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 September 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 November 2, 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 September 30, 1999
INDEX
Page
Facing sheet 1
Index 2
Part I. Financial Information (unaudited)
Item 1. a) Condensed consolidated interim balance sheets at September
30, 1999 and December 31, 1998 3
b) Condensed consolidated interim statements of operations for
the three and nine month periods ended September 30, 1999
and September 30, 1998 4
c) Condensed consolidated interim statements of cash flows for
the nine month periods ended September 30, 1999 and
September 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 16
Part II. Other Information 17
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
Signature 18
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACCOM, INC.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
As of
----------------
September 30, December 31,
1999 1998
---- ----
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 517 $ --
Accounts receivable, net 3,606 3,578
Inventories 4,585 5,345
Other current assets 1,176 535
-------- --------
Total current assets 9,884 9,458
Property and equipment, net 2,364 3,299
Intangibles, net 2,838 3,247
Restricted cash -- 1,132
Other assets 70 77
-------- --------
Total assets $ 15,156 $ 17,213
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Bank borrowings - line of credit $ -- $ 3,916
Current portion of notes payable 1,315 900
Accounts payable 3,298 2,108
Accrued liabilities 3,172 3,823
Customer deposits 1,017 1,285
Deferred revenue 13 87
-------- --------
Total current liabilities 8,815 12,119
Long-term loans and notes payable, less current portion 3,310 1,165
Stockholders' equity:
Common stock, $0.001 par value; 40,000 shares authorized; 10,123 and 10,123
shares issued and outstanding on
September 30, 1999 and December 31, 1998, respectively 24,197 24,197
Notes receivable from stockholders (630) (630)
Accumulated deficit (20,536) (19,638)
-------- --------
Total stockholders' equity 3,031 3,929
-------- --------
Total liabilities and stockholders' equity $ 15,156 $ 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, Nine Months Ended,
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 8,768 $ 2,383 $ 26,654 $ 8,484
Cost of sales 4,233 1,523 12,162 4,432
-----------------------------------------------------------
Gross profit 4,535 860 14,492 4,052
-----------------------------------------------------------
Operating expenses:
Research and development 1,959 903 5,740 2,511
Marketing and sales 2,465 1,210 6,904 3,753
General and administrative 783 273 2,430 920
-----------------------------------------------------------
Total operating expenses 5,207 2,386 15,074 7,184
-----------------------------------------------------------
Operating loss (672) (1,526) (582) (3,132)
Interest and other income (expenses), net (141) 46 (314) 127
-----------------------------------------------------------
Loss before provision for income taxes (813) (1,480) (896) (3,005)
Provision for income taxes -- 13 2 18
-----------------------------------------------------------
Net loss $ (813) $ (1,493) $ (898) $ (3,023)
===========================================================
Net loss per share - basic and diluted $ (0.08) $ (0.22) $ (0.09) $ (0.45)
===========================================================
Shares used in computation of net
loss per share - basic and diluted 10,123 6,671 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)
Nine Months Ended
September 30,
-------------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (898) $(3,023)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,190 432
Changes in operating assets and liabilities:
Accounts receivable (28) 1,544
Inventories 760 (238)
Other current assets (641) 484
Other assets 7 --
Accounts payable 1,190 (770)
Accrued liabilities (651) (515)
Customer deposits (268) 1
Deferred revenue (74) (45)
------- -------
Net cash provided by (used in) operating activities 587 (2,130)
------- -------
Cash flows from investing activities:
Net purchases of property and equipment (416) (278)
Proceeds from disposal/reclassification of property and equipment 570 --
------- -------
Net cash provided by (used in) investing activities 154 (278)
Cash flows from financing activities:
Repayment of line of credit (3,916) --
Repayment of notes payable (750) (10)
Proceeds from long-term notes 3,310 --
Issuance of common stock -- 13
Purchase of common stock -- (4)
Restricted cash 1,132 --
------- -------
Net cash used in financing activities (224) (1)
------- -------
Net increase (decrease) in cash and cash equivalents 517 (2,409)
Cash and cash equivalents at beginning of period -- 5,640
------- -------
Cash and cash equivalents at end of period $ 517 $ 3,231
======= =======
<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 September 30,
1999, the condensed consolidated interim statements of operations for the three
and nine month periods ended September 30, 1999 and 1998, and the condensed
consolidated interim statements of cash flows for the nine month periods ended
September 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 September 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 nine month periods ended September 30, 1999, are not necessarily
indicative of the operating results for any future period.
