to be included in the
calculation of the BORROWING BASE, all of such ELIGIBLE ACCOUNTS will have been
generated in compliance with the BORROWER'S normal credit policies as
historically in effect (or as modified from time to time on prior written notice
of the LENDER), or on such other reasonable terms disclosed in writing to the
LENDER in advance of the creation of such ACCOUNTS, and such terms shall be
expressly set forth on the face of all invoices.
Section 4.16. Approvals. The BORROWER possesses all franchises,
approvals, licenses, contracts, merchandising agreements, merchandising
contracts and governmental approvals, registrations and exemptions necessary for
it lawfully to conduct its business and operation as presently conducted and as
anticipated to be conducted after CLOSING.
Section 4.17. Financial Statements. The financial statements of the
BORROWER which have been delivered to the LENDER prior to the date of this
AGREEMENT, fairly present the financial condition of the BORROWER as of the
respective dates thereof and the results and operations of the BORROWER for the
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fiscal periods ended on such respective dates, all in accordance with G.A.A.P.
The BORROWER has no direct or contingent liability or obligation known to the
BORROWER and not disclosed on the financial statements delivered to the LENDER
or disclosed on Schedule 4.17 hereto. There has been no adverse change in the
financial condition of the BORROWER since the audited financial statements of
the BORROWER dated December 31, 1998, and the BORROWER does not know of or have
any reason to expect any material adverse change in the assets, liabilities,
properties, business, or condition, financial or otherwise, of the BORROWER.
Section 4.18. Solvency. The BORROWER will be SOLVENT both before and
after CLOSING, after giving full effect to the OBLIGATIONS and all of the
BORROWER'S liabilities.
Section 4.19. Fair Labor Standards Act. The BORROWER has complied in
all material respects with the Fair Labor Standards Act of 1938, as amended.
Section 4.20. Employee Benefit Plans.
Section 4.20.1. Compliance. The BORROWER and its ERISA AFFILIATES
are in compliance in all material respects with all applicable provisions of
ERISA and the regulations thereunder and of the CODE with respect to all
EMPLOYEE BENEFIT PLANS.
Section 4.20.2. Absence Of Termination Event. No TERMINATION EVENT
has occurred or is reasonably expected to occur with respect to any GUARANTEED
PENSION PLAN.
Section 4.20.3. Actuarial Value. The actuarial present value (as
defined in Section 4001 of ERISA) of all benefit commitments (as defined in
Section 4001 of ERISA) under each GUARANTEED PENSION PLAN does not exceed the
assets of that plan.
Section 4.20.4. No Withdrawal Liability. Neither the BORROWER nor
any of its ERISA AFFILIATES has incurred or reasonably expects to incur any
withdrawal liability under ERISA in connection with any MULTIEMPLOYER PLANS.
Section 4.21. Environmental Conditions.
Section 4.21.1. Existence Of Permits. The BORROWER has obtained
all legally required permits, licenses, variances, clearances and all other
necessary approvals (collectively, the "EPA PERMITS") for use of the FACILITIES
and the operation and conduct of its business from all applicable federal,
state, and local governmental authorities, utility companies or
development-related entities including, but not limited to, any and all
appropriate Federal or State environmental protection agencies and other county
or city departments, public water works and public utilities in regard to the
use of the FACILITIES, the operation and conduct of its business, and the
handling, transporting, treating, storage, disposal, discharge, or RELEASE of
REGULATED SUBSTANCES, if any, into, on or from the environment (including, but
not limited to, any air, water, or soil).
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Section 4.21.2. Compliance With Permits. Each issued EPA PERMIT is
in full force and effect, has not expired or been suspended, denied or revoked,
and is not under challenge by any PERSON. The BORROWER is in compliance in all
material aspects with each issued EPA PERMIT.
Section 4.21.3. No Litigation. Neither the BORROWER nor any of the
FACILITIES are subject to any private or governmental litigation, or to the
knowledge of the BORROWER, threatened litigation, lien or judicial or
administrative notice, order or action involving the BORROWER or any of the
FACILITIES relating to REGULATED SUBSTANCES or environmental problems,
impairments or liabilities.
Section 4.21.4. No Releases. To the best knowledge of the
BORROWER, there has been no RELEASE into, on or from any of the FACILITIES and
no REGULATED SUBSTANCES are located on or have been treated, stored, processed,
disposed of, handled or transported to or from, any of the FACILITIES in
violation of any ENVIRONMENTAL LAWS. To the best knowledge of the BORROWER, no
REGULATED SUBSTANCES have been treated, stored, disposed, RELEASED, located,
discharged, possessed, managed, processed, or otherwise handled in the operation
or conduct of the BORROWER'S business in violation of any ENVIRONMENTAL LAWS.
The BORROWER has complied in all material respects with all ENVIRONMENTAL LAWS
affecting the FACILITIES and the BORROWER'S businesses.
Section 4.21.5. Transportation. The BORROWER does not transport,
in any manner, any REGULATED SUBSTANCES except in the ordinary course of the
BORROWER'S business in material compliance with all ENVIRONMENTAL LAWS.
Section 4.21.6. No Violation Notices. The BORROWER has not
received any notices that any REGULATED SUBSTANCES transported from any FACILITY
have been disposed of in violation of any ENVIRONMENTAL LAWS.
Section 4.21.7. No Notice Of Violations. The BORROWER has not
received written notice of any circumstances which would be likely to result in
any obligation under any ENVIRONMENTAL LAW to investigate or remediate any
REGULATED SUBSTANCES in, on or under any of the FACILITIES.
ARTICLE 5
AFFIRMATIVE COVENANTS
The BORROWER agrees during the term of this AGREEMENT and while any
OBLIGATIONS are outstanding and unpaid to do and perform each of the acts and
promises set forth in this Article 5:
Section 5.1. Payment. All OBLIGATIONS shall be paid in full when and as
due.
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Section 5.2. Insurance. The BORROWER shall obtain and maintain such
insurance coverages as are reasonable, customary and prudent for businesses
engaged in activities similar to the business activities of the BORROWER.
Without limitation to the foregoing, the BORROWER shall maintain for all of its
assets and properties, whether real, personal, or mixed and including but not
limited to the COLLATERAL, fire and extended coverage casualty insurance in
amounts satisfactory to the LENDER and sufficient to prevent any co-insurance
liability (which amount shall be the full insurable value of the assets and
properties insured unless the LENDER in writing agrees to a lesser amount),
naming the LENDER as sole loss payee with respect to the COLLATERAL, with
insurance companies and upon policy forms containing standard mortgagee clauses
which are acceptable to and approved by the LENDER. The BORROWER shall submit to
the LENDER the originals of the casualty insurance policies and paid receipts
evidencing payment of the premiums due on the same. The casualty insurance
policies shall be endorsed so as to make them noncancellable unless thirty (30)
days prior notice of cancellation is provided to the LENDER. The proceeds of any
insured loss shall be applied by the LENDER to the OBLIGATIONS, in such order of
application as determined by the LENDER, unless the LENDER in its sole
discretion permits the use thereof to repair or replace damaged or destroyed
COLLATERAL.
Section 5.3. Books And Records. The BORROWER shall notify the LENDER in
writing if the BORROWER modifies or changes its method of accounting or enters
into, modifies, or terminates any agreement presently existing, or at any time
hereafter entered into with any third party accounting firm for the preparation
and/or storage of the BORROWER'S accounting records.
Section 5.4. Collection Of Accounts; Sale Of Inventory. The BORROWER
shall only collect its RECEIVABLES and sell its INVENTORY in the ordinary course
of the BORROWER'S business.
Section 5.5. Notice Of Litigation And Proceedings. The BORROWER shall
give prompt notice to the LENDER of any action, suit, citation, violation,
direction, notice or proceeding before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
affecting the BORROWER, or the assets or properties thereof, which, if
determined adversely to the BORROWER: (a) could require the BORROWER to pay over
more than Fifty Thousand Dollars ($50,000.00) or deliver assets the value of
which exceeds that sum (whether or not the claim is considered to be covered by
insurance); or (b) could reasonably be expected to have a material adverse
effect upon the financial condition or business operations of the BORROWER.
Section 5.6. Payment Of Liabilities To Third Persons. The BORROWER
shall pay when and as due, or within applicable grace periods, all liabilities
due to third persons, except when the amount thereof is being contested in good
faith by appropriate proceedings and with adequate reserves therefor being set
aside by the BORROWER.
Section 5.7. Notice Of Change Of Business Location. The BORROWER shall
notify the LENDER thirty (30) days in advance of: (a) any change in the location
of its existing offices or place of business; (b) the establishment of any new,
or the discontinuation of any existing, place of business; and (c) any change in
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or addition to the locations at which the COLLATERAL is kept. Prior to moving
any COLLATERAL to any location not owned by the BORROWER (other than deliveries
to ACCOUNT DEBTORS of sold or leased items), the BORROWER shall obtain and
deliver to the LENDER an agreement, in form and substance acceptable to the
LENDER, pursuant to which the owner of such location shall: (a) subordinate any
rights which it may have, or thereafter may obtain, in any of the COLLATERAL to
the rights and security interests of the LENDER in the COLLATERAL; and (b) allow
the LENDER access to the COLLATERAL in order to remove the COLLATERAL from such
location. In the event any COLLATERAL is stored with a warehousemen or other
bailee, and the COLLATERAL is evidenced by a negotiable document of title, the
BORROWER shall immediately deliver the document of title to the LENDER.
