UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended June 30, 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 (IRS Employer
incorporation or organization) Identification Number)
1490 O'Brien Drive
Menlo Park, California 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 328-3818
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes ___ No _X_
As of August 3, 1999, 10,123,247 shares of the Registrant's common stock, $0.001
par value, were outstanding.
ACCOM, INC.
FORM 10-Q For the Quarter Ended June 30, 1999
INDEX
Page
----
Facing sheet 1
Index 2
Part I. Financial Information (unaudited)
Item 1. a) Condensed consolidated interim balance sheets at June 30, 1999 and December 31, 1998 3
b) Condensed consolidated interim statements of operations for the three and six month 4
periods ended June 30, 1999 and June 30, 1998
c) Condensed consolidated interim statements of cash flows for the six month periods
ended June 30, 1999 and June 30, 1998 5
d) Notes to condensed consolidated interim financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risks 15
Part II. Other Information 16
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
Signature 19
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACCOM, INC.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(In thousands, except per share data)
As of
----------------------------
June 30, December 31,
1999 1998
---- ----
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 977 $ --
Accounts receivable, net 4,140 3,578
Inventories 3,589 5,345
Other current assets 1,094 535
-------- --------
Total current assets 9,800 9,458
Property and equipment, net 2,660 3,299
Intangibles, net 2,974 3,247
Restricted cash -- 1,132
Other assets 80 77
-------- --------
Total assets $ 15,514 $ 17,213
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Bank borrowings - line of credit $ -- $ 3,916
Current portion of notes payable 1,765 900
Accounts payable 2,405 2,108
Accrued liabilities 3,217 3,823
Customer deposits 969 1,285
Deferred revenue 15 87
-------- --------
Total current liabilities 8,371 12,119
Long-term loans and notes payable, less current portion 3,299 1,165
Stockholders' equity:
Common stock, $0.001 par value; 20,233 shares authorized;
10,123 and 10,121 shares issued and outstanding on
June 30, 1999 and December 31, 1998, respectively 24,197 24,197
Notes receivable from stockholders (630) (630)
Accumulated deficit (19,723) (19,638)
-------- --------
Total stockholders' equity 3,844 3,929
-------- --------
Total liabilities and stockholders' equity $ 15,514 $ 17,213
======== ========
<FN>
Note: The condensed consolidated balance sheet at December 31, 1998, has been derived from the audited annual consolidated
balance sheet at that date but does not include all of the information and footnotes required by generally accepted
accounting principles for a complete consolidated balance sheet.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
</FN>
-3-
ACCOM, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended, Six Months Ended,
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 8,348 $ 3,028 $ 17,886 $ 6,101
Cost of sales 3,870 1,546 7,929 2,909
-------- -------- -------- --------
Gross profit 4,478 1,482 9,957 3,192
-------- -------- -------- --------
Operating expenses:
Research and development 1,836 773 3,781 1,608
Marketing and sales 2,339 1,362 4,439 2,542
General and administrative 840 340 1,647 646
-------- -------- -------- --------
Total operating expenses 5,015 2,475 9,867 4,796
-------- -------- -------- --------
Operating income (loss) (537) (993) 90 (1,604)
Interest and other income (expenses), net (62) 41 (173) 81
-------- -------- -------- --------
Loss before provision for income taxes (599) (952) (83) (1,523)
Provision for income taxes -- -- 2 5
-------- -------- -------- --------
Net loss $ (599) $ (952) $ (85) $ (1,528)
======== ======== ======== ========
Net loss per share - basic and diluted $ (0.06) $ (0.14) $ (0.01) $ (0.23)
======== ======== ======== ========
Shares used in computation of net
loss per share - basic and diluted 10,123 6,672 10,123 6,671
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
</FN>
-4-
ACCOM, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
----------------
June 30,
------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (85) $(1,530)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 821 293
Changes in operating assets and liabilities:
Accounts receivable (562) 1,143
Inventories 1,756 (371)
Other current assets (559) 90
Other assets (3) --
Accounts payable 297 (518)
Accrued liabilities (606) (211)
Customer deposits (316) (9)
Deferred revenue (72) (49)
------- -------
Net cash provided by (used in) operating activities 671 (1,162)
------- -------
Cash flows from investing activities:
Expenditures for property and equipment (256) (233)
Proceeds from disposal/reclassification of property and equipment 347 --
------- -------
Net cash provided by (used in) investing activities 91 (233)
Cash flows from financing activities:
Repayment of line of credit (3,916) --
Repayment of notes payable (300) (10)
Proceeds from long-term notes 3,299 --
Issuance of common stock -- 13
Purchase of common stock -- (4)
Restricted cash 1,132 --
------- -------
Net cash provided by (used in) financing activities 215 (1)