Note 2. Comprehensive Loss
Comprehensive loss is equal to net loss for the three and nine month
periods ended September 30, 1999 and 1998.
Note 3. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
1999 1998
------ ------
Purchased parts and materials $1,135 $2,399
Work-in-process 1,451 394
Finished goods 284 151
Demonstration inventory 1,715 2,401
------ ------
$4,585 $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.
Additionally, in November, 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 $4.0 million to $2.0 million, the
elimination of inventory as part of the borrowing base, an
-6-
increase in the interest rate by 200 basis points, and the granting of a waiver
of default for non-compliance with certain financial covenants. In addition, LBC
and the Company agreed to discontinue the agreement by January 31, 2000. As of
September 30, 1999, the Company had availability of $3.7 million under the line,
and there were no borrowings outstanding under the line.
Indebtedness under the line of credit accrues interest at LBC's prime
rate plus 375 basis points. The revolving loans are secured by all assets of the
Company.
Borrowings under the line are subject to compliance with certain
financial covenants. As of September 30, 1999, the Company was not in compliance
with certain financial covenants. In connection with the November, 1999,
amendment to the agreement between the Company and LBC, LBC granted a waiver to
the Company for non-compliance with the financial covenants.
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 Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
Market 1999 1998 1999 1998
------ ------- ------- ------- -------
Production $ 933 $ 918 $ 2,902 $ 4,161
Post Production 3,589 1,026 13,233 2,553
Distribution 2,897 250 7,100 1,217
Other 1,349 189 3,419 553
------- ------- ------- -------
$ 8,768 $ 2,383 $26,654 $ 8,484
======= ======= ======= =======
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 products Integrated non-linear editing workstation for long and
short form programs and commercials
------------------------------------------------------------------------------------------------------------------
Video Digital Disk Recorders
------------------------------------------------------------------------------------------------------------------
APR(TM)/Attache On-line post production editing and effects and on-air
playback of graphics for broadcast
------------------------------------------------------------------------------------------------------------------
DISTRIBUTION:
------------------------------------------------------------------------------------------------------------------
Digital Signal Processors
------------------------------------------------------------------------------------------------------------------
Dveous(TM) and Brutus Digital Video Effects systems for news and sports
------------------------------------------------------------------------------------------------------------------
Digital News Graphics and Clip Servers
------------------------------------------------------------------------------------------------------------------
Axess(TM) Creation and broadcast distribution of news graphics
and short video segments
------------------------------------------------------------------------------------------------------------------
-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 September 30, 1999 and September 30, 1998
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the three months ended September 30, 1999
and 1998 as reported (dollar amounts in thousands):
Three Months Ended
September 30, Increase (Decrease)
------------- -------------------------
1999 1998 Amount Percent
------- ------- ------- ---------
Net sales $ 8,768 $ 2,383 $ 6,385 267.9%
Cost of sales 4,233 1,523 2,710 177.9%
---------------------------------------------------------
Gross profit 4,535 860 3,675 427.3%
Operating expenses:
Research and development 1,959 903 1,056 116.9%
Marketing and sales 2,465 1,210 1,255 103.7%
General and administrative 783 273 510 186.8%
---------------------------------------------------------
Total operating expenses 5,207 2,386 2,821 118.2%
---------------------------------------------------------
Operating loss (672) (1,526) 854 56.0%
Interest and other income (expenses), net (141) 46 (187) (445.2%)
---------------------------------------------------------
Loss before provision for income taxes (813) (1,480) 667 45.1%
Provision for income taxes -- 13 (13) (100.0%)
=========================================================
Net loss $ (813) $(1,493) 680 45.5%
=========================================================
<FN>
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the three months ended September 30, 1999
and 1998, as a percentage of net sales, as reported:
</FN>
Three Months Ended Increase
September 30, (Decrease)
------------- ----------
1999 1998
-------- -------
Net sales 100.0 % 100.0 % -- %
Cost of sales 48.3 % 63.9 % (15.6)%
--------------------------------
Gross margin 51.7 % 36.1 % 15.6 %
Operating expenses:
Research and development 22.4 % 37.9 % (15.5)%
Marketing and sales 28.1 % 50.8 % (22.7)%
General and administrative 8.9 % 11.4 % (2.5)%
--------------------------------
Total operating expenses 59.4 % 100.1 % (40.7)%
--------------------------------
Operating loss (7.7)% (64.0)% 56.3 %
Interest and other income (expenses), net (1.6)% 1.9 % (3.5)%
--------------------------------
Loss before provision for income taxes (9.3)% (62.1)% 52.8 %
Provision for income taxes -- 0.5 % (0.5)%
--------------------------------
Net loss (9.3)% (62.6)% 53.3 %
================================
Net sales. The increase in net sales during the three months ended
September 30, 1999, from levels for the same period in 1998 was primarily due to
increased sales in the post production and
-9-
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
September 30, 1999 and 1998, represented 33.5% and 37.0% of net sales,
respectively.
