Item 1. Business
The company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Specifically, the Company wishes to alert readers that the factors set forth in the sections entitled "Manufacturing and Supplies," "Competition" "Proprietary Rights and Licenses" and "Additional Factors That May Affect Future Results," below, as well as other factors, could in the future affect, and in the past have affected, the Company's actual results and could cause the Company's results for future years or quarters to differ materially from those expressed in any forward looking statements made by or on behalf of the Company, including without limitation those contained in this 10-K report. Forward looking statements can be identified by forward looking words, such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words.
General
Accom, Inc. ("Accom" or the "Company") designs, manufactures, sells, and supports a complete line of digital video signal processing, editing, and disk recording, and virtual set tools, primarily for the professional worldwide video production, post production and live broadcasting, and computer video production and post-production, marketplaces. The Company's systems are designed to be used by video professionals to create, edit and broadcast high quality video content such as television shows, commercials, news, music videos and video games.
The proliferation of distribution channels for video content, including cable, satellite and direct view systems such as videos and DVDs, is increasing the demand for broadcast content while diminishing the potential viewing audience and revenue per channel. To compete more effectively, broadcasters and other professional content creators require systems that reduce the cost of developing and delivering video content and more flexibly distribute the same or repurposed content over multiple channels. These systems must be capable of performing mission-critical tasks reliably and in real time without detracting from the final video quality. As video professionals transition from traditional stand-alone analog systems to integrated digital systems, they also require systems that can be easily integrated with existing equipment to leverage their significant capital investments.
The Company provides innovative products that cost-effectively meet the needs of professional content creators and broadcasters in real time video production, post-production and distribution. The Company's current products include the ELSET(R) virtual set system used in the production process by replacing traditional physical studio sets with three-dimensional ("3D") virtual sets, on-line video editing systems and digital video disk recorders used during the content creation production and post production processes, and networked still image and video clip storage systems used by broadcasters in the distribution process.
The Company's strategy is to maintain its leadership position in the professional segment of the video post-production market by enhancing its existing product lines and developing new products that establish higher standards of performance in video editing and digital recording. The Company also plans to build upon its established reputation in the post-production segment to market the ELSET(R) Virtual Set and its Axess(TM) news graphics and clip server to the production and distribution markets, respectively. Additionally, the Company continues to pursue its strategy of first developing and marketing full-featured systems to prove technological feasibility and market acceptance and then designing lower-priced products with reduced feature sets to appeal to a broader base of customers.
The Company sells its products through a combination of its direct sales force and indirect distribution channels.
On December 10, 1998, the Company acquired substantially all of the assets and certain liabilities of Scitex Digital Video, Inc. and certain of its affiliates, as part of the Company's strategy to broaden its product line and to grow the Company. The acquired assets include Scitex Digital Video's business of developing, manufacturing, marketing and selling digital video manipulation equipment and non-linear video workstations for the video industry. The products that were acquired in such transaction are described in the Section entitled "Products" below.
Industry Overview
The creation and distribution of video content consists of four distinct stages: pre-production, production, post-production and distribution.
o Pre-production involves creation of the script and storyboard.
o Production (content creation) involves shooting video or film, as well as creation of computer-generated graphics and sound recording.
o Post-production consists of editing and manipulating diverse images and audio elements into a final program, including off-line and on-line editing.
o Distribution is the delivery of the finished video content to the viewer through traditional channels such as broadcast, satellite and cable channels or through direct distribution of video rentals, DVDs and video games.
The market for systems used in the video content creation, editing and distribution process ranges from high-end professional users such as television networks, cable television companies and independent production and post-production houses, to professionals and non-professionals that create video content for less demanding applications such as corporate communications. High-end professional users typically drive the performance standards for innovation, quality, speed and features for the video production and broadcast markets.
The channels available for distribution of video content are proliferating as new cable, satellite and direct view alternatives supplement traditional delivery systems. This proliferation is increasing the demand for broadcast content. Concurrently, the viewing audience per channel and, therefore, the potential revenue per channel is being reduced. To more effectively compete in this environment, broadcasters and other video professionals must reduce the cost of developing and delivering content and find more flexible means to distribute the same or repurposed content over multiple channels. These requirements span the production, post-production, and distribution segments of marketplace.
Production
A large portion of the cost of creating content is attributable to the actual shooting of video, which is performed on location or on studio stages. A typical video studio consists of a soundproofed stage, a specially designed set, high-intensity lighting, sophisticated video equipment and, often, a fully-equipped control room. Studios are often dedicated to a single type of production due to the time and cost necessary to change, or strike, sets. Actual set costs vary widely depending on the nature of the content being shot on the set and production budget constraints. Physical sets are inflexible and require significant manual effort to assemble and disassemble. With the proliferation of distribution channels, producers of video content need flexible production techniques that will enable them to quickly and efficiently create content for distribution through multiple channels. Content creators are therefore searching for innovative solutions to lower set costs, increase flexibility in the production of video and create more interesting content.