Section 5.8. Payment Of Taxes. The BORROWER shall pay or cause to be
paid when and as due all taxes, assessments and charges or levies imposed upon
it or on any of its property or which it is required to withhold and pay over to
the taxing authority or which it must pay on its income, except where contested
in good faith, by appropriate proceedings and at its own cost and expense;
provided, however, that the BORROWER shall not be deemed to be contesting in
good faith by appropriate proceedings unless: (a) such proceedings operate to
prevent the taxing authority from attempting to collect the taxes, assessments
or charges; (b) the COLLATERAL is not subject to sale, forfeiture or loss during
such proceedings; (c) the BORROWER'S contest does not subject the LENDER to any
claim by the taxing authority or any other person; (d) the BORROWER establishes
appropriate reserves, satisfactory to the LENDER in its sole discretion, for the
payment of all taxes, assessments, charges, levies, legal fees, court costs and
other expenses for which the BORROWER would be liable if unsuccessful in the
contest; (e) the BORROWER prosecutes the contest continuously to its final
conclusion; and (f) at the conclusion of the proceedings, the BORROWER promptly
pays all amounts determined to be payable, including but not limited to all
taxes, assessments, charges, levies, legal fees and court costs.
Section 5.9. Inspections Of Records. The BORROWER shall permit
representatives of the LENDER access to the BORROWER'S places of business, at
intervals and at such times as determined by the LENDER, to inspect the
COLLATERAL and to review and make extracts from or photocopies of the books and
records of the BORROWER. The BORROWER agrees to pay to the LENDER the audit fees
and other expenses incurred by the LENDER in connection with such inspections.
Section 5.10. Notice Of Events Affecting Collateral; Compromise Of
Receivables; Returned Or Repossessed Goods. The BORROWER shall promptly report
to the LENDER: (a) any reclamation, return or repossession of goods; (b) all
claims or disputes asserted by any ACCOUNT DEBTOR or other obligor involving in
excess of Fifty Thousand Dollars ($50,000.00); and (c) all matters materially
affecting the value, enforceability or collectibility of any of the COLLATERAL.
Without the LENDER'S consent, the BORROWER shall not compromise or adjust any of
the RECEIVABLES which have been included by the BORROWER in the determination of
the BORROWING BASE, extend the time for payment thereof, or grant any additional
discounts, allowances or credits thereon; provided, however, that the BORROWER
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may grant, in the ordinary course of business, to any party obligated on any of
the RECEIVABLES, any rebate, refund, or adjustment to which such party may be
lawfully entitled, and may accept, in connection therewith, the return of goods,
sale, or lease of which shall have given rise to such RECEIVABLES. If any goods,
the sale of which has resulted in RECEIVABLES included in determining the
BORROWING BASE, are returned by the ACCOUNT DEBTOR for credit or repossessed by
the BORROWER, the BORROWER shall receive and hold such goods as trustee for the
LENDER and as additional security for the payment of the OBLIGATIONS, and make
disposition thereof as required by the LENDER.
Section 5.11. Documentation Of Collateral. The BORROWER agrees that
upon the request of the LENDER, the BORROWER will provide the LENDER with: (a)
written statements or schedules identifying and describing the COLLATERAL, and
all additions, substitutions, and replacements thereof, in such detail as the
LENDER may require; (b) copies of ACCOUNT DEBTORS' invoices or billing
statements; (c) evidence of shipment or delivery of goods or merchandise to or
performance of services for ACCOUNT DEBTORS; and (d) such other schedules and
information as the LENDER reasonably may require. The items to be provided under
this Section shall be in form satisfactory to the LENDER and are to be executed
and delivered to the LENDER from time to time solely for the LENDER'S
convenience in maintaining RECORDS of the COLLATERAL. The failure of the
BORROWER to give any of such items to the LENDER shall not affect, terminate,
modify or otherwise limit the LENDER'S security interests in the COLLATERAL. The
LENDER shall have the right, at any time and from time to time, to verify the
eligibility of the BORROWER'S RECEIVABLES, including obtaining verification of
the RECEIVABLES directly from ACCOUNT DEBTORS.
Section 5.12. Reporting Requirements. The BORROWER shall submit the
following items to the LENDER:
Section 5.12.1. Receivables And Accounts Payable Reports. On or
before the tenth (10th) day of each calendar month: (i) a RECEIVABLES report and
aging; and (ii) an accounts payable report and aging, both in form reasonably
acceptable to the LENDER and containing such information as the LENDER may
specify from time to time. Such reports shall be accompanied by such reports,
copies of sales journals, remittance reports, and other documentation as the
LENDER may reasonably request from time to time.
Section 5.12.2. Borrowing Base Report. Once each calendar week, or
more frequently if requested by the LENDER, a collateral and loan report in such
form and context as may be specified by the LENDER from time to time.
Section 5.12.3. Quarterly Financial Statements. As soon as
available and in any event within forty-five (45) calendar days after the end of
each of the first three quarters of each FISCAL YEAR, the BORROWER shall submit
to the LENDER a consolidated and consolidating balance sheet of the BORROWER and
its SUBSIDIARIES as of the end of such quarter, a consolidated and consolidating
statement of income and retained earnings of the BORROWER and its SUBSIDIARIES
for the period commencing at the end of the previous FISCAL YEAR and ending with
the end of such quarter, and a consolidated and consolidating statement of cash
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flow of the BORROWER and its SUBSIDIARIES for the portion of the FISCAL YEAR
ended with the last day of such quarter, all in reasonable detail and stating in
comparative form the respective consolidated and consolidating figures for the
corresponding date and period in the previous FISCAL YEAR and all prepared in
accordance with G.A.A.P. and certified by the chief financial officer of the
BORROWER (subject to year-end adjustments).
Section 5.12.4. Monthly Financial Statements. As soon as available
and in any event within thirty (30) calendar days after the end of each calendar
month, the BORROWER shall submit to the LENDER a consolidated and consolidating
balance sheet of the BORROWER and its SUBSIDIARIES as of the end of such month
and a consolidated and consolidating statement of income and retained earnings
of the BORROWER and its SUBSIDIARIES for such month, and a consolidated and
consolidating statement of cash flow of the BORROWER and its SUBSIDIARIES for
such month, all in reasonable detail and stating in comparative form the
respective consolidated and consolidating figures for the corresponding date and
period in the previous FISCAL YEAR and all prepared in accordance with G.A.A.P.
and certified by the Chief Financial Officer of the BORROWER (subject to
year-end adjustment).
Section 5.12.5. Annual Financial Statements. As soon as
available and in any event within ninety (90) calendar days after the end of
each FISCAL YEAR of the BORROWER, the BORROWER shall submit to the LENDER a
consolidated and consolidating balance sheet of the BORROWER and its
SUBSIDIARIES as of the end of such FISCAL YEAR and a consolidated and
consolidating statement of income and retained earnings of the BORROWER and its
SUBSIDIARIES for such FISCAL YEAR, and a consolidated and consolidating
statement of cash flow of the BORROWER and its SUBSIDIARIES for such FISCAL
YEAR, all in reasonable detail and stating in comparative form the respective
consolidated and consolidating figures for the corresponding date and period in
the prior FISCAL YEAR and all prepared in accordance with G.A.A.P. and
accompanied by an audited opinion thereon acceptable to the LENDER by
independent accountants selected by the BORROWER and acceptable to the LENDER.
Section 5.12.6. SEC And Other Filings. Within five (5) days
after the sending, filing, or receipt thereof, copies of: (a) all financial
statements, reports, notices and proxy statements that the BORROWER sends to its
shareholders; and (b) all regular, periodic and special reports, registration
statements and prospectuses that the BORROWER renders to or files with the
Securities And Exchange Commission or any national securities exchange,
including without limitation each of the Forms 10-K and 10-Q filed by the
BORROWER with the Securities And Exchange Commission.
Section 5.12.7. Management Letters. Promptly upon receipt thereof,
the BORROWER shall submit to the LENDER copies of any reports submitted to the
BORROWER or any SUBSIDIARY by independent certified public accountants in
connection with the examination of the financial statements of the BORROWER or
any SUBSIDIARY made by such accountants.