------- -------
Net increase (decrease) in cash and cash equivalents 977 (1,396)
Cash and cash equivalents at beginning of period -- 5,640
------- -------
Cash and cash equivalents at end of period $ 977 $ 4,244
======= =======
<FN>
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
</FN>
-5-
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Preparation
The condensed consolidated interim balance sheet as of June 30, 1999,
the condensed consolidated interim statements of operations for the three and
six month periods ended June 30, 1999 and 1998, and the condensed consolidated
interim statements of cash flows for the six month periods ended June 30, 1999
and 1998 have been prepared by the Company and are unaudited. In the opinion of
management, all adjustments (consisting of normal accruals) necessary to present
fairly the financial position as of June 30, 1999 and the results of operations
and cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
These condensed consolidated interim financial statements should be
reviewed in conjunction with the audited consolidated annual financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the three months ended December 31, 1998. The results of operations for
the three and six month periods ended June 30, 1999, are not necessarily
indicative of the operating results for any future period.
Note 2. Comprehensive Income
Comprehensive loss is equal to net loss for the three and six month
periods ended June 30, 1999 and 1998.
Note 3. Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
1999 1998
---- ----
Purchased parts and materials $ 1,044 $ 2,399
Work-in-process 891 394
Finished goods 175 151
Demonstration inventory 1,479 2,401
----------------------------- -----------------------------
$ 3,589 $ 5,345
============================= =============================
Note 4. Debt
The Company has a revolving line of credit ("line") with LaSalle
Business Credit, Inc. ("LBC"). The line of credit was originally established in
December, 1998. The line provides for borrowings subject to the level of
eligible accounts receivable and inventories. In July, 1999, certain aspects of
the line were modified in an amendment to the agreement between the Company and
LBC. Among the changes were a reduction in the amount of the line from $7.5
million to $4.0 million, a reduction in the borrowing base, an increase in the
interest rate by 50 basis points, and changes in certain financial covenants. As
of June 30, 1999, the Company had availability of $4.5 million under the line,
and there were no borrowings outstanding under the line.
-6-
Indebtedness under the line of credit accrues interest at LBC's prime
rate plus 175 basis points. The term of the original agreement which established
the line of credit is three years and is renewable on a yearly basis thereafter.
The revolving loans are secured by all assets of the Company.
Borrowings under the line are subject to compliance with certain
financial covenants. The Company is currently in compliance with these covenants
(as amended).
On March 12, 1999, the Company completed a private placement of $3.5
million in senior subordinated convertible notes with a group of investors. The
notes have a coupon rate of 6% per year, mature in the year 2004, and are
convertible, at any time, into shares of Accom common stock at a price of $1.30
per share. The proceeds from these notes were used to pay the balance
outstanding on the LBC line of credit at the time the proceeds were received.
In conjunction with the sale of convertible notes, the Company and the
investors entered into an Investors Rights Agreement. The Investors Right
Agreement grants the investors, among other things, certain rights with respect
to the common stock of the Company issuable upon conversion of the notes.
The Company has two subordinated promissory notes of $750,000 and
$1,315,000 issued to Scitex Digital Video as partial consideration for the
purchase of certain assets and liabilities and the business of Scitex Digital
Video in December, 1998. 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 100 basis points at the beginning of every fiscal
quarter, starting July 1, 1999.
Note 5. Segment Information
Management has organized the business into 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 (in thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
Market 1999 1998 1999 1998
------ ---- ---- ---- ----
Production $ 744 $ 1,405 $ 1,968 $ 3,243
Post Production 4,265 592 9,644 1,527
Distribution 2,316 899 4,203 967
Other 1,023 132 2,071 364
------------- -------------- ------------- -------------
$ 8,348 $ 3,028 $ 17,886 $ 6,101
============= ============== ============= =============
Substantially all of the Company's assets are in the United States. All sales to
external customers are accepted and approved in the United States.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Company's Consolidated Financial Statements as of December 31, 1998 and
September 30, 1998 and 1997 and for the three-month periods ended December 31,
1998 and 1997 and the twelve-month periods ended September 30, 1998, 1997, and
1996, included in its Transition Report on Form 10-K for the
Transition Period from October 1, 1998 to December 31, 1998.