Post-Production
Video editing is critical to the post-production process and is often completed in two steps: off-line, to reduce raw material to a smaller, more manageable group of elements; and on-line, to assemble video, audio and graphic elements into a final program. The on-line video editing process typically occurs in a video "editing suite" comprised of sophisticated, interconnected equipment such as video recorders and switchers, digital video effects systems, storage devices for still images and computer-based graphics systems. Video editing suites can cost up to several million dollars due to the cost and variety of equipment required, and professional post-production services can cost in excess of $1,000 per hour.
Over the past several years, a number of personal computer-based off-line editing systems have been introduced to enable more efficient and cost-effective editing. However, these off-line systems rely upon compression algorithms to convert raw video content to signals capable of being manipulated on personal computers. This use of highly compressed video compromises video fidelity. Currently, video effects and compositing, as well as two-dimensional ("2D") and 3D graphic elements, must be created in an uncompressed format. An editor using a compression-based off-line system must decompress the video, add effects and graphics and then recompress the video. This adds complexity to the editing process and often further compromises the video fidelity of the final content. Moreover, these off-line systems typically provide the user with a single video stream, which does not allow the simultaneous manipulation of multiple streams of video elements in real time.
To improve productivity and creative flexibility, high-end professionals increasingly require on-line editing systems with simultaneous random access to multiple video streams and video of D1 quality, a standard digital video format that represents one of the highest levels of video quality commercially available today. Unlike traditional taped-based analog systems, an on-line editing system based on digital video disk recorders enables the user to instantly and randomly access any part of the stored video, audio or other material, rearrange the material and play back edited material without repeatedly winding and rewinding tape to locate desired sequences. In contrast to off-line systems, on-line digital-based systems do not require high levels of compression and, therefore, do not detract from the fidelity of the final video content. As post-production professionals transition their on-line edit rooms to digital technologies, they often create hybrid environments that integrate traditional analog video processing equipment with digital systems. Therefore, these professionals need on-line editing systems that easily interface with equipment made by different manufacturers.
Distribution
Most distributors of video content such as television networks and cable broadcasters currently rely on standalone still image disk storage devices and analog tape-based systems when broadcasting graphics and video clips during news, sports or entertainment presentations. These are typically single-user devices that cannot be easily networked to serve multiple users. With the proliferation of distribution channels, distributors of video content increasingly require more flexible means of accessing and distributing content over multiple channels. Quick access by multiple users to content such as computer-generated graphics and short segment video clips is critical to effective and economical news, sports and entertainment broadcasting. Networked digital video disk recorders enable distributors of video content to make material more readily available to multiple users and for broadcast through multiple channels. Distributors of video content are beginning to transition to digitally-based networks that increase the speed at which information is shared, reduce the time necessary to complete production tasks and more efficiently utilize the content they create and distribute.
The Accom(R) Approach
The Company believes that traditional video systems do not adequately meet the emerging production, post-production and distribution needs of high-end content creators and broadcasters. Professionals in this market segment require flexible, cost-effective systems that perform mission-critical tasks reliably and in real time without detracting from the final video
quality. These new systems must also be capable of accommodating high-end video professionals as they transition from traditional stand-alone analog systems to integrated digital systems. In addition, high-end professionals require systems that can be easily integrated with existing video content creation and distribution equipment to leverage their significant equipment investments.
Accom provides innovative products that cost-effectively meet the needs of high-end content creators and broadcasters in real time video production, post-production and distribution. Relying on its core technologies and its knowledge of the high-end video market, the Company develops sophisticated digital systems comprised of both standard and proprietary hardware and software. Accom believes that this approach results in flexible solutions, offering price and performance advantages over competitive systems while facilitating the transition to hybrid and digital environments.
Accom's systems offer the following benefits:
Open Systems. The Company designs products for ease of integration with other manufacturers' products, such as video switchers, digital video effects devices and video recorders. This capability allows users to leverage their existing equipment investments and customize their systems to meet current and future requirements.
Real Time Performance. Accom systems operate in real time and execute processing and control functions 50 or 60 times per second. This enables content producers to instantly view video content in full-quality video resolution during production and post-production.
High Video Fidelity. Accom systems operate in fully uncompressed video formats. This capability provides video content creators with D1 quality video, enabling them to deliver the same content for high-end distribution channels or distribution channels requiring lower resolution.
Ease Of Use. The Company's systems are designed to improve the productivity of users and to reduce training time. For example, certain of the Company's products utilize video images and graphical user interfaces that eliminate the need for complicated menu structures and time codes.
Leveraged Solutions. Accom combines certain of its individual products to create integrated solutions that offer performance benefits beyond those available when such products are used individually. For example, the Company integrates its on-line editor products with its digital video disk recorders to provide on-line, random access editing capability.
The Company offers a range of products to the high-end segment of the video production, post-production and distribution markets. The Company's current key products are:
o Virtual set tools, which are designed to enable content producers to cost-effectively create programs with virtual production sets instead of traditional sets;
o Digital disk recorders to produce computer graphics and animation;
o On-line video editing systems used by post production professionals;
o Non-linear editing systrems used by post production professionals;
o Digital video effects and switchers used by broadcasters and post-production professionals;
o Digital video disk recorders used during the on-line post production editing process; and
o Networked still image and video clip storage systems used by broadcast distributors of video content.