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Section 5.12.8. Certificates Of No Default. Within thirty (30)
calendar days after the end of each of the quarters of each FISCAL YEAR of the
BORROWER, the BORROWER shall submit to the LENDER a certificate of the chief
financial officer of the BORROWER in the form of Exhibit 5.12.8 attached hereto,
certifying that: (i) there exists no DEFAULT or EVENT OF DEFAULT, or if a
DEFAULT or an EVENT OF DEFAULT exists, specifying the nature thereof, the period
of existence thereof and what action the BORROWER proposes to take with respect
thereto; (ii) no material adverse change in the condition, financial or
otherwise, business, property or results of operations of the BORROWER has
occurred since the previous certificate was sent to the LENDER by the BORROWER
or, if any such change has occurred, specifying the nature thereof and what
action the BORROWER has taken or proposes to take with respect thereto; (iii)
all insurance premiums then due have been paid; (iv) all taxes then due have
been paid or, for those taxes which have not been paid, a statement of the taxes
not paid and a description of the BORROWER'S rationale therefor; (v) no
litigation, investigation or proceedings, or injunction, writ or restraining
order is pending or threatened or, if any such litigation, investigation,
proceeding, injunction, writ or order is pending, describing the nature thereof;
and (vi) stating whether or not the BORROWER is in compliance with the covenants
in this AGREEMENT, including a calculation of the financial covenants in the
schedule attached to such officers' certificates in form satisfactory to the
LENDER.
Section 5.12.9. Reports To Other Creditors. Promptly after the
furnishing thereof, the BORROWER shall submit to the LENDER copies of any
statement or report furnished to any other PERSON pursuant to the terms of any
indenture, loan, or credit or similar agreement and not otherwise required to be
furnished to the LENDER pursuant to any other provisions of this AGREEMENT.
Section 5.12.10. Management Changes. The BORROWER shall notify the
LENDER immediately of any changes in the personnel holding the positions of
either President or Chief Financial Officer of the BORROWER.
Section 5.12.11. General Information. In addition to the items set
forth in subparagraphs 5.12.1 through 5.12.10 above, the BORROWER agrees to
submit to the LENDER such other information respecting the condition or
operations, financial or otherwise, of the BORROWER as the LENDER may reasonably
request from time to time.
Section 5.13. Employee Benefit Plans And Guaranteed Pension Plans. The
BORROWER will, and will cause each of its ERISA AFFILIATES to: (a) comply with
all requirements imposed by ERISA and the CODE, applicable from time to time to
any of its GUARANTEED PENSION PLANS or EMPLOYEE BENEFIT PLANS; (b) make full
payment when due of all amounts which, under the provisions of EMPLOYEE BENEFIT
PLANS or under applicable LAW, are required to be paid as contributions thereto;
(c) not permit to exist any material accumulated funding deficiency, whether or
not waived; (d) file on a timely basis all reports, notices and other filings
required by any governmental agency with respect to any of its EMPLOYEE BENEFITS
PLANS; (e) make any payments to MULTIEMPLOYER PLANS required to be made under
any agreement relating to such MULTIEMPLOYER PLANS, or under any LAW pertaining
thereto; (f) not amend or otherwise alter any GUARANTEED PENSION PLAN if the
effect would be to cause the actuarial present value of all benefit commitments
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under any GUARANTEED PENSION PLAN to be less than the current value of the
assets of such GUARANTEED PENSION PLAN allocable to such benefit commitments;
(g) furnish to all participants, beneficiaries and employees under any of the
EMPLOYEE BENEFIT PLANS, within the periods prescribed by LAW, all reports,
notices and other information to which they are entitled under applicable LAW;
and (h) take no action which would cause any of the EMPLOYEE BENEFIT PLANS to
fail to meet any qualification requirement imposed by the CODE. As used in this
Section, the term "accumulated funding deficiency" has the meaning specified in
Section 302 of ERISA and Section 412 of the CODE, and the terms "actuarial
present value", "benefit commitments" and "current value" have the meaning
specified in Section 4001 of ERISA.
Section 5.14. Maintenance Of Fixed Assets. The BORROWER shall maintain
and preserve all of its fixed assets in a state of good and efficient working
order.
Section 5.15. Consignments. The BORROWER shall advise the LENDER of all
PERSONS to whom it has consigned or assigned INVENTORY for sale or distribution,
and the location of the INVENTORY subject to any such consignment or assignment
arrangement. The BORROWER shall: (a) duly and properly file financing statements
in all applicable places of public record with respect to each of such
consignments or assignments, which filings shall comply with Section 9-114 of
the 1972 version of the Uniform Commercial Code and with all other requirements
necessary for the BORROWER to protect its interests therein under applicable
LAWS; (b) supply the LENDER with prior evidence of such filing and with a
financing statement, judgment and tax lien search in the name of the consignee
or assignee in all applicable places of public record; and (c) provide written
notification to any holder of any security interests in the inventory of the
consignee or assignee who has filed a financing statement before the BORROWER
files its financing statement, which notice shall state that the BORROWER
expects to deliver goods or assignments, shall describe the goods by item or
type and which notification shall be received by any such holder within five (5)
years before the consignee receives possession of the goods and at five (5) year
intervals thereafter.
Section 5.16. Federal Assignment Of Claims Act. The BORROWER shall
notify the LENDER if any RECEIVABLE arises out of a contract with the United
States of America, or any department, agency or instrumentality thereof, and
shall execute all documents or instruments and shall take all steps or actions
required by the LENDER so that all monies due or to become due under such
contract are assigned to the LENDER and notice given thereof to the United
States in accordance with the requirements of the Federal Assignment of Claims
Act, as amended.
Section 5.17. Compliance With Laws. The BORROWER shall comply in all
material respects with all applicable LAWS, including, but not limited to, all
LAWS with respect to: (a) all restrictions, specifications, or other
requirements pertaining to products that it sells or to the services it
performs; (b) the conduct of its business; (c) the use, maintenance, and
operation of the real and personal properties owned or leased by it in the
conduct of its business; and (d) the obtaining and maintenance of all necessary
licenses, franchises, permits and governmental approvals, registrations and
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exemptions necessary to engage in its business. Without limiting the generality
of the preceding Section, the BORROWER shall: (i) comply in all material
respects with, and ensure such compliance by all tenants and subtenants, if any,
with, all applicable ENVIRONMENTAL LAWS and obtain and comply in all material
respects with and maintain, and ensure that all tenants and subtenants obtain
and comply with and maintain, any and all licenses, approvals, notifications,
registrations or permits required by applicable ENVIRONMENTAL LAWS; (ii) conduct
and complete all investigations, studies, sampling and testing, and all
remedial, removal and other actions required under ENVIRONMENTAL LAWS, and
promptly comply with all lawful orders and directives of any governmental
authority regarding ENVIRONMENTAL LAWS; and (iii) defend, indemnify and hold
harmless the LENDER, and its employees, agents, officers and directors, from and
against any claims, demands, penalties, fines, liabilities, settlements,
damages, costs and expenses of whatever kind or nature known or unknown,
contingent or otherwise, arising out of, or in any way relating to the violation
of, noncompliance with or liability under any ENVIRONMENTAL LAWS applicable to
the operations of the BORROWER, or any orders, requirements or demands of
governmental authorities related thereto, including, without limitation,
reasonable attorney's and consultant's fees, investigation and laboratory fees,
response costs, court costs and litigation expenses, except to the extent that
any of the foregoing directly result from the gross negligence or willful
misconduct of the party seeking indemnification therefor. The BORROWER agrees to
promptly notify the LENDER of any RELEASE of a REGULATED SUBSTANCE on, to or
from any FACILITY in violation of any ENVIRONMENTAL LAWS or of any notice
received by the BORROWER that the BORROWER or any FACILITY is not in compliance
with any ENVIRONMENTAL LAWS.
Section 5.18. Tangible Net Worth. The BORROWER shall maintain a
TANGIBLE NET WORTH of not less than: (a) Two Million Dollars ($2,000,000.00) as
of March 31, 2000; (b) Two Million Six Hundred Thousand Dollars ($2,600,000.00)
as of June 30, 2000; (c) Three Million Four Hundred Thousand Dollars
($3,400,000.00) as of September 30, 2000; (d) Four Million Eight Hundred
Thousand Dollars ($4,800,000.00) as of December 31, 2000 and as of the last day
of each calendar quarter after December 31, 2000.
Section 5.19. EBITDA. The BORROWER shall have an EBITDA of not less
than: (a) One Hundred Thousand Dollars ($100,000.00) for the three (3) month
period ending March 31, 2000; (b) One Hundred Thousand Dollars ($100,000.00) for
the four (4) month period ending April 30, 2000; (c) Two Hundred Thousand
Dollars ($200,000.00) for the five (5) month period ending May 31, 2000; (d)
Seven Hundred Thousand Dollars ($700,000.00) for the six (6) month period ending
June 30, 2000; (e) Eight Hundred Thousand Dollars ($800,000.00) for the seven
(7) month period ending July 31, 2000; (f) One Million Two Hundred Thousand
Dollars ($1,200,000.00) for the eight (8) month period ending August 31, 2000;
(g) Two Million Dollars ($2,000,000.00) for the nine (9) month period ending
September 30, 2000; (h) Two Million Five Hundred Thousand Dollars
($2,500,000.00) for the ten (10) month period ending October 31, 2000; (i) Three
Million Dollars ($3,000,000.00) for the eleven (11) month period ending November
30, 2000; (j) Four Million Dollars ($4,000,000.00) for the twelve (12) month
period ending December 31, 2000; and (k) Four Million Dollars ($4,000,000.00)
for each twelve (12) month period ending on the last day of a calendar month
after December 31, 2000.