Additionally, the following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements. 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 Company's Transition Report on Form 10-K for the Transition Period from
October 1, 1998 to December 31, 1998, under the sections in Item 1 entitled
"Manufacturing and Suppliers," "Competition," "Proprietary Rights and Licenses"
and "Additional Factors That May Affect Future Results," as well as other
factors, could affect future results and have affected the Company's actual
results in the past 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-Q report. Forward-looking statements can be
identified by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words.
Overview
Accom designs, manufactures, sells, and supports a complete line of
digital video signal processing, editing, and disk recording, and virtual set
tools, primarily for the worldwide, professional video production, post
production and live broadcasting, and computer video production and
post-production, marketplaces. The Company's systems are designed to be used by
video professionals to create, edit and broadcast high quality video content
such as television shows, commercials, news, music videos and video games.
The following table summarizes the Company's products and the primary
marketplaces they address:
- ----------------------------------------------------------------------------------------------------------------
MARKETS / Product Primary Applications
- ----------------------------------------------------------------------------------------------------------------
PRODUCTION:
- ----------------------------------------------------------------------------------------------------------------
Virtual Set Production Tools
- ----------------------------------------------------------------------------------------------------------------
ELSET(R) Virtual Set Virtual sets for high-end video content creation
Production in real time
- ----------------------------------------------------------------------------------------------------------------
Computer Graphics and Animation Digital Disk Recorders
- ----------------------------------------------------------------------------------------------------------------
WSD(R)/2Xtreme Desktop computer graphics and animation production
- ----------------------------------------------------------------------------------------------------------------
POST PRODUCTION:
- ----------------------------------------------------------------------------------------------------------------
Digital Signal Processors
- ----------------------------------------------------------------------------------------------------------------
8150 Digital Switcher Digital switcher for on-line post production editing
for commercials and long form television programs
- ----------------------------------------------------------------------------------------------------------------
Digital Editors
- ----------------------------------------------------------------------------------------------------------------
Axial(R) 3000 Edit controller for on-line post production editing
for commercials and long form television programs
Sphere family of Integrated non-linear editing workstation for long and
products short form programs and commercials
- ----------------------------------------------------------------------------------------------------------------
Video Digital Disk Recorders
- ----------------------------------------------------------------------------------------------------------------
APR(TM)/Attache On-line post production editing and effects and on-air
playback of graphics for broadcast
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTION
- ----------------------------------------------------------------------------------------------------------------
Digital Signal Processors
- ----------------------------------------------------------------------------------------------------------------
Dveous(TM) and Brutus Digital Video Effects systems for news and sports
- ----------------------------------------------------------------------------------------------------------------
Digital News Graphics and Clip Servers
- ----------------------------------------------------------------------------------------------------------------
Axess(TM) Creation and broadcast distribution of news graphics
and short video segments
- ----------------------------------------------------------------------------------------------------------------
-8-
The Company's revenues are currently derived primarily from product
sales. The Company generally recognizes revenue upon product shipment. If
significant obligations exist at the time of shipment, revenue recognition is
deferred until such obligations are met.
The Company's gross margin has historically fluctuated from quarter to
quarter. Gross margins are dependent on the mix of higher and lower-priced
products having various gross margin percentages and the percentage of sales
made through direct and indirect distribution channels.