The following table presents net sales dollar volume for the three
months ended September 30, 1999 and 1998, by market and related percentages of
total net sales (dollar amounts in thousands):
Three Months Ended
September 30,
-------------
1999 1998
---- ----
Marketplace Amount Percent Amount Percent
----------- ------ ------- ------ -------
Production $ 933 10.7% $ 918 38.5%
Post Production 3,589 40.9% 1,026 43.1%
Distribution 2,897 33.0% 250 10.5%
Other 1,349 15.4% 189 7.9%
----------------------- ----------------------
$8,768 100.0% $2,383 100.0%
======================= ======================
Cost of sales. Cost of sales, as a percentage of sales, decreased for
the three months ended September 30, 1999, from levels for the three months
ended September 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 September 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 three months
ended September 30, 1999 increased over levels for the three months ended
September 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 September 30, 1999 from levels for the same
period in 1998 was primarily due to increases in headcount, related overhead
expenses and amortization of intangibles which were 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 September 30, 1999, decreased over levels for the three
months ended September 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 in
December, 1998.
-10-
Results of Operations
Nine Months Ended September 30, 1999 and September 30, 1998
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the nine months ended September 30, 1999
and 1998 as reported (dollar amounts in thousands):
Nine Months Ended
September 30, Increase (Decrease)
------------- -------------------
1999 1998 Amount Percent
-------- -------- -------- -------
Net sales $ 26,654 $ 8,484 $ 18,170 214.2%
Cost of sales 12,162 4,432 7,730 174.4%
-------- -------- -------- -------
Gross profit 14,492 4,052 10,440 257.7%
Operating expenses:
Research and development 5,740 2,511 3,229 128.6%
Marketing and sales 6,904 3,753 3,151 84.0%
General and administrative 2,430 920 1,510 164.1%
-------- -------- -------- -------
Total operating expenses 15,074 7,184 7,890 109.8%
-------- -------- -------- -------
Operating loss (582) (3,132) 2,550 81.4%
Interest and other income (expenses), net (314) 127 (441) (347.2%)
-------- -------- -------- -------
Loss before provision for income taxes (896) (3,005) 2,109 70.2%
Provision for income taxes 2 18 (16) (88.9%)
-------- -------- -------- -------
Net loss $ (898) $ (3,023) $ 2,125 70.3%
======== ======== ======== =======
The following table presents the Company's Condensed Consolidated
Interim Statements of Operations for the nine months ended September 30, 1999
and 1998, as a percentage of net sales, as reported:
Nine Months Ended Increase
September 30, (Decrease)
------------- ----------
1999 1998
---- ----
Net sales 100.0 % 100.0 % -- %
Cost of sales 45.6 % 52.2 % (6.6)%
----------------------------
Gross margin 54.4 % 47.8 % 6.6 %
Operating expenses:
Research and development 21.6 % 29.6 % (8.0)%
Marketing and sales 25.9 % 44.2 % (18.3)%
General and administrative 9.1 % 10.9 % (1.8)%
----------------------------
Total operating expenses 56.6 % 84.7 % (28.1)%
----------------------------
Operating loss (2.2)% (36.9)% 34.7 %
Interest and other income (expenses), net (1.2)% 1.5 % (2.7)%
----------------------------
Loss before provision for income taxes (3.4)% (35.4)% 32.0 %
Provision for income taxes -- % 0.2 % (0.2)%
----------------------------
Net loss (3.4)% (35.6)% 32.2 %
============================
Net sales. The increase in net sales during the nine months ended
September 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 in
December, 1998. International sales for the nine months ended September 30, 1999
and 1998, represented 33.9% and 42.8% of net sales, respectively.