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Section 5.20. Interest Coverage Ratio. The BORROWER shall maintain an
INTEREST COVERAGE RATIO of not less than: (a) 1.0 to 1.0 for the three (3) month
period ending March 31, 2000; (b) 2.0 to 1.0 for the six (6) month period ending
June 30, 2000; (c) 5.0 to 1.0 for the nine (9) month period ending September 30,
2000; (d) 5.0 to 1.0 for the twelve (12) month period ending December 31, 2000;
and (e) 5.0 to 1.0 for each twelve (12) month period ending on the last day of a
fiscal quarter after December 31, 2000.
ARTICLE 6
NEGATIVE COVENANTS
The BORROWER covenants while any OBLIGATIONS are outstanding and unpaid
not to do or to permit to be done or to occur any of the acts or occurrences set
forth in this Article 6 without the prior written authorization of the LENDER.
Section 6.1. No Change Of Name, Merger, Etc. The BORROWER shall not
change its name or enter into any merger, consolidation, reorganization or
recapitalization.
Section 6.2. No Sale Or Transfer Of Assets. The BORROWER shall not
sell, transfer, lease or otherwise dispose of all or any part of the COLLATERAL,
or all or any part of any of its other assets, except that: (a) INVENTORY may be
sold to ACCOUNT DEBTORS in the ordinary course of the BORROWER'S business; and
(b) whether or not there is a DEFAULT, the BORROWER may use the "MONEY MARKET
FUNDS" to pay (i) up to Three Hundred Thousand Dollars ($300,000.00) of the
expenses relating to the sale of the BORROWER'S virtual production line, and
(ii) up to Eight Hundred Thousand Dollars ($800,000.00) in final payment of the
note issued in connection with the acquisition of the assets of Scitex Digital
Video, Inc. As used herein, the term "MONEY MARKET FUNDS" means the monies held
by the BORROWER in Account Number 1890670308 at Comerica Bank.
Section 6.3. No Encumbrance Of Assets. The BORROWER shall not mortgage,
pledge, grant or permit to exist a security interest in or lien upon any of its
assets of any kind, now owned or hereafter acquired, except for PERMITTED LIENS.
Section 6.4. No Indebtedness. The BORROWER shall not incur, create,
assume, or permit to exist any INDEBTEDNESS except: (a) the OBLIGATIONS; and (b)
INDEBTEDNESS secured by PERMITTED LIENS.
Section 6.5. Restricted Payments. The BORROWER shall not make any
RESTRICTED PAYMENTS.
Section 6.6. Transactions With Affiliates. The BORROWER shall not make
any contract for the purchase of any items from any AFFILIATE or the performance
of any services (including employment services) by any AFFILIATE, unless such
contract is on terms which fairly represent generally available terms to be
obtained in transactions of a similar nature with independent third PERSONS.
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Section 6.7. Loans, Investments And Sale-Leasebacks. The BORROWER shall
not make any advance, loan, investment, or material acquisition of assets or
enter into any sale-leaseback transactions.
Section 6.8. No Acquisition Of Equity In Or Assets Of Third Persons.
The BORROWER shall not acquire any equity interests in, or all or substantially
all of the assets of, any PERSON.
Section 6.9. No Assignment. The BORROWER shall not assign or attempt to
assign its rights under this AGREEMENT.
Section 6.10. No Alteration Of Structure Or Operations. The BORROWER
shall not amend or change materially its capital structure or its line or scope
of business, nor shall it engage in business ventures other than those in which
it is presently engaged.
Section 6.11. Unpermitted Uses Of Loan Proceeds. The BORROWER shall not
use any part of the proceeds of the LOAN hereunder for any purpose which
constitutes a violation of, or is inconsistent with, regulations of the Board of
Governors of the Federal Reserve System, including without limitation, the
purchase or carrying of (or refinancing of indebtedness originally incurred to
purchase or carry) margin securities.
Section 6.12. Long Term Contracts. The BORROWER shall not enter into
any management contract, employment contract, consulting contract,
non-competition contract, service contract or the like, having a term in excess
of thirteen (13) months or requiring the payment of any monies by the BORROWER
on a date occurring more than thirteen (13) months after the date of such
contract with any AFFILIATE.
Section 6.13. Changes In Fiscal Year. The BORROWER shall not change its
FISCAL YEAR.
Section 6.14. Limitation On Issuance Of Equity Interests. The BORROWER
shall not issue or sell any equity interest in the BORROWER that, by its terms
or by the terms of any security into which it is convertible or exchangeable,
is, or upon the happening of an event or passage of time would be: (a)
convertible or exchangeable into a liability of the BORROWER; or (b) required to
be redeemed or repurchased, including at the option of the holder, in whole or
in part, or has, or upon the happening of an event or passage of time would
have, a redemption or similar payment due.
Section 6.15. Capital Expenditures. The BORROWER shall not make any
CAPITAL EXPENDITURES in excess of: (a) Three Hundred Fifty Thousand Dollars
($350,000.00) in the aggregate during the three (3) month period ending March
31, 2000; (b) Six Hundred Thousand Dollars ($600,000.00) in the aggregate during
the six (6) month period ending June 30, 2000; (c) Seven Hundred Fifty Thousand
Dollars ($750,000.00) in the aggregate during the nine (9) month period ending
September 30, 2000; (d) Nine Hundred Thousand Dollars ($900,000.00) in the
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aggregate during the twelve (12) month period ending December 31, 2000; or (e)
Nine Hundred Thousand Dollars ($900,000.00) in the aggregate during any twelve
(12) month period ending on the last day of a fiscal quarter after December 31,
2000.
ARTICLE 7
EVENTS OF DEFAULT
Subject to the notice and cure provisions set forth in Section 7.16,
the occurrence of any of the following events shall constitute an EVENT OF
DEFAULT.
Section 7.1. Failure To Pay. The failure by the BORROWER to pay any of
the OBLIGATIONS when and as due.
Section 7.2. Violation Of Covenants. The failure by the BORROWER to
perform or a violation of any of the covenants or agreements provided in this
AGREEMENT or in any of the other LOAN DOCUMENTS.
Section 7.3. Representation Or Warranty. The failure of any
representation or warranty made by the BORROWER to be true in any material
respect, as of the date made.
Section 7.4. Default Under Loan Documents. A breach of or default by
the BORROWER under the terms, covenants, and conditions set forth in any other
LOAN DOCUMENT.
Section 7.5. Cross-Default. A breach of or default under the terms,
covenants, or conditions of any agreement, loan, guaranty, or other transaction
of the BORROWER with the LENDER or with any other lender.
Section 7.6. Judgments. The BORROWER shall suffer final judgments for
the payment of money aggregating in excess of Fifty Thousand Dollars
($50,000.00) and shall not discharge the same within a period of thirty (30)
days unless, pending further proceedings, execution has not been commenced or if
commenced has been effectively stayed.
Section 7.7. Levy By Judgment Creditor. A judgment creditor of the
BORROWER shall obtain possession of any of the COLLATERAL by any means,
including but not limited to levy, distraint, replevin or self-help, and the
BORROWER shall not remedy same within thirty (30) days thereof; or a writ of
garnishment is served on the LENDER relating to any of the accounts of the
BORROWER maintained by the LENDER.
Section 7.8. Failure To Pay Liabilities. The BORROWER shall fail to pay
any of its debts, in any material amount, due any third PERSON and such failure
shall continue beyond any applicable grace period, unless the applicable
BORROWER holds a good faith defense to payment and has set aside reasonable
reserves for the payment thereof.
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Section 7.9. Involuntary Insolvency Proceedings. The institution of
involuntary INSOLVENCY PROCEEDINGS against the BORROWER and the failure of any
such INSOLVENCY PROCEEDINGS to be dismissed before the earliest to occur of: (a)
the date which is ninety (90) days after the institution of such INSOLVENCY
PROCEEDINGS; (b) the entry of any order for relief in the INSOLVENCY PROCEEDING
or any order adjudicating the BORROWER insolvent; or (c) the impairment (as to
validity, priority or otherwise) of any security interest or lien of the LENDER
in any of the COLLATERAL.
Section 7.10. Voluntary Insolvency Proceedings. The commencement by the
BORROWER of INSOLVENCY PROCEEDINGS.
Section 7.11. Material Adverse Event. The occurrence of a MATERIAL
ADVERSE EVENT.