Results of Operations
Three Months Ended June 30, 1999 and June 30, 1998
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the three months ended June 30, 1999 and
1998 as reported (dollar amounts in thousands):
Three Months Ended
June 30, Increase (Decrease)
---------------------- -------------------------
1999 1998 Amount Percent
---- ---- ------ -------
Net sales $ 8,348 $ 3,028 $ 5,320 175.7%
Cost of sales 3,870 1,546 2,324 150.3%
------- ------- ------- -----
Gross profit 4,478 1,482 2,996 202.2%
Operating expenses:
Research and development 1,836 773 1,063 137.5%
Marketing and sales 2,339 1,362 977 71.7%
General and administrative 840 340 500 147.1%
------- ------- ------- -----
Total operating expenses 5,015 2,475 2,540 102.6%
------- ------- ------- -----
Operating loss (537) (993) 456 45.9%
Interest and other income (expenses), net (62) 41 (103) (251.2%)
------- ------- ------- -----
Net loss $ (599) $ (952) 353 37.1%
======= ======= ======= =====
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the three months ended June 30, 1999 and
1998, as a percentage of net sales, as reported:
Three Months Ended Increase
June 30, (Decrease)
-------- ----------
1999 1998
---- ----
Net sales 100.0 % 100.0 % -- %
Cost of sales 46.4 % 51.1 % (4.7)%
---------------------------------
Gross margin 53.6 % 48.9 % 4.7 %
Operating expenses:
Research and development 22.0 % 25.5 % (3.5)%
Marketing and sales 28.0 % 45.0 % (17.0)%
General and administrative 10.1 % 11.2 % (1.1)%
---------------------------------
Total operating expenses 60.1 % 81.7 % (21.6)%
---------------------------------
Operating loss (6.5)% (32.8)% 26.3 %
Interest and other income (expenses), net (0.7)% 1.4 % (2.1)%
---------------------------------
Net loss (7.2)% (31.4)% 24.2 %
=================================
Net sales. The increase in net sales during the three months ended June
30, 1999, from levels for the same period in 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 Scitex Digital Video acquisition. International
sales for the three months ended June 30, 1999 and 1998, represented 32.6% and
39.7% of net sales, respectively.
-9-
The following table presents net sales dollar volume for the three
months ended June 30, 1999 and 1998, by market and related percentages of total
net sales (dollar amounts in thousands):
Three Months Ended
June 30,
--------------------------------------------------------
1999 1998
--------------------- ---------------------
Marketplace Amount Percent Amount Percent
----------- ------ ------- ------ -------
Production $ 744 8.9% $ 1,405 46.4%
Post Production 4,265 51.1% 592 19.6%
Distribution 2,316 27.7% 899 29.7%
Other 1,023 12.3% 132 4.3%
----------------------------- -----------------------------
$ 8,348 100.0% $ 3,028 100.0%
============================= =============================
Cost of sales. Cost of sales, as a percentage of sales, decreased for
the three months ended June 30, 1999, from levels for the three months ended
June 30, 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
three months ended June 30, 1999, increased over levels for the same period in
1998 primarily due to increases in headcount, 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 three months
ended June 30, 1999 increased over levels for the three months ended June 30,
1998, primarily due to increases in headcount and related overhead expenses,
sales commission expenses, and travel 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 three months ended June 30, 1999 from levels for the same
period in 1998 was primarily due to increases in headcount and related overhead
expenses, consultant fees, 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
three months ended June 30, 1999, decreased over levels for the three months
ended June 30, 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.
-10-
Results of Operations
Six Months Ended June 30, 1999 and June 30, 1998
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the six months ended June 30, 1999 and 1998
as reported (dollar amounts in thousands):
Six Months Ended
June 30, Increase (Decrease)
-------- -------------------
1999 1998 Amount Percent
---- ---- ------ -------
Net sales $ 17,886 $ 6,101 $ 11,785 193.2%
Cost of sales 7,929 2,909 5,020 172.6%
-------- -------- -------- -----
Gross profit 9,957 3,192 6,765 211.9%
Operating expenses:
Research and development 3,781 1,608 2,173 135.1%
Marketing and sales 4,439 2,542 1,897 74.6%
General and administrative 1,647 646 1,001 155.0%
-------- -------- -------- -----
Total operating expenses 9,867 4,796 5,071 105.7%
-------- -------- -------- -----
Operating income (loss) 90 (1,604) 1,694 105.6%
Interest and other income (expenses), net (173) 81 (254) (313.6%)
-------- -------- -------- -----
Loss before provision for income taxes (83) (1,523) 1,440 94.6%
Provision for income taxes 2 5 (3) (60.0%)
-------- -------- -------- -----
Net loss $ (85) $ (1,528) 1,443 94.4%
======== ======== ======== =====
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the six months ended June 30, 1999 and
1998, as a percentage of net sales, as reported:
Six Months Ended Increase
March 31, (Decrease)
--------- ----------
1999 1998
---- ----
Net sales 100.0 % 100.0 % -- %
Cost of sales 44.3 % 47.7 % (3.4)%
-------------------------------
Gross margin 55.7 % 52.3 % 3.4 %
Operating expenses:
Research and development 21.2 % 26.3 % (5.1)%
Marketing and sales 24.8 % 41.7 % (16.9)%
General and administrative 9.2 % 10.6 % (1.4)%
-------------------------------
Total operating expenses 55.2 % 78.6 % (23.4)%
-------------------------------
Operating income (loss) 0.5 % (26.3)% 26.8 %
Interest and other income (expenses), net (1.0)% 1.3 % (2.3)%
-------------------------------
Net loss (0.5)% (25.0)% 24.5 %
===============================
Net sales. The increase in net sales during the six months ended June
30, 1999, from levels for the same period in 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 Scitex Digital Video acquisition. International
sales for the six months ended June 30, 1999 and 1998, represented 34.0% and
45.1% of net sales, respectively.