Accom Strategy
Accom's goal is to be a leading supplier of production, post-production and distribution systems to the high-end video content creation, editing and broadcast markets. To achieve this goal, Accom is following a strategy that includes the following key elements:
Maintain Leadership Position in Current High-End Market. The Company has established a reputation for meeting the exacting needs of the high-end segment of the video post-production market. The Company plans to maintain its leadership position in the high-end segment of the video post-production market developing new products that establish higher standards of performance in video editing and digital recording.
Expand into New High-End Market Segment. The Company plans to leverage its existing reputation in the high-end post-production segment to market the ELSET(R) Virtual Set and the Axess(TM) to the production and distribution market segments, respectively.
Broaden Lower-Priced Product Line. The Company has introduced products, such as the Axial(R) 3000 on-line editor, the Workstation Disk ("WSD(R)") digital video disk recorders, and the APR(TM) digital video disk recorders that provide high-end users with reduced feature sets at lower prices. In the past the Company first developed and marketed full-featured systems to prove technological feasibility and market acceptance, then designed lower-priced products with reduced feature sets to appeal to a broader base of customers. Beginning with the WSD(R)/2Xtreme and APR(TM) (Accom Professional Recorder) line of products, the Company has shifted to introducing products that offer high value but also significant price advantages over competing products.
Invest in Innovative Technologies. The Company has developed significant expertise in core technologies relating to editing, real time control, and digital video disk recording. The Company intends to continue to internally develop and acquire new technologies as necessary to design products that satisfy customer requirements for quality, speed, cost and functionality. For example, by acquiring the company that developed ELSET(R), the Company obtained access to virtual set technology.
Enhance Distribution Channels. The Company plans to expand its direct marketing and sales efforts to more effectively penetrate the high-end market segment. In addition, the Company intends to expand its indirect distribution channels, including dealers, value-added resellers and third-party software solutions vendors, to increase sales of lower-priced products.
Products
The Company currently offers six product lines that address the needs of the video and computer graphics production, post-production and distribution market segments. The ELSET(R) Virtual Set is designed to be used in the production of video content. The Company's video digital on-line editing systems, disk recorders and signal processing equipment are used primarily in post-production. Digital news graphics and clip servers address the needs of video distribution. The Company's digital disk recorders are also used in the production of computer graphics and animation.
The following table summarizes the Company's fiscal 1998 net sales by market segment:
---- Market Amount Percent ------ ------ ------- Production $ 6,551 51.9% Post Production 3,593 28.5% Distribution 1,847 14.6% Other 626 5.0% ------------------------------------ $12,617 100.0% ====================================
Video Virtual Set Production Tools
The ELSET(R) Virtual Set is designed to enable content creators to create virtual sets utilizing standard 2D and 3D painting, modeling and animation tools and to combine these virtual sets with live actors in real time. The ELSET(R) Virtual Set combines the virtual world
and the real world to create the illusion that the actors are a part of the virtual set. Thus, content creators are able to achieve greater artistic control over the environments in which content is developed. Traditional physical sets can be replaced or augmented by virtual sets to achieve the desired look of large studios while using a small physical studio. Virtual sets can be readily altered.
The Company believes that ELSET(R) Virtual Set will enable content producers and the organizations that service such producers to leverage their investment in existing studio infrastructures. Content producers can utilize the same virtual set in different studios and quickly load new sets to alter the appearance of the set. The Company believes that by implementing the ELSET(R) Virtual Set, these professionals will be able to greatly increase the amount of content that can be produced in their existing studios and substantially reduce the labor and storage costs associated with traditional physical sets. The company anticipates that the ELSET(R) Virtual Set will be used primarily in the production of news and sports broadcasts, children's programs, news magazines, music videos, video games and talk shows.
To broadcast a virtual set or to produce a program using virtual sets, standard production equipment such as lights, cameras, camera control heads, video keyers, switchers is required. The Company does not supply this equipment but it is readily available from a variety of sources. Similarly, 2D and 3D painting and modeling tools are required for creating the virtual sets, which the Company does not supply but are readily available from various sources.
The Company currently offers three ELSET(R) Virtual Set products:
ELSET(R) LIVE software operates on the Silicon Graphics ("SGI") Onyx 2 computers and is used for real time productions. The Company primarily offers the ELSET(R) LIVE software; however from time to time will also resell the SGI hardware for the convenience of the customers.
ELSET(R)POST software operates on the SGI O2 computer and is used for non-real time productions. ELSET(R)POST offers a lower cost alternative to ELSET(R)LIVE by allowing users to trade off production time against cost. ELSET(R)POST utilizes Alias 3D software to create the set and to preview scenes in lower quality during production. During production, camera moves in addition to animation triggers are recorded on the O2 while the actors are recorded in full quality on a video recorder. After the production is complete, the virtual scenes are rendered in full quality using the SGI computer and recorded on the Accom WSD(R) digital disk recorder. The final program is composited using the recording of the actors and the rendered sets from the Accom WSD(R) digital disk recorder. By rendering virtual sets off-line, complex scenes may be produced that are not possible in real time virtual set productions.