Section 7.12. ERISA. If any TERMINATION EVENT shall occur and as of the
date thereof or any subsequent date, the sum of the various liabilities of the
BORROWER and its ERISA AFFILIATES (such liabilities to include, without
limitation, any liability to the Pension Benefit Guaranty Corporation (or any
successor thereto) or to any other party under Sections 4062, 4063, or 4064 of
ERISA or any other provision of LAW and to be calculated after giving effect to
the tax consequences thereof) resulting from or otherwise associated with such
event exceeds Fifty Thousand Dollars ($50,000.00); or the BORROWER or any of its
ERISA AFFILIATES as an employer under any MULTIEMPLOYER PLAN shall have made a
complete or partial withdrawal from such MULTIEMPLOYER PLANS and the plan
sponsors of such MULTIEMPLOYER PLANS shall have notified such withdrawing
employer that such employer has incurred a withdrawal liability requiring a
payment in an amount exceeding Fifty Thousand Dollars ($50,000.00).
Section 7.13. Transfer Of Equity Interests. The transfer of any equity
interests in the BORROWER from the ownership existing as of CLOSING, the
dissolution of the BORROWER, the pledge of any equity interests of the BORROWER
except to the LENDER, or the issuance of additional equity interests in the
BORROWER which issuance has the effect of diluting the existing interests of the
existing equity holders in the BORROWER.
Section 7.14. Indictment Of Borrower. The indictment of the BORROWER
for a felony under any federal, state or other LAW.
Section 7.15. Injunction. The issuance of any injunction against the
BORROWER which enjoins or restrains the BORROWER from continuing to conduct any
material part of the BORROWER'S business affairs.
Section 7.16. Notice And Cure Rights. Notwithstanding any provision to
the contrary set forth in any of the LOAN DOCUMENTS, an EVENT OF DEFAULT shall
not be deemed to have occurred with respect to: (a) the failure to pay a
monetary amount due to the LENDER pursuant to the terms of the LOAN DOCUMENTS
until five (5) calendar days after the LENDER has forwarded notice of such
failure to pay to the BORROWER and the BORROWER has failed to pay such unpaid
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amount; and (b) with respect to the violation of any other covenant or
requirement of the LOAN DOCUMENTS, excepting the specific provisions of this
AGREEMENT excluded in the next succeeding sentence of this Section, until after
the LENDER has forwarded notice of such violation to the BORROWER and the
BORROWER has failed to correct such violation within thirty (30) calendar days
after the date of the sending of such notice. A violation of any of the
following Sections of this AGREEMENT shall immediately constitute an EVENT OF
DEFAULT without the BORROWER having any notice or cure rights: Sections 7.3,
7.6, 7.7, 7.8, 7.9, 7.10, 7.11, 7.13, and 7.15.
ARTICLE 8
RIGHTS AND REMEDIES ON THE OCCURRENCE
OF AN EVENT OF DEFAULT
Section 8.1. Lender's Specific Rights And Remedies. In addition to all
other rights and remedies provided by LAW and the LOAN DOCUMENTS, upon the
occurrence of any EVENT OF DEFAULT, the LENDER may: (a) accelerate and call
immediately due and payable all or any part of the OBLIGATIONS; (b) seek
specific performance or injunctive relief to enforce performance of the
undertakings, duties, and agreements provided in the LOAN DOCUMENTS, whether or
not a remedy at law exists or is adequate; and (c) exercise any rights of a
secured creditor under the Uniform Commercial Code, as adopted and amended in
Maryland, including the right to take possession of the COLLATERAL without the
use of judicial process or hearing of any kind and the right to require the
BORROWER to assemble the COLLATERAL at such place as the LENDER may specify.
Section 8.2. Automatic Acceleration. Upon the occurrence of an EVENT OF
DEFAULT as described in Sections 7.9 or 7.10 of this AGREEMENT, the OBLIGATIONS
shall be automatically accelerated and due and payable without any notice,
demand or action of any type on the part of the LENDER.
Section 8.3. Sale Of Collateral. In addition to any other remedy
provided herein, upon the occurrence of an EVENT OF DEFAULT, the LENDER, in a
commercially reasonable fashion, may sell at public or private sale or otherwise
realize upon, in Baltimore, Maryland, or elsewhere, the whole or, from time to
time, any part of all COLLATERAL which is personal property, or any interest
which the BORROWER may have therein. Pending any such action, the LENDER may
collect and liquidate the COLLATERAL. After deducting from the proceeds of sale
or other disposition of such COLLATERAL all expenses, including all expenses for
legal services, the LENDER shall apply such proceeds toward the satisfaction of
the OBLIGATIONS. Any remainder of the proceeds after satisfaction in full of the
OBLIGATIONS shall be distributed as required by applicable LAW. Notice of any
sale or other disposition (other than sales or other dispositions of COLLATERAL
which is perishable or threatens to decline speedily in value or of a type
customarily sold on a recognized market) shall be given to the BORROWER not less
than ten (10) calendar days before the time of any intended public sale or of
the time after which any intended private sale or other disposition of the
COLLATERAL is to be made, which the BORROWER hereby agrees shall be commercially
reasonable notice of such sale or other disposition. The BORROWER shall
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assemble, or shall cause to be assembled, at the BORROWER'S own expense, the
COLLATERAL at such place or places as the LENDER shall designate. At any such
sale or other disposition, the LENDER may, to the extent permissible under
applicable law, purchase the whole or any part of the COLLATERAL, free from any
right of redemption on the part of the BORROWER, which right is hereby waived
and released to the extent lawfully permitted. Without limiting the generality
of any of the rights and remedies conferred upon the LENDER under this Section,
the LENDER may, to the full extent permitted by applicable law: (a) enter upon
the premises of the BORROWER, exclude therefrom the BORROWER or any PERSON
connected therewith, and take immediate possession of the COLLATERAL, either
personally or by means of a receiver appointed by a court of competent
jurisdiction, using all necessary force to do so; (b) at the LENDER'S option,
use, operate, manage, and control the COLLATERAL in any lawful manner; (c)
collect and receive all income, revenue, earnings, issues, and profits
therefrom; and (d) maintain, alter or remove the COLLATERAL as the LENDER may
determine in the LENDER'S discretion.
Section 8.4. Letters Of Credit. Upon the request of the LENDER, at any
time after the occurrence of an EVENT OF DEFAULT, the BORROWER shall immediately
deposit in a cash collateral account at the LENDER, over which the LENDER has
sole access, an amount equal to the aggregate then undrawn and unexpired amount
of all LETTERS OF CREDIT. Amounts held in such cash collateral account shall be
applied by the LENDER to the payment of drafts drawn under LETTERS OF CREDIT,
and the unused portion thereof after all LETTERS OF CREDIT shall have expired or
been fully drawn upon shall be applied to repay the other OBLIGATIONS. After all
LETTERS OF CREDIT shall have expired or have been fully drawn upon and all other
OBLIGATIONS shall have been paid in full, the balance, if any, in such cash
collateral account shall be returned to the BORROWER. In the event the BORROWER
fails to deposit into the cash collateral account an amount equal to the then
undrawn and unexpired amount of all LETTERS OF CREDIT, the LENDER shall be
authorized to deposit into such cash collateral account proceeds from the
liquidation of the COLLATERAL until the balance in such account equals the
aggregate then undrawn and unexpired amount of all LETTERS OF CREDIT.
Section 8.5. Remedies Cumulative. The rights and remedies provided in
this AGREEMENT and in the other LOAN DOCUMENTS or otherwise under applicable
LAWS shall be cumulative and the exercise of any particular right or remedy
shall not preclude the exercise of any other rights or remedies in addition to,
or as an alternative of, such right or remedy.
ARTICLE 9
GENERAL CONDITIONS AND TERMS
Section 9.1. Obligations Are Unconditional. The payment and performance
of the OBLIGATIONS shall be the absolute and unconditional duty and obligation
of the BORROWER, and shall be independent of any defense or any rights of
set-off, recoupment or counterclaim which the BORROWER might otherwise have
against the LENDER. The BORROWER shall pay the payments of the principal and
interest to be made upon the OBLIGATIONS, free of any deductions and without
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abatement, diminution or set-off other than those herein expressly provided.
Until such time as the OBLIGATIONS have been fully paid and performed, the
BORROWER shall not: (a) suspend or discontinue any payments required by the LOAN
DOCUMENTS; and (b) fail to perform and observe all of the BORROWER'S covenants
and agreements set forth in the LOAN DOCUMENTS.
Section 9.2. Indemnity. The BORROWER agrees to defend, indemnify and
hold harmless the LENDER and the entities affiliated with the LENDER and all of
the LENDER'S and its affiliated entities' employees, agents, officers and
directors, from and against any losses, penalties, fines, liabilities,
settlements, damages, costs and expenses, suffered in connection with any claim,
investigation, litigation or other proceeding (whether or not the LENDER or an
affiliated entity is a party thereto) and the prosecution and defense thereof,
arising out of or in any way connected with any LOAN DOCUMENT, including without
limitation reasonable attorneys' and consultant's fees, except to the extent
that any of the foregoing directly result from the gross negligence or willful
misconduct of the party seeking indemnification therefor. Notwithstanding any
termination of this AGREEMENT or payment and performance of the OBLIGATIONS, the
indemnities provided for herein shall continue in full force and effect and
shall protect all of the above-described PERSONS against events arising after
such termination, payment or performance as well as before.