The following table presents net sales dollar volume for the six months
ended June 30, 1999 and 1998, by market and related percentages of total net
sales (dollar amounts in thousands):
-11-
Six Months Ended
June 30,
-------------------------------------------------------
1999 1998
--------------------- ---------------------
Marketplace Amount Percent Amount Percent
----------- ------ ------- ------ -------
Production $ 1,968 11.0% $ 3,243 53.2%
Post Production 9,644 53.9% 1,527 25.0%
Distribution 4,203 23.5% 967 15.8%
Other 2,071 11.6% 364 6.0%
----------------------------- -----------------------------
$ 17,886 100.0% $ 6,101 100.0%
============================= =============================
Cost of sales. Cost of sales, as a percentage of sales, decreased for
the six months ended June 30, 1999, from levels for the six months ended June
30, 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 six
months ended June 30, 1999, increased over levels for the same period in 1998
primarily 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 six months
ended June 30, 1999, increased over levels for the six months ended June 30,
1998, primarily due to increases in headcount and related overhead expenses,
expenses for consultants and temporary employees, sales commission expenses, and
trade show 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 six months ended June 30, 1999, from levels for the same period
in 1998 was primarily due to increases in headcount and related overhead
expenses, expenses for consultants and temporary employees, 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
six months ended June 30, 1999, decreased over levels for the six months ended
June 30, 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.
-12-
Liquidity and Capital Resources
Since inception, the Company has financed its operations and
expenditures for property and equipment through the sale of capital stock,
borrowings under a bank line of credit, issue of senior subordinated convertible
notes, and term loans. As of June 30, 1999, the Company had $977,000 of cash and
cash equivalents.
Operating activities provided $671,000 in net cash in the six months
ended June 30, 1999 and used $1.2 million in net cash in the six months ended
June 30, 1998. Net cash provided by operations in the six months ended June 30,
1999, was due primarily to a decrease in inventories partially offset by an
increase in accounts receivable and other current assets and a decrease in other
accrued liabilities. Proceeds from the issue of long-term, senior subordinated
convertible notes, together with cash provided by operating activities, were
used in financing activities for the repayment of amounts borrowed previously
under a line of credit. Net cash used by operations in the six months ended June
30, 1998, was primarily due to the net loss, an increase in inventories, and a
decrease in accounts payable partially offset by a decrease in accounts
receivable. Additional cash was used in investing activities for the purchase of
property and equipment.
On December 10, 1998, the Company signed an agreement with LaSalle
Business Credit, Inc., a member of the ABN AMRO group, for a revolving line of
credit ("line"). The agreement was amended on March 11, 1999 and July 23, 1999.
The line of credit provides for borrowings subject to the level of eligible
accounts receivable and inventories and requires compliance with certain
financial covenants. The line is secured by all the assets of the Company. Under
the terms of the July, 1999, amendment to the original agreement between the
Company and LaSalle Business Credit, the amount of the line was reduced from
$7.5 million to $4.0 million, the borrowing base was reduced, the interest rate
charged on borrowings against the line was increased by 50 basis points, and
certain financial covenants were changed. As of June 30, 1999, the Company was
in compliance with the amended financial covenants and had no borrowings
outstanding under the line.