ELSET(R) LIVE-NT system is a real time virtual set system offering a lower cost alternative to the ELSET(R)LIVE running on the SGI Onyx2 platform. ELSET(R) LIVE-NT runs on a Windows NT platform and a graphics engine from Real 3D. The virtual sets are designed by using 3D Studio Max modeling software from Kinetex. The Accom proprietary software is a "plug in" for the 3D Studio Max software.
Computer Graphics and Animation Digital Disk Recorder
The Company's WSD digital disk recorder is primarily used in the production and post production of computer graphics and animation. The WSD(R)/2Xtreme, the fourth generation WSD(R) product, is a D1 quality digital video disk recorder and video subsystem that enables users to record and play back digital video images in real time and rapidly transfer digital video images to and from computer workstations. The WSD(R)/2Xtreme enables more efficient creation of 2D and 3D graphics and animation by providing a bridge between the computer workstation and video tape recorders and other video devices. The WSD(R)/2Xtreme's digital random access recording and playback features improve the quality of desktop graphics production by eliminating the speed and maintenance problems associated with analog video tape recorders. With the WSD(R)/2Xtreme, frames can be played back in real time so the user can see the end result in full motion on a video monitor. An SGI graphic interface option enables users to preview frames on the workstation display at full resolution or display real time video from the WSD(R)/Xtreme disk or input source. The Company has worked closely with a number of third-party software developers to integrate the WSD(R)/2Xtreme with their applications. The WSD(R)/Xtreme also provides both Ethernet and SCSI interfaces, thereby enabling connection to other computer platforms. Accom has interfaces for the WSD(R)/Xtreme to enable Windows(TM) personal computer and Apple Macintosh users to integrate the WSD(R)/Xtreme into their systems. The WSD(R)/2Xtreme offers all of the features of its predecessors, but at a price that is almost half of the Xtreme model it replaced.
Digital Signal Processing Equipment
On December 10, 1998 Accom acquired substantially all of the assets of Scitex Digital Video. The 8150 switcher, the Dveous(TM) and the Brutus digital video effects (DVE) product lines were a part of this acquisition.
The 8150 Digital Switcher with Built-in 3D Effects
The 8150 switcher is typically used in an on-line post-production editing suite. In addition to a switcher, this type of an editing suite requires an on-line editor like the Axial(R) and digital disk recorder like the APR(TM) Attache or the WSD 2Xtreme --- products manufactured by Accom. This 8150 is a powerful switcher which combines the familiar Mix/Effects architecture with limitless effects layering capabilities. The 8150's graphically assisted control panel and built-in high density 3.5" floppy drive and other advanced features make it easy to operate. The 8150 offers an optional 3D Digital Video Effects based on the twin channel Dveous(TM) architecture. This technology provides powerful new effects such as SuperShadow(TM), UltraWarp(TM), and the realistic textures and light sources of SurfaceFX(TM).
Dveous(TM) Digital Video Effects
The Dveous is a powerful, full quality and fully featured DVE. Dveous is used in post-production suites as well as for live sports and news applications by television stations and production companies. DVEs are used to manipulate video images in real-time to create effects like flying pictures, page turns and more complex effects which were only possible in the opitcal domain at one point in time. The Dveous is considered by many as the leading high-end DVE
product and is used by many well-known broadcasters through out the world. The Dveous video processing system is based around four-field video framestores. Video information is upsampled vertically to create a full frame of data for every field. The Dveous also contains 23x12-point video filters and four-point store output interpolators to provide superb image quality for picture expansion and compression. All picture transform information is calculated to 1.2nS spatial precision with full 10 bits per pixel precision.
Brutus Digital Video Effects
Brutus is a solution built on the established benchmark of Dveous(TM) . Brutus offers multi-channels of Dveous DVE combined throught the Brutus combiner to create complex effects and manipulate multiple images in real-time. Any Dveous can easily upgrade to Brutus. The primary application of Brutus is in live sports production where effects have to be applied to multiple pictures simultaneously in a coordinated fashion.
Digital Video Editors
The Company currently offers two product lines in the digital editing area, the Axial and the Sphere family of editors. On December 10, 1998 Accom acquired substantially all the assets of Scitex Digital Video. The Sphere product line was a part of this acquisition.
On-Line Editors
The Company's Axial(R) line of digital on-line video editing systems consists of various models of the new Axial(R) 3000. (The Axial(R) 3000 replaces the Axial(R) 2010, and with options offers most of the features of the top-end Axial(R) 2020.) The Key upgrade option for the Axial(R) 3000 is Live Video, Random Access Visual Editing System ("RAVE") and the Axial(R) Cache Editor. A primary benefit of the Axial(R) line of products is their ability to import edit decision lists from off-line editing systems for quick assembly of full-quality video content. The Axial(R) 3000 are used to perform editing and compositing for the high-end segment of the post-production market.