Section 9.3. Lender Expenses. All LENDER EXPENSES shall be paid by the
BORROWER, whether incurred prior to or after CLOSING, such that the subject
transactions shall at all times be cost free to the LENDER.
Section 9.4. Authorization To Obtain Financial Information. The
BORROWER hereby irrevocably authorizes its accounting firm to provide the LENDER
from time to time with such information as may be requested by the LENDER, and
hereby authorizes the LENDER to contact directly such accounting firm in order
to obtain such information.
Section 9.5. Incorporation; Construction Of Inconsistent Provisions.
The terms and conditions of the LOAN DOCUMENTS are incorporated by reference and
made a part hereof, as if fully set forth herein. In the event of any
inconsistency between this AGREEMENT and any other LOAN DOCUMENT, such
inconsistency shall be construed, interpreted, and resolved so as to benefit the
LENDER, independent of whether this AGREEMENT or another LOAN DOCUMENT controls,
and the LENDER'S election of which interpretation or construction is for the
LENDER'S benefit shall govern.
Section 9.6. Waivers. The LENDER at any time or from time to time may
waive all or any rights under this AGREEMENT or any other LOAN DOCUMENT, but any
waiver or indulgence by the LENDER at any time or from time to time shall not
constitute a future waiver of performance or exact performance by the BORROWER.
Section 9.7. Continuing Obligation Of Borrower. The terms, conditions,
and covenants set forth herein and in the LOAN DOCUMENTS shall survive CLOSING
and shall constitute a continuing obligation of the BORROWER during the course
of the transactions contemplated herein. The security interests, liens and other
security provided by this AGREEMENT shall remain in effect so long as any
OBLIGATION, whether direct or contingent, is outstanding, unpaid or unsatisfied.
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Section 9.8. Choice Of Law. The laws of the State of Maryland
(excluding, however, conflict of law principles) shall govern and be applied to
determine all issues relating to this AGREEMENT and the rights and obligations
of the parties hereto, including the validity, construction, interpretation, and
enforceability of this AGREEMENT and its various provisions and the consequences
and legal effect of all transactions and events which resulted in the execution
of this AGREEMENT or which occurred or were to occur as a direct or indirect
result of this AGREEMENT having been executed.
Section 9.9. Submission To Jurisdiction; Venue; Actions Against Lender.
For purposes of any action, in law or in equity, which is based directly or
indirectly on this AGREEMENT, any other LOAN DOCUMENT or any matter related to
this AGREEMENT or any other LOAN DOCUMENT, including any action for recognition
or enforcement of any of the LENDER'S rights under the LOAN DOCUMENTS or any
judgment obtained by the LENDER in respect thereof, the BORROWER hereby:
Section 9.9.1. Jurisdiction. Irrevocably submits to the
non-exclusive general jurisdiction of the courts of the State of Maryland and,
if a basis for federal jurisdiction exists at any time, the courts of the United
States of America for the District of Maryland.
Section 9.9.2. Venue. Agrees that venue shall be proper in the
Circuit Court for Baltimore City, Maryland, the Circuit Court for any county in
the state of Maryland, as selected by the LENDER, and, if a basis for federal
jurisdiction exists, the courts of the United States of America for the District
of Maryland.
Section 9.9.3. Waiver Of Objections To Venue. Waives any right to
object to the maintenance of any suit in any of the courts specified in Section
9.9.2 above on the basis of improper venue or convenience of forum. The BORROWER
further agrees that it shall not institute any suit or other action against the
LENDER, in law or in equity, which is based directly or indirectly on this
AGREEMENT, any other LOAN DOCUMENT or any matter related to this AGREEMENT or
any other LOAN DOCUMENT, in any court other than a court specified in Section
9.9.2 above; provided, that in any instance in which there is then pending a
suit instituted by the LENDER against the BORROWER in a court other than a court
specified in Section 9.9.2 above, the BORROWER may file in such suit any
counterclaim which it has against the LENDER but only if such counterclaim is a
compulsory counterclaim and would be barred if not filed as a counterclaim in
such suit. The BORROWER agrees that any suit brought by it against the LENDER
not in accordance with this paragraph should be forthwith dismissed or
transferred to a court specified in Section 9.9.2 above.
Section 9.10. Notices. Any notice required or permitted by or in
connection with this AGREEMENT shall be in writing and shall be made by
facsimile (confirmed on the date the facsimile is sent by one of the other
methods of giving notice provided for in this Section) or by hand delivery, by
Federal Express, or other similar overnight delivery service, or by certified
39
<PAGE>
mail, unrestricted delivery, return receipt requested, postage prepaid,
addressed to the LENDER or the BORROWER at the appropriate address set forth
below or to such other address as may be hereafter specified by written notice
by the LENDER or the BORROWER. Notice shall be considered given as of the date
of the facsimile or the hand delivery, one (1) calendar day after delivery to
Federal Express or similar overnight delivery service, or three (3) calendar
days after the date of mailing, independent of the date of actual delivery or
whether delivery is ever in fact made, as the case may be, provided the giver of
notice can establish the fact that notice was given as provided herein. If
notice is tendered pursuant to the provisions of this Section and is refused by
the intended recipient thereof, the notice, nevertheless, shall be considered to
have been given and shall be effective as of the date herein provided.
If to the LENDER: THE PROVIDENT BANK
One East Fourth Street, 249A
Cincinnati, Ohio 45202
Attn: Jose V. Garde, Vice President
Facsimile: (513) 639-1588
If to the BORROWER: ACCOM, INC.
1490 O'Brien Drive
Menlo Park, California 94025
Attn: Don McCauley, CFO
Facsimile: _____________________
With A Courtesy Copy To: Gibson, Dunn & Crutcher LLP
1530 Page Mill Road
Palo Alto, California 94304-1125
Attn.: Gregory Toll Davidson
Fax No.: (____) _______________
The failure of the LENDER to send the above courtesy copy shall not impair the
effectiveness of notice given to the BORROWER in the manner provided herein.
Section 9.11. Participations. The LENDER reserves the right to assign
all or any portion of its interests in any of the OBLIGATIONS or the LOAN
DOCUMENTS or to participate with other lending institutions any of the
OBLIGATIONS and the LOAN DOCUMENTS on such terms and at such times as the LENDER
may determine from time to time, all without any consent thereto or notice
thereof to the BORROWER. The BORROWER hereby grants to each participating
lending institution, to the full extent of the OBLIGATIONS, the right to set off
deposit accounts maintained by the BORROWER with such institution, and the
BORROWER agrees to pay the LENDER EXPENSES of any such participating lending
institution which arise or are incurred as a result of the occurrence of an
EVENT OF DEFAULT.
Section 9.12. Miscellaneous Provisions. The parties agree that: (a)
this AGREEMENT shall be effective as of the date first above written,
independent of the date of execution or delivery hereof; (b) this AGREEMENT
shall be binding upon the parties and their successors and assigns, contains the
40
<PAGE>
final and entire agreement and understanding of the parties, and may neither be
amended or altered except by a writing signed by the parties; (c) time is
strictly of the essence of this AGREEMENT; (d) as used herein, the singular
includes the plural and the plural includes the singular, the use of any gender
applies to all genders; (e) the captions contained herein are for purposes of
convenience only and are not a part of this AGREEMENT; (f) a carbon,
photographic, photocopy or other reproduction of a security agreement or
financing statement shall be sufficient as a financing statement; (g) this
AGREEMENT may be delivered by facsimile, and a facsimile of any party's
signature to this AGREEMENT shall be deemed an original signature for all
purposes; and (h) this AGREEMENT may be executed in several counterparts, each
of which shall be an original, but all of which, when taken together, shall
constitute one and the same document.
Section 9.13. Waiver Of Trial By Jury. Each party to this AGREEMENT
agrees that any suit, action, or proceeding, whether claim or counterclaim,
brought or instituted by either party hereto or any successor or assign of any
party on or with respect to this AGREEMENT or any other LOAN DOCUMENT or which
in any way relates, directly or indirectly, to the OBLIGATIONS or any event,
transaction, or occurrence arising out of or in any way connected with any of
the OBLIGATIONS, or the dealings of the parties with respect thereto, shall be
tried only by a court and not by a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY
RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION, OR PROCEEDING.
IN WITNESS WHEREOF, the LENDER and the BORROWER have duly executed this
AGREEMENT under seal as of the date first above written.
WITNESS/ATTEST: THE PROVIDENT BANK,
An Ohio Chartered Banking Institution
By: /s/ J.DAVID KOMMALAN (SEAL)
--------------------
J. David Kommalan,
Vice President
ACCOM, INC.,
A Delaware Corporation
By: /s/ DONALD K. MCCAULEY (SEAL)
- ------------------------------- ----------------------
Donald K. McCauley,
Senior Vice President and CFO
<PAGE>
Schedule 1.48
Permitted Liens
<PAGE>
Schedule 4.2
Pending Litigation
Niaid Environmental Corporation v. Accom, Inc. and Does 1 to 50, inclusive Case
No. 409220 filed on June 1, 1999 in the Superior Court of the State of
California, County of San Mateo
<PAGE>
Schedule 4.7
Other Names
Accom of California
Merged Into Borrower
Axial Corporation
Scitex Digital Video, Inc.