On March 12, 1999, the Company completed a private placement of $3.5
million in senior subordinated convertible notes with a group of investors. The
notes have a coupon rate of 6% per year, mature in 2004, and are convertible, at
any time, into shares of Accom common stock at a price of $1.30 per share.
Proceeds from the private placement were used to pay the balance on the line of
credit with LaSalle Business Credit that was outstanding at the time the
proceeds were received.
Based on current revenue levels, the Company believes that its existing
cash and cash equivalents will be sufficient to meet its cash requirements for
at least the next twelve months. Although operating activities may provide cash
in certain periods, to the extent the Company grows in the future, its operating
and investing activities may use cash and, consequently, such growth may require
the Company to obtain additional sources of financing. There can be no assurance
that any necessary additional financing will be available to the Company on
commercially reasonable terms, if at all.
Status of Progress in Becoming Year 2000 Compatible
The "Year 2000 Issue" is typically the result of software being
written using two digits rather than four digits to define the applicable year.
If the Company's software with date-sensitive functions is not Year 2000
compliant, it may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, interruptions in
manufacturing operations, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
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The Company has made a preliminary review of the most pertinent Year
2000 issues which have been identified as potentially having a material impact
on the Company's operations and financial condition. More comprehensive study in
certain areas is still to be undertaken.
The Company has identified three areas relating to Year 2000 issues
which may materially affect the Company's business: 1) Information Technology,
addressing internal software and business systems; 2) the Company's Products;
and 3) Third Party, addressing the preparedness of suppliers.
Information Technology Program: Internal applications systems such as
inventory and financial accounting software, computer network hardware and
software, and software applications programs may have Year 2000 problems. As a
result of the acquisition of Scitex Digital Video (SDV) on December 10, 1998,
the Company decided to use the Man-Man software already in use at SDV as its
main inventory and accounting software. The Man-Man software currently in use is
version 10.2 which is not Year 2000 compliant. Version 11.3, an upgrade of this
software, is Year 2000 compliant and has been procured by the Company by renewal
of its Man-Man license, at a cost of $67,000. Total cost to implement this
upgrade is estimated to be less than $100,000. As of June 30, 1999, at least
$20,000 of expected costs had been identified which related to replacement of
software applications and operating systems (which currently are readily
available for licensing by the Company) which the Company anticipates will take
place in the third quarter of 1999. Related to these software upgrades, hardware
on certain computers may also need to be replaced to make them compatible with
the upgraded software. The estimated cost of replacing such hardware is $30,000.
If required modifications to existing software and hardware and conversions to
new software are not made, or are not completed in a timely way, the Year 2000
Issue could have a material impact on the operations of the Company due to the
inability to accurately and effectively track inventory and other financial
results.
Product Readiness Program: Certain products the Company sells have been
identified to have Year 2000 problems which must be corrected to permit smooth
operation by the user. The Year 2000 solution consists of software changes which
are transmitted to customers by way of CD-ROMs and floppy diskettes. These
changes have been completed and transmitted to all customers on the Company's
customer list. These changes are also available to customers who are not on the
Company's current customer list. The Company believes the costs associated with
these activities is immaterial given the relatively low cost of the media and
small amount of internal labor utilized. The Company is currently assessing its
exposure to contingencies related to the Year 2000 Issue for the products it has
sold; however, it does not expect these contingencies to have a material impact
on the operations of the Company.
Third Party Program: The Company relies on numerous vendors in the
course of operating the business. If these vendors encounter Year 2000 problems
which impact their ability to deliver goods and services to the Company, the
Company's business might be materially and adversely affected. The Company is in
the process of conducting a comprehensive survey of its vendors to determine
their Year 2000 readiness and will complete this survey in the third quarter of
1999. The Company has not yet determined the extent to which the Company's
operations are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. In order to protect against the acquisition of additional
non-compliant products, the Company will require that certain hardware and
software suppliers providing goods and services to the Company after June, 1999,
warrant that products sold or licensed to the Company are Year 2000 compliant.
Finally, the Company is also vulnerable to external forces that might generally
affect industry and commerce, such as utility or transportation company Year
2000 compliance failures and related service interruptions.
The Company anticipates addressing and remedying the critical Year 2000
issues by the end of the third quarter of 1999, which is prior to any
anticipated impact on its operating systems and expects the Year 2000 project to
continue beyond the year 2000 with respect to resolution of non-critical issues.