-11-
The following table presents net sales dollar volume for the nine
months ended September 30, 1999 and 1998, by market and related percentages of
total net sales (dollar amounts in thousands):
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
Marketplace Amount Percent Amount Percent
----------- ------ ------- ------ -------
Production $ 2,902 10.9% $ 4,161 49.1%
Post Production 13,233 49.7% 2,553 30.1%
Distribution 7,100 26.6% 1,217 14.3%
Other 3,419 12.8% 553 6.5%
----------------------- -----------------------
$26,654 100.0% $ 8,484 100.0%
======================= =======================
Cost of sales. Cost of sales, as a percentage of sales, decreased for
the nine months ended September 30, 1999, from levels for the nine months ended
September 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
nine months ended September 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 nine months
ended September 30, 1999, increased over levels for the nine months ended
September 30, 1998, primarily due to increases in headcount and related overhead
expenses, expenses for consultants and temporary employees, 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 nine months ended September 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, fees for
professional services 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
nine months ended September 30, 1999, decreased over levels for the nine months
ended September 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 in December, 1998.
-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 September 30, 1999, the Company had $517,000 of
cash and cash equivalents.
Operating activities provided $587,000 in net cash in the nine months
ended September 30, 1999, and used $2.1 million in net cash in the nine months
ended September 30, 1998. Net cash provided by operations in the nine months
ended September 30, 1999, was due primarily to a decrease in inventories and an
increase in accounts payable partially offset by an increase in 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 as well as the repayment of
notes payable incurred as part of the Scitex Digital Video acquisition. Net cash
used by operations in the nine months ended September 30, 1998, was primarily
due to the net loss and a decrease in accounts payable and other accrued
liabilities 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. ("LBC"), a member of the ABN AMRO group, for a revolving
line of credit ("line"). The agreement was amended on March 11, 1999, July 23,
1999, and November 3, 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
agreement between the Company and LBC, 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. Under the terms of the November, 1999,
amendment to the agreement between the Company and LBC, the amount of the line
was reduced from $4.0 million to $2.0 million, inventory was eliminated as part
of the borrowing base, the interest rate charged on borrowings against the line
was increased by 200 basis points, a waiver was granted for non-compliance with
certain financial covenants, and LBC and the Company agreed to discontinue the
agreement by January 31, 2000. As of September 30, 1999, the Company 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 upon current revenue and expense 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.
-13-
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.
The Company has reviewed the most pertinent Year 2000 issues which have
been identified as potentially having a material impact on the Company's
operations and financial condition.
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 Company has upgraded its Man-Man
software to version 11.2, which is Year 2000 compliant. Total cost to implement
this upgrade was less than $100,000. As of September 30, 1999, at least $20,000
of expected costs had been identified which related to replacement of software
applications and operating systems which took 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 remaining cost of replacing such hardware is $20,000. 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 fourth 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
-14-
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 believes it has addressed and remedied the critical Year
2000 issues prior to the end of the third quarter of 1999 and expects the Year
2000 project to continue beyond the year 2000 with respect to resolution of
non-critical issues. The success of the remediation of the critical year 2000
issues is contingent upon the timeliness and accuracy of software and hardware
upgrades from vendors, adequacy and quality of resources available to work on
completion of the project and any other unforeseen factors. There can be no
assurance that the Company has been or 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 finalized 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 finalizing such a plan in
the fourth 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.
-15-
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.
-16-
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Waiver and Third Amendment to Loan and Security Agreement,
dated as of November 3, 1999, between the Company and LaSalle
Business Credit, Inc.
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.
-17-
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: November 12, 1999
-18-