<PAGE>
Schedule 4.11
Chief Place Of Business
1490 O'Brien Drive,
Menlo Park, California 94025
Collateral Records
1490 O'Brien Drive,
Menlo Park, California 94025
431 Crown Point Circle, #150
Grass Valley, California 95945
<PAGE>
Schedule 4.12
Location Of Inventory
1490 O'Brien Drive,
Menlo Park, California 94025
431 Crown Point Circle, #150
Grass Valley, California 95945
<PAGE>
Schedule 4.13
Subsidiaries
Accom Europe Ltd.
Accom International, Inc.
Accom Virtual Studio, Inc.
Accom Asia-Pacific
<PAGE>
Schedule 4.17
Liabilities And Obligations Not Disclosed In Financial Statements
<PAGE>
Baltimore, Maryland $2,000,000.00
February 10, 2000
REVOLVING LOAN PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, ACCOM, INC., a Delaware
corporation ("BORROWER"), promises to pay to the order of THE PROVIDENT BANK, an
Ohio Chartered Banking Institution, ("LENDER"), at the LENDER'S offices at One
East Fourth Street, Cincinnati, Ohio 45202 or at such other places as the holder
of this Promissory Note may from time to time designate, the principal sum of
Two Million Dollars ($2,000,000.00), or so much as may have been advanced to the
BORROWER as proceeds of the "REVOLVING LOAN," as such term is defined and
described in the Loan And Security Agreement ("AGREEMENT") of even date herewith
between the LENDER and the BORROWER, together with interest thereon at the rate
or rates hereafter specified until paid in full and any and all other sums which
may be owing to the holder of this Promissory Note by the BORROWER pursuant to
this Promissory Note. The following terms shall apply to this Promissory Note.
1. Interest Rate. Interest shall accrue on the unpaid principal balance of this
Promissory Note until paid in full at the annual fluctuating rate of interest
which shall equal the rate obtained by adding One and One-Quarter percent
(1.25%) to the "Prime Rate, " in effect from time to time. As used in this
Promissory Note, the term "PRIME RATE" means the rate of interest announced from
time to time by the LENDER as its prime commercial lending rate of interest, it
being understood that such announced rate bears no inference, implication,
representation, or warranty that such announced rate is charged to any
particular customer or customers of the LENDER. Changes in the applicable
interest rate shall be made as of the occurrence of each change in the PRIME
RATE.
2. Calculation Of Interest. Interest shall be calculated on the basis of a three
hundred sixty (360) days per year factor applied to the actual days on which
there exists an unpaid balance hereunder.
3. Repayment. Accrued and unpaid interest, plus any then due applicable late
payment charges or default interest, shall be paid in consecutive monthly
payments beginning on March 1, 2000, and continuing on the first calendar day of
each succeeding month until March 1, 2003, which is the final and absolute
maturity date of this Promissory Note, at which time all sums due hereunder that
remain unpaid, including principal, interest, charges and fees, shall be paid in
full.
4. Late Payment Charge. If any payment due hereunder, including any final
installment, is not received by the holder within fifteen (15) calendar days
after its due date, the BORROWER shall pay a late payment charge equal to five
percent (5%) of the amount then due (including both principal and interest). The
late payment charge shall be due whether or not the holder declares this
Promissory Note in default or accelerates and demands immediate payment of the
sums due hereunder. The existence of the right by the holder to receive a late
payment charge shall not constitute a grace period or provide any right in the
BORROWER to make a payment other than on its due date.
<PAGE>
5. Application Of Payments. All payments made hereunder shall be applied first
to late payment charges or other sums owed to the holder, next to accrued
interest, and then to principal, or in such other order or proportion as the
holder, in the holder's sole discretion, may elect from time to time.
6. Prepayment. The BORROWER may prepay this Promissory Note in whole or in part
at any time without premium or additional interest. All prepayments made upon
the unpaid principal balance of this Promissory Note shall be applied to the
unpaid principal balance in the inverse order of scheduled maturities.
7. Rights Upon Occurrence Of An Event Of Default. Upon the occurrence of an
"EVENT OF DEFAULT," as such term is defined in the AGREEMENT, the holder of this
Promissory Note shall have the following rights in addition to such other rights
and remedies as are authorized by the AGREEMENT or otherwise available to the
holder under applicable laws:
7.1 Acceleration. The holder of this Promissory Note, in the holder's
sole discretion and without notice or demand, may accelerate and declare due and
immediately owing the entire unpaid principal balance plus accrued interest and
all other sums payable to the holder in accordance with the terms of any of the
"LOAN DOCUMENTS," as such term is defined in the AGREEMENT.
7.2 Default Interest Rate. The holder of this Promissory Note, in the
holder's sole discretion and without notice or demand, may raise the rate of
interest accruing on the unpaid principal balance by two (2) percentage points
above the rate of interest otherwise applicable, independent of whether the
holder elects to accelerate the unpaid principal balance as a result of such
default, unless prior to the imposition of the default rate of interest, the
BORROWER cures such event to the satisfaction of the holder hereof. Any
individual waiver of the holder's right to impose the default rate of interest
shall not be considered a waiver of this section or any future right of the
holder to impose the default rate of interest pursuant to this Section.
7.3 Confession Of Judgment. The BORROWER authorizes any attorney
admitted to practice before any court of record in the United States to appear
on its behalf in any court in one or more proceedings, or before any clerk
thereof or prothonotary or other court official, and to confess judgment against
the BORROWER in favor of the holder of this Promissory Note in the full amount
due on this Promissory Note (including principal, accrued interest and any and
all charges, fees and costs) plus attorneys' fees equal to fifteen percent (15%)
of the amount due, plus court costs, all without prior notice or opportunity of
the BORROWER for prior hearing. The BORROWER agrees and consents that venue and
jurisdiction shall be proper in the Circuit Court of any County of the State of
Maryland or of Baltimore City, Maryland, or in the United States District Court
for the District of Maryland. The BORROWER waives the benefit of any and every
statute, ordinance, or rule of court which may be lawfully waived conferring
upon it any right or privilege of exemption, homestead rights, stay of
execution, or supplementary proceedings, or other relief from the enforcement or
immediate enforcement of a judgment or related proceedings on a judgment. The
authority and power to appear for and enter judgment against the BORROWER shall
<PAGE>
not be exhausted by one or more exercises thereof, or by any imperfect exercise
thereof, and shall not be extinguished by any judgment entered pursuant thereto;
such authority and power may be exercised on one or more occasions from time to
time, in the same or different jurisdictions, as often as the holder shall deem
necessary, convenient, or proper. In the event that the holder receives, as a
result of execution on a judgment confessed hereunder, attorneys' fees which
exceed the actual legal fees incurred by the holder in connection with the
unpaid balance due to the holder pursuant to this Promissory Note, then, upon
full and final payment of all other sums due and owing to the holder pursuant to
this Promissory Note and payment of the actual attorneys' fees incurred by the
holder, the holder shall remit such excess amount of attorneys' fees to the
BORROWER.
8. Expenses Of Collection And Attorneys' Fees. Should this Promissory Note be
referred to an attorney for collection, whether or not judgment has been
confessed or suit has been filed, the BORROWER shall pay all of the holder's
costs, fees and expenses, including attorneys' fees, resulting from such
referral.
9. Waiver Of Defenses. In the event any one or more holders of this Promissory
Note transfer this Promissory Note for value, the BORROWER agrees that all
subsequent holders of this Promissory Note who take for value and without actual
knowledge of a claim or defense of the BORROWER against a prior holder shall not
be subject to any claims or defenses which the BORROWER may have against a prior
holder, all of which are waived as to the subsequent holder, and that all such
subsequent holders shall have all rights of a holder in due course with respect
to the BORROWER even though the subsequent holder may not qualify, under
applicable law, absent this section, as a holder in due course. The BORROWER
shall retain all rights and claims which the BORROWER may have against prior
holders despite any such transfers and the waiver of defenses provided in this
section as to subsequent holders.
10. Waiver Of Protest. The BORROWER, and all other parties to this Promissory
Note, whether maker, indorser, or guarantor, waive presentment, notice of
dishonor and protest.
11. Extensions Of Maturity. All parties to this Promissory Note, whether maker,
indorser, or guarantor, agree that the maturity of this Promissory Note, or any
payment due hereunder, may be extended at any time or from time to time without
releasing, discharging, or affecting the liability of such party.
12. Manner And Method Of Payment. All payments called for in this Promissory
Note shall be made in lawful money of the United States of America. If made by
check, draft, or other payment instrument, such check, draft, or other payment
instrument shall represent immediately available funds. In the holder's
discretion, any payment made by a check, draft, or other payment instrument
<PAGE>
shall not be considered to have been made until such time as the funds
represented thereby have been collected by the holder. Should any payment date
fall on a non-banking day, the BORROWER shall make the payment on the next
succeeding banking day.