The Axial(R) 3000 with Live Video Option offers an enhanced visual interface that enables the video editor to edit information by working with pictures and video clips instead of only timecode numbers. Axial(R) models utilize a text file approach for interfacing with external equipment that minimizes the need to write new software device drivers, thereby facilitating the integration of external equipment with the editing system. Axial(R) is based on a multi-process architecture that enables it to simultaneously control up to 47 independent devices. In August 1994, the Company received an International Teleproduction Society ("ITS") Monitor Award for Special Achievement in Engineering Excellence for the Axial(R) 2020.
The basic Axial(R) 3000 is a lower-priced, on-line editing system designed to address the needs of a broader group of professional users. The Axial(R) 3000 is used in post-production suites producing content such as long form programs and corporate videos under lower production budgets.
RAVE and the Axial(R) Cache are options that enable users to integrate the Company's on-line video editing and digital video disk recording technologies. RAVE combines the Axial(R) and Accom's WSD(R) or APR(TM) uncompressed digital disk recorders (DDRs). These DDRs provide immediate random access to stored images and the flexibility of non-linear operation. RAVE was one of the first editing systems to feature non-linear, D1 quality video for on-line editing.
Nonlinear Editing
The Company's Sphere family of digital nonlinear editing systems offers a complete range of solutions for simple to complex applications. The Sphere family consists of four main products, MicroSphere(R), VideoSphere(R), StrataSphere(R) and DigiSphere(R).
MicroSphere(R) offers dual stream, realtime video editing with effects for multimedia and graphics production. Files are stored in native QuickTime(TM) format for up and downstream compatibility throughout the Sphere line, and for compatibility with all QuickTime-capable graphics applications. MicroSphere(R) may be used as a stand-alone platform, or may be integrated into a Sphere collaborative workgroup.
VideoSphere(R) is a finishing platform featuring dual-stream broadcast-quality video, four internal stereo pair audio, realtime effects, wipes, and transitions. In addition to the standard 3D DVE the DveousFX(R) option adds Abekas(R) caliber effects capabilities including SurfaceFX(TM) 3D light sourcing and texturing that fully interact with the UltraWarp(R) palette. VideoSphere(R) also features sophisticated picture correction controls originally developed for the Abekas(R) 8150.
StrataSphere(R) offers all the features of the VideoSphere(R) with the addition of full motion alpha channel. The StrataSphere(R) combines Abekas(R) 8150 Production Switcher keying power and the brilliant 3D effects of the Abekas(R) Dveous(TM) DVE to allow composition of up to fifty layers of video, each with full key signal integrity in real time.
DigiSphere(R) was designed to perform the tasks of media acquisition and distribution without the expensive need to tie up a full-blown editing workstation.
Post Production Digital Video Disk Recorder -- APR(TM)
The Company's newest family of digital video disk recorders is the Accom Professional Recorder ("APR(TM)"), which again is used in on-line video post production editing. APR(TM)s are based on newer hard drive technology.
APR(TM)/Attache is the first product from this family and the seventh DDR product from Accom. Attache was announced and first shown in September 1997, and full production shipments began in the second quarter of calendar 1998. The APR(TM) enables the digital recording and playback of D1 quality video onto a real time, random access redundant arrays of individual disks ("RAID"). Applications of the APR(TM) include random access video editing and the editing of 2D and 3D graphics and animation for production and post-production. Unlike a video tape recorder, the APR(TM) can instantly access stored images and play back the images at
speeds ranging from 1/100th to 100 times normal play speed. The APR(TM) is configured to offer storage of 30 minutes and 60 minutes of uncompressed video recording times. The APR(TM) offers a "half-bandwidth" channel option called KeyTrack(TM). KeyTrack allows a synchronous key/matte signal to be recorded in sync with the video. Two complete videotape recorders or DDRs are normally required for this capability.
APR(TM)/Attache is the first digital disk recorder to offer "PreRead" and "PostRead" functions. "PreRead" (write-after-read) allows material to be played off the disk, processed externally, and re-recorded back on the same disk in real time. This allows one Attache to function as both a playback device and a record device, effectively replacing two devices in the post production suite. "PostRead" (read-after-write) allows material to be played out. Limited versions of PreRead and PostRead have been available on videotape recorders for several years and have become standard features of videotape recorders.
Digital News Graphics and Clip Servers
The Axess(TM) is designed to be used by broadcast professionals for the preparation and on-air presentation of computer-generated graphics, still images and video clips. The Axess(TM) enables broadcasters to digitally store, categorize, search and obtain quick access to a library of previously recorded still images, computer-generated graphics and video clips for use during on-air presentations of news, sports or entertainment events. The Axess(TM) is a networked system of individual nodes, each having its own storage modules. Storage is configured to meet the needs of each user, but every node on the network has access to the information stored in other nodes. An option designed with RAID provides real-time video storage. The storage options enable a user to record and play back a mixture of still and moving images. Depending on the selected storage options, a single node can be configured to store from 1,000 up to 70,000 still images or from 17 minutes up to 2+ hours of uncompressed video. Each Axess(TM) system is a user-designed configuration based on just a few standard hardware components. The price of the Axess(TM) varies widely depending on the number of nodes and the amount of storage per node.