These dates are contingent upon the timeliness and accuracy of software and
hardware upgrades from vendors, adequacy and quality of resources available to
work on completion of the project and any other
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unforeseen factors. There can be no assurance that the Company will be
successful in its efforts to resolve any Year 2000 issues and to continue
operations in the year 2000. The failure of the Company to successfully resolve
such issues could result in a shutdown of some or all of the Company's
operations, which would have a material adverse effect on the Company.
Contingency Plans.
The Company has not yet developed a contingency plan to address
situations that may result if the Company is unable to achieve Year 2000
readiness of its critical operations but anticipates developing such a plan
during the third quarter of 1999. There can be no assurance that the Company
will be able to develop a contingency plan that will adequately address issues
that may arise in the year 2000. The failure of the Company to develop and
implement, if necessary, an appropriate contingency plan could have a material
impact on the operations of the Company.
Costs.
The total expense of the Year 2000 project is currently estimated to be
less than $150,000 which is not material to the Company's business operations or
financial condition. The Company has not yet fully estimated all the Year 2000
costs, in particular, those costs associated with the replacement of software
running on personal computers and the costs of modifying, testing and
distributing updates to ensure its own products are Year 2000 compliant. The
costs incurred to date have not been material.
If the Company or its suppliers fail to remedy any Year 2000 issues,
the most likely worst case scenario would include one or a combination of the
following events occurring: interruption of electricity which would prevent the
manufacturing and testing of products; collapse of financial and communications
networks which would hinder the payment and collection of invoices as well as
basic business transactions conducted over the telephone or the Internet;
shortages of supplies and parts resulting from "panic" buying or hoarding which
would adversely affect the manufacturing of products as well as ongoing research
and development; malfunctioning of date-sensitive parts and assemblies used in
products the Company manufactures and develops which would render those parts
inoperable. Any of these occurrences could result in the Company incurring
material costs and losing revenue. At this time, the Company is not able to
estimate the extent or duration of the events discussed above or to quantify the
effect they would have on the Company's future revenues and results from
operations.
The expenses of the Year 2000 project are being funded through
operating cash flows.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. There can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Accom develops its technology in the United States and sells its
products primarily in North America, Europe, and the Far East. As a result, the
Company's financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
As all of the Company's sales are currently made in U.S. dollars, a
strengthening of the dollar could make the Company's products less competitive
in foreign markets. The Company's interest expense on short-term notes payable
are sensitive to changes in the general level of interest rates. Due to the
nature of the Company's debts, the Company has concluded that there is currently
no material market risk exposure. Therefore, no quantitative tabular disclosures
have been presented.
-15-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Effective May 26, 1999, the Board of Directors unanimously voted to
amend the Company's Bylaws to (a) eliminate the ability of stockholders
to call a special meeting of stockholders; and (b) require stockholders
to give written notice of any proposal or the nomination of a director
to the Secretary of the Company not less than 90 days nor more than 120
days prior to the anniversary date of the prior year's Annual Meeting
of Stockholders; provided, however, that in the event that the date of
the Annual Meeting of Stockholders is more than 30 days before or more
than 60 days after such anniversary date, notice by the stockholder
must be received not less than 90 days nor more than 120 days prior to
the Annual Meeting of Stockholders (or not less than ten days after the
first public announcement of the date of the meeting, if later). These
provisions may have the effect of delaying or precluding a nomination
for the election of directors or of delaying or precluding any other
business of a particular meeting if the proper procedures are not met.
The provisions may also discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempt to obtain control of the Company.
Effective July 20, 1999, pursuant to the prior approval of the
Company's stockholders at the Annual Meeting of Stockholders and of the
Company's Board of Directors, the Amended and Restated Certificate of
Incorporation of the Company (the "Certificate") was amended as
described below. First, the Certificate was amended to increase the
number of authorized shares of the Company's Common Stock from
20,233,497 to 40,000,000, and the total number of shares of authorized
stock from 22,233,497 to 42,000,000. Second, the Certificate was
amended to adopt classified board provisions to (i) implement a
classified board of directors divided into three classes of directors,
with the term of office of one of the three classes of directors
expiring each year and with each class being elected for a three-year
term, (ii) provide that only the Board of Directors, and not the
stockholders, may set by resolution the number of directors within the
specified range of five (5) to nine (9), (iii) provide that only the
Board of Directors may fill vacancies on the Board (unless no Board
members remain) and that any director appointed to fill a vacancy on
the Board of Directors will serve for the remainder of the full term of
the class in which the vacancy occurred, and (iv) require a vote of 66
2/3% of the Company's stockholders to amend or repeal the foregoing
classified board provisions (the "Classified Board Provisions"). Third,
the Certificate was amended to provide that the Company elects to be
governed by the business combination statute set forth in Section 203
of the Delaware General Corporation Law.