13. Maximum Rate Of Interest. Any provision contained in any of the LOAN
DOCUMENTS to the contrary notwithstanding, the holder of this Promissory Note
shall not be entitled to receive or collect, nor shall the BORROWER be obligated
to pay, interest hereunder in excess of the maximum rate of interest permitted
by the laws of any state determined to be applicable thereto or the laws of the
United States of America applicable to loans in such applicable state or states,
and if any provisions of this Promissory Note or of any of the other LOAN
DOCUMENTS shall ever be construed or held to permit or require the charging,
collection or payment of any amount of interest in excess of that permitted by
such laws applicable thereto, the provisions of this paragraph shall control and
shall override any contrary or inconsistent provision. The intention of the
parties is to at all times conform strictly with all applicable usury laws, and
other applicable laws regulating the rates of interest which may be lawfully
charged upon the credit facility evidenced by this Promissory Note. The interest
to be paid in accordance with the terms of this Promissory Note shall be held
subject to reduction to the amount allowed under any usury or other laws as now
or hereafter construed by the courts having jurisdiction, and any sums of money
paid in excess of the interest rate allowed by law shall be applied in reduction
of the principal amounts owing under this Promissory Note.
14. Notices. Any notice or demand required or permitted by or in connection with
this Promissory Note shall be given in the manner specified in the AGREEMENT for
the giving of notices under the AGREEMENT. Notwithstanding anything to the
contrary, all notices and demands for payment from the holder actually received
in writing by the BORROWER shall be considered to be effective upon the receipt
thereof by the BORROWER regardless of the procedure or method utilized to
accomplish delivery thereof to the BORROWER.
15. Assignability. This Promissory Note may be assigned by the LENDER or any
holder at any time or from time to time without notice to or consent from the
BORROWER.
16. Binding Nature. This Promissory Note shall inure to the benefit of and be
enforceable by the LENDER and the LENDER'S successors and assigns and any other
person to whom the LENDER or any holder may grant an interest in the BORROWER'S
obligations hereunder, and shall be binding and enforceable against the BORROWER
and the BORROWER'S successors and assigns.
17. Invalidity Of Any Part. If any provision or part of any provision of this
Promissory Note shall for any reason be held invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions of this Promissory Note and this Promissory Note shall be
construed as if such invalid, illegal or unenforceable provision or part thereof
<PAGE>
had never been contained herein, but only to the extent of its invalidity,
illegality, or unenforceability.
18. Choice Of Law. The laws of the State of Maryland (excluding, however,
conflict of law principles) shall govern and be applied to determine all issues
relating to this Promissory Note and the rights and obligations of the parties
hereto, including the validity, construction, interpretation, and enforceability
of this Promissory Note and its various provisions and the consequences and
legal effect of all transactions and events which resulted in the issuance of
this Promissory Note or which occurred or were to occur as a direct or indirect
result of this Promissory Note having been executed.
19. Consent To Jurisdiction; Agreement As To Venue. The BORROWER irrevocably
consents to the non-exclusive jurisdiction of the courts of the State of
Maryland and of the United States District Court for the District of Maryland,
if a basis for federal jurisdiction exists. The BORROWER agrees that venue shall
be proper in any circuit court of the State of Maryland selected by the LENDER
or in the United States District Court for the District of Maryland if a basis
for federal jurisdiction exists and waives any right to object to the
maintenance of a suit in any of the state or federal courts of the State of
Maryland on the basis of improper venue or of inconvenience of forum.
20. Unconditional Obligations. The BORROWER'S obligations under this Promissory
Note shall be the unconditional duty and obligation of the BORROWER and shall be
independent of any rights of set-off, recoupment or counterclaim which the
BORROWER might otherwise have against the holder of this Promissory Note. The
BORROWER shall pay absolutely the payments of principal, interest, fees and
expenses required hereunder, free of any deductions and without abatement,
diminution or set-off.
21. Seal And Effective Date. This Promissory Note is an instrument executed
under seal and is to be considered effective and enforceable as of the date set
forth on the first page hereof, independent of the date of actual execution and
delivery.
22. Tense; Gender; Defined Terms; Section Headings. As used herein, the singular
includes the plural and the plural includes the singular. A reference to any
gender also applies to any other gender. Defined terms are entirely capitalized
throughout. The section headings are for convenience only and are not part of
this Promissory Note.
23. Actions Against Lender. Any action brought by the BORROWER against the
LENDER which is based, directly or indirectly, on this Promissory Note or any
matter in or related to this Promissory Note, including but not limited to the
making of the loan evidenced hereby or the administration or collection thereof,
shall be brought only in the courts of the State of Maryland. The BORROWER may
not file a counterclaim against the LENDER in a suit brought by the LENDER
against the BORROWER in a state other than the State of Maryland unless under
<PAGE>
the rules of procedure of the court in which the LENDER brought the action the
counterclaim is mandatory, and not merely permissive, and will be considered
waived unless filed as a counterclaim in the action instituted by the LENDER.
The BORROWER agrees that any forum other than the State of Maryland is an
inconvenient forum and that a suit brought by the BORROWER against the LENDER in
a court of any state other than the State of Maryland should be forthwith
dismissed or transferred to a court located in the State of Maryland by that
Court.
24. Waiver Of Jury Trial. The BORROWER (by execution of this Promissory Note)
and the LENDER (by acceptance of this Promissory Note) agree that any suit,
action, or proceeding, whether claim or counterclaim, brought or instituted by
or against the BORROWER or the LENDER, or any successor or assign of the
BORROWER or the LENDER, on or with respect to this Promissory Note or any of the
other LOAN DOCUMENTS, or which in any way relates, directly or indirectly, to
the obligations of the BORROWER to the LENDER under this Promissory Note or any
of the other LOAN DOCUMENTS, or the dealings of the parties with respect
thereto, shall be tried only by a court and not by a jury. THE BORROWER AND THE
LENDER HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT,
ACTION, OR PROCEEDING.
IN WITNESS WHEREOF, the BORROWER has duly executed this Promissory Note
under seal as of the date first above written.
WITNESS/ATTEST: THE BORROWER:
ACCOM, INC.
A Delaware Corporation
By: /s/ DONALD K. MCCAULEY (SEAL)
- ---------------------------------- ----------------------
Name: Donald K. McCauley
Title: Senior Vice President
[Acknowledge on following page.]
<PAGE>
ACKNOWLEDGMENT
STATE OF Maryland, CITY/COUNTY OF Baltimore, TO WIT:
I HEREBY CERTIFY that on this 10th day of February, 2000 before me, the
undersigned Notary Public of the aforesaid State, personally appeared Donald K.
McCauley, and acknowledged himself to be the Senior VP of Accom, Inc., a
Delaware corporation, and that he, as such Senior VP, being authorized so to do,
executed the foregoing instrument for the purposes therein contained by signing
the name of Accom, Inc. by himself as Senior VP.
IN WITNESS MY Hand and Notarial Seal.
LAURA BELL (SEAL)
----------------
NOTARY PUBLIC
My Commission Expires:
3/1/2004
EXHIBIT 21.1
Subsidiaries of the Company
Accom Europe Ltd.
Accom Asia-Pacific
Accom Virtual Studio, Inc.
Accom Virtual Studio (Germany) GmbH
ELSET Electronic-Set GmbH
Accom International, Inc.
37
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 January
22, 2000, 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
March 30, 2000
38
<PAGE>
<TABLE>
SCHEDULE II
ACCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In thousands)
<CAPTION>
Balance at Charges to Balance at
Beginning of Cost and End of
Period Expenses Deductions * Other Adjustments Period
------ -------- ------------ ----------------- ------
<S> <C> <C> <C> <C> <C>
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 -- 2,630** 2,896
Year ended December 31, 1999 ........................ 2,896 -- 733 -- 2,163
<FN>
* All deductions represent write-offs of bad debt.
** This adjustment was made to increase reserves as part of the acquisition
of Scitex Digital Video in December 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 328,000
<SECURITIES> 0
<RECEIVABLES> 3,779,000
<ALLOWANCES> (2,163,000)
<INVENTORY> 5,112,000
<CURRENT-ASSETS> 7,636,000
<PP&E> 6,402,000
<DEPRECIATION> (4,059,000)
<TOTAL-ASSETS> 12,035,000
<CURRENT-LIABILITIES> 7,436,000
<BONDS> 0
0
0
<COMMON> 23,571,000
<OTHER-SE> (22,233,000)
<TOTAL-LIABILITY-AND-EQUITY> 12,035,000
<SALES> 32,969,000
<TOTAL-REVENUES> 32,969,000
<CGS> 15,568,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,570,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 414,000
<INCOME-PRETAX> (2,583,000)
<INCOME-TAX> 12,000
<INCOME-CONTINUING> (2,595,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,595,000)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