Customers and Applications
The primary end users of the Company's products are production, post-production, broadcast and cable companies and studios. One customer, AIM Co. Ltd., a distributor, accounted for 16% and 13% of the Company's total revenues in fiscal 1998 and 1997, respectively. No customer accounted for more than 10% of the Company's total revenues during fiscal 1996.
Marketing, Sales and Service
The Company markets its products through a combination of its direct sales force and indirect distribution channels. The Company exhibits its products at major trade shows for the video and computer graphics industries. The Company also initiates special direct mail and advertising campaigns prior to certain trade shows and advertises in industry trade journals.
In the United States, the Company markets its products at trade shows such as those held by the National Association of Broadcasters ("NAB") and ACM SIGGRAPH. The Company conducts domestic direct sales through employees based in New Jersey, Illinois, Florida, Texas
and California, and uses independent representatives to market its products in geographic areas that are not served by its direct sales organization. The Company utilizes an additional sales channel of distributors for its WSD(R)/2Xtreme product line to more effectively reach the independent dealers and VARs that integrate workstations, software and peripheral devices.
Outside the United States, the Company markets its products at trade shows such as those held by the International Broadcast Conference in Europe and the InterBee in Japan. The Company sells its products through a network of distributors that cover a myriad of countries. During fiscal 1998, 1997, and 1996 the Company generated 45%, 42%, and 38%, respectively, of its net sales from customers in markets outside of the United States. The Company has two employees based in the United Kingdom to manage and support the Company's distributors in Europe, Africa and Middle East. The Company has one employee based in Hong Kong to manage and support its distributors in Asia Pacific. The Company manages its distributors in Central and South America through its corporate headquarters in Menlo Park, California.
The Company provides technical support and training to its customers directly and through its distributors and maintains a technical support group in its Menlo Park facility.
The Company generally ships its products within 30 days after acceptance of a customer purchase order. The Company does not believe that its backlog at any particular point in time is material or indicative of future revenue levels.
Research and Development
The Company's research and development efforts currently are focused on the development of product enhancements and new products for its digital video on-line editor, video and computer graphics digital disk recorders and virtual set product lines. The Company's engineering staff consists of software and hardware engineers and other support personnel. As of September 30, 1998, the Company employed 26 people in its research and development organization, of which approximately 17 professionals are focused on software development. As of December 29, 1998, following the acquisition of the business of Scitex Digital Video, the Company employed 44 people in its research and development organization, of which approximately 25 professionals are focused on software development. During fiscal 1998, 1997 and 1996, the Company's research and development expenses were approximately $3.3 million, $3.3 million, and $3.9 million, respectively. The Company believes that its success will depend in part upon its ability to enhance its existing products and to develop and introduce new products and features to incorporate new technologies and meet changing customer requirements and emerging industry standards on a timely and cost-effective basis.
Manufacturing and Suppliers
The Company manufactures its systems at its facility in Menlo Park, California. The Company's manufacturing operation consists primarily of the testing of subassemblies and components purchased from third parties, the duplication of software and the configuration, assembly and testing of complete systems. The Company relies on independent contractors to manufacture certain systems, components and subassemblies in accordance with the Company's specifications. Each of the Company's products undergoes testing and quality inspection during the final assembly stage.
The Company is dependent on sole source suppliers for certain key components and parts used in its products. The Company purchases sole source components in some product lines pursuant to purchase orders placed from time to time, does not carry significant inventories of these components and has no long-term supply arrangements. Financial, market or other developments adversely affecting sole source suppliers could have an adverse effect on its ability to supply the Company with components and, consequently, upon the Company's business, financial condition and results of operations. In addition, the Company and certain of its suppliers subcontract the manufacture of certain systems, components and subassemblies to third parties. While the timeliness and quality of deliveries to date from the Company's suppliers and assemblers have been acceptable, there can be no assurance that supply or assembly problems will not occur in the future. While the Company believes that alternative sources for these components or services could be arranged, the process of qualifying new suppliers or assemblers could be lengthy, and there can be no assurance that any additional sources would be available to the Company on a timely basis or at a cost acceptable to the Company. Any disruption or reduction in the future supply of any key components currently obtained from a single or limited source could have a material adverse effect on the Company's business, financial condition and results of operations.
Competition
The video production, post-production and distribution equipment markets are highly competitive and are characterized by rapid technological change, frequent new product introductions, short product lives, evolving industry standards and significant price erosion over the life of a product. The Company anticipates increased competition in these markets from both existing vendors and new market entrants. The Company believes that the primary competitive factors in the high-end market are feature availability, quality, price, ease of use, compatibility with other manufacturers' products, ability to provide complete systems, continued introduction of new products and product enhancements, customer service and support and distribution. The Company believes that it competes favorably in the high-end segment of the video production, post-production and distribution market with respect to most of these factors.
In the digital on-line video editor, nonlinear video editor and digital video disk recorder market, the Company has to date encountered competition primarily from a limited number of comparably-sized companies as well as larger vendors such as Sony Corporation ("Sony"), The Grass Valley Group (a subsidiary of Tektronix, Inc.) ("Grass Valley"), Media 100, Inc. and Avid Technology, Inc. ("Avid"). Each of these larger companies has substantially greater financial, technical, marketing, sales and customer support resources, greater name recognition and larger installed customer bases than the Company. As the Company continues to broaden its lower-priced on-line video editor and digital video disk recorder product lines, the Company anticipates that it will encounter increased competition, including from these larger vendors.
The digital news graphics and clip server market segment is an emerging market segment. The Company currently is encountering competition from established video companies such as Quantel Ltd. (a subsidiary of Carlton Communications plc) ("Quantel"), Leitch Technology Corporation ("Leitch") and Pinnacle Systems, Inc. ("Pinnacle"). In addition, certain established computer and electronics companies are currently offering or have announced their intentions to offer products or solutions that compete with the Axess(TM). In addition, the Company expects that
existing vendors and new market entrants will develop products that will compete directly with the Axess(TM) and that competition will increase significantly as the market for digital news graphics and clip servers develops. Many of the Company's current and potential competitors have substantially greater financial, technical, marketing, sales and customer support resources, greater name recognition and larger installed customer bases than the Company.
The virtual set system market is also an emerging market. The Company competes with, among others, Discreet Logic, Inc. ("Discreet Logic"), RT-SET Ltd. (a subsidiary of BVR Technologies Ltd., an Israeli corporation), ORAD (an Israeli corporation) and privately-held companies such as Brainstorm (a Spanish company). The Company expects that competition will increase significantly as the market for virtual set systems develops. In addition, certain established software and computer companies such as SGI, which have substantially greater financial, technical, marketing, sales and customer support resources than the Company, may acquire or develop virtual set technology and compete with the Company.Increased competition in any of the Company's markets could result in price reductions, reduced margins and loss of market share, all which would materially and adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully against current or future competitors.
Proprietary Rights and Licenses
Proprietary Rights
The Company's success and ability to compete is dependent in part upon its proprietary technology. The Company relies on a combination of patent, trade secret, copyright and trademark law, nondisclosure agreements and other intellectual property methods to protect its technology. The Company's products are generally sold pursuant to purchase and license agreements that contain terms and conditions restricting unauthorized disclosure or reverse-compiling of the proprietary software embodied in the products. The Company owns 38 United States patents, eight foreign patents and has applications pending for 18 additional patents in the United States. The Company is also pursuing patent applications in certain foreign countries. There can be no assurance that any of the Company's currently pending patent applications or future applications will be granted in full or in part or that claims allowed will be sufficiently broad to protect the Company's technology. The Company also owns 33 registered trademarks in the United States and has several pending United States and foreign trademark applications. Although the Company relies to a great extent on trade secret protection for much of its technology, and has obtained written confidentiality agreements from all of its key employees, consultants and vendors, there can be no assurance that third parties will not either independently develop the same or similar technology, obtain unauthorized access to the Company's proprietary technology or misuse the technology to which the Company has granted access.
There has been substantial industry litigation regarding patent, trademark and other intellectual property rights involving technology companies. In the future, litigation may be necessary to enforce any patents issued to the Company, to protect trade secrets, trademarks and other intellectual property rights owned by the Company, to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. The Company is not aware of any stated claims against it regarding
intellectual property rights. Any litigation arising out of such claims could result in substantial cost and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company believes that, due to the rapid proliferation of new technology in the industry, legal protection through means such as the patent and copyright laws will be less influential on the Company's ability to compete than such factors as the creativity of its development staff and its ability to develop new products and markets and to service its customers.
The laws of certain foreign countries treat the protection of proprietary rights differently from those in the United States, and in many cases the protection afforded by such foreign laws is weaker than in the United States.
ELSET(R) Acquisition
Development of the ELSET(R) Virtual Set was initiated by Video Art Production GmbH ("VAP"), and all title and rights to the ELSET(R) Virtual Set were contributed to ELSET GmbH when ELSET GmbH was formed as a joint venture by the Company and VAP in December 1994. Through its wholly-owned subsidiary, Accom Virtual Studio, Inc. ("AVS"), the Company owns 100% of the outstanding shares of ELSET GmbH.
Although all title and rights to the ELSET(R) Virtual Set were contributed to ELSET GmbH when it was formed as a joint venture by the Company and VAP, VAP has certain obligations under a December 1991 contract with the Commission of the European Communities entitled "Mona Lisa -- Modeling Natural Images of Synthesis and Animation" (the "Mona Lisa Contract"). In particular, materials developed pursuant to the Mona Lisa Contract must be shared with all members of the consortium of companies that contribute to the Mona Lisa project (the "Mona Lisa Consortium") for such members' research and development purposes. However, pursuant to the Mona Lisa Contract, the materials need not be shared with other members of the Mona Lisa Consortium if such sharing opposes the major business interests of the developer or the products covered by such materials are about to become commercially available. It is possible that the ELSET(R) Virtual Set in the form in which it was contributed to ELSET GmbH by VAP could be deemed to have been developed pursuant to the Mona Lisa Contract. Even if this is found to be the case, the Company believes that since the ELSET(R) Virtual Set has become commercially available, the earlier version need not be shared with other members of the Mona Lisa Consortium. However, there can be no assurance that the Mona Lisa Contract would not be interpreted to require VAP to share the earlier version. Although the Company believes that the development work that has been undertaken since the contribution of the ELSET(R) Virtual Set to ELSET GmbH would make it difficult for a member of the Mona Lisa Consortium to duplicate the ELSET(R) Virtual Set, if such sharing is required, there can be no assurance that members of the Mona Lisa Consortium, acting alone or in concert, would not be able to use the shared technology to develop, market and sell a competitive virtual set system. In such event, the Company's business, financial condition and results of operations would be materially
adversely affected. It is also possible that VAP has granted to the other members of the Mona Lisa Consortium the right to use the trademark "ELSET(R)." Therefore, there can be no assurance that the ELSET GmbH will be able to claim the exclusive right to use this trademark, which could have a material adverse effect on the value of such trademark to the Company.
Employees
On September 30, 1998, the Company had 64 full-time employees, including 26 in research and development, 20 in marketing, sales and technical support, 12 in manufacturing and 6 in administration and finance. As a result of purchasing the assests of Scitex Digital Video on December 10, 1998, the Company currently has 134 full-time employees including 44 in research and development, 45 in marketing, sales and technical support, 25 in manufacturing and 20 in administration and finance. The Company's success will depend in large part on its ability to attract and retain qualified personnel, who are in great demand throughout the industry. None of the Company's employees is represented by a labor union. The Company believes that its employee relations are good.
Additional Factors That May Affect Future Results
The company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Specifically, the Company wishes to alert readers that the factors set forth in the sections entitled "Manufacturing and Supplies," "Competition" and "Proprietary Rights and Licenses," above, the factors set forth below, as well as other factors, could in the future affect, and in the past have affected, the Company's actual results and could cause the Company's results for future years or quarters to differ materially from those expressed in any forward looking statements made by or on behalf of the Company, including without limitation those contained in this 10-K report. Forward looking statements can be identified by forward looking words, such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words.
Failure to Successfully Integrate Newly Acquired Business. On December 10, 1998, the Company acquired substantially all of the assets of Scitex Digital Video, Inc. and certain of its affiliates (the "Acquisition"). See "Business--Overview." The Company entered into the Acquisition with the expectation that the Acquisition would result in certain benefits for the combined businesses. Achieving the anticipated benefits of the Acquisition will depend in part upon whether certain of the two companies business operations and their product offerings can be integrated in an efficient and effective manner. This will require the dedication of management resources which may temporarily distract attention from day-to-day business of the Company. The integration may not be accomplished smoothly or successfully and may not result in cost savings in operations, in which case the failure to do so could have an adverse effect on the Company's results of operations and financial condition.
Potential Fluctuations in Operating Results. The Company incurred a net loss of $2.9 million in fiscal 1998. The Company also incurred a net loss of $4.5 million in fiscal 1997 and a net loss of $916,000 in fiscal 1996. There can be no assurance that the Company will be profitable on a quarterly or annual basis in the future. The Company's quarterly operating results in the past have fluctuated and may fluctuate significantly in the future depending on such factors as the timing and shipment of significant orders, new product introductions and changes in
pricing policies by the Company and its competitors, the timing and market acceptance of the Company's new products and product enhancements, including the ELSET(R) Virtual Set, the Company's product mix, the mix of distribution channels through which the Company's products are sold, the Company's inability to obtain sufficient supplies of sole or limited source components for its products and charges related to refocusing and streamlining operations. In response to competitive pressures or new product introductions, the Company may make certain pricing changes or other actions, such as restructuring the product lines, that could materially and adversely affect the Company's operating results. In addition, new product introductions by the Company could contribute to quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline. The Company believes that its net sales generally will decrease in the second quarter of each fiscal year as compared to the prior quarter due to decreased expenditures in the post-production market during that period and delayed customer purchasing decisions in anticipation of new product introductions by the Company and others at the annual NAB convention.
The Company currently anticipates that a number of factors may cause its gross margins to decline in future periods from current levels. The Company believes that the market for on-line video editors and digital video disk recorders will continue to mature and, therefore, that the gross margins the Company derives from sales of these products may decline in future periods. The Company intends to increase its sales of lower-margin on-line video editor and digital video disk recorder products in the future as it pursues the strategy of broadening its lower-priced product lines. Furthermore, if the Company expands its indirect sales channels, its gross margins may be negatively impacted because of discounts associated with sales through these channels. In addition, the Company currently anticipates that revenues from sales of the ELSET(R) Virtual Set will positively impact the Company's net sales but may negatively impact its gross margins if a significant portion of ELSET(R) Virtual Set sales include the resale of the Onyx, which generates lower gross margins than sales of the Company's products.
The Company's expense levels are based, in part, on its expectations of future revenues. In particular, the Company expects to incur significant expenses in connection with the continued development and marketing of the ELSET(R) Virtual Set. The Company may therefore be required to incur significant expenses to support continuing development and marketing of the ELSET(R) Virtual Set.
Many of the Company's expenses are relatively fixed and