In addition, effective July 20, 1999, pursuant to the approvals
described above, the Company's Bylaws were amended to conform with the
Classified Board Provisions.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders
On July 20, 1999, the Company held its annual meeting of stockholders.
At such meeting, the Company's stockholders approved the following
items by the following votes:
1. The election of the following directors with two directors serving
a three-year term, two directors serving a two-year term, and two
directors serving a one-year term:
Nominee Term For Withheld Abstain
----------------------------------- -------------- --------------- -------------- ---------------
Junaid Sheikh 3 years 9,896,422 0 17,072
Lionel M. Allan 1 year 9,896,422 0 17,072
Thomas E. Fanella 2 years 9,896,422 0 17,072
David A. Lahar 2 years 9,896,422 0 17,072
Eugene M. Matalene, Jr. 1 year 9,896,422 0 17,072
Michael Luckwell 3 years 9,896,422 0 17,072
2. An amendment to the Company's Restated Certificate of
Incorporation increasing the number of authorized shares of Common
Stock from 20,233,497 to 40,000,000 and the number of total
authorized shares of capital stock from 22,233,497 to 42,000,000
For 9,811,290
Against 96,204
Abstain 6,000
3. An amendment to the Company's Restated Certificate of
Incorporation adopting classified provisions and an amendment to
the Company's Bylaws to conform with the classified Board
provisions
For 6,201,247
Against 1,057,670
Abstain 25,923
Broker Non-Vote 2,628,654
4. An amendment to the Company's Certificate of Incorporation to
provide that the Company elects to be governed by the business
combination statute set forth in Section 203 of the Delaware
General Corporation Law
For 6,242,294
Against 1,022,079
Abstain 20,467
Broker Non-Vote 2,628,654
5. An amendment to the Company's 1995 Stock Incentive/Stock Issuance
Plan
For 7,207,341
Against 74,533
Abstain 2,966
Broker Non-Vote 2,628,654
6. Ratification of the appointment of Ernst & Young LLP as
independent auditors of the Company for the Company's 1999
calendar year
For 9,911,009
Against 1,150
Abstain 1,335
-17-
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.1 Certificate of Amendment of the Bylaws of the
Company, dated as of May 26, 1999.
4.2 Certificate of Amendment of Certificate of
Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on July
20, 1999
4.3 Certificate of Amendment of the Bylaws of the
Company, dated as of July 20, 1999
10.1 Second Amendment to Loan and Security Agreement,
dated as of July 23, 1999, between the Company and
LaSalle Business Credit, Inc.
10.2 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
10.3 Amended and Restated Secured Promissory Note, dated
as of June 20, 1999, issued to Phillip Bennett in the
principal amount of $500,000
27.1 Financial Data Schedule (EDGAR filed version only)
(b) Reports on Form 8-K.
On December 23, 1998, the Company filed a Current Report on
Form 8-K to report the Company's acquisition of the assets of
Scitex Digital Video, Inc. ("Scitex") and certain of Scitex's
affiliates as well as the details of the financing the Company
obtained related to such acquisition, including a loan
agreement and a sale of common stock. The Company did not file
the audited historical financial statements of the acquired
business and the pro forma financial statements of the
combined businesses required to be filed as an amendment to
the Form 8-K within 60 days after the original filing due date
because the audited financial statements for Scitex Digital
Video did not exist. The Company currently is in the process
of arranging for the preparation of the audited financials of
Scitex Digital Video and will file the financial statements
required by such Form 8-K as soon as practicable after the
audit is complete.
-18-
SIGNATURE
Pursuant to the requirements 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.
ACCOM, INC.
By: /s/ JUNAID SHEIKH
-----------------------------------
(Junaid Sheikh)
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ DONALD K. McCAULEY
------------------------------------
(Donald K. McCauley)
Senior Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 12, 1999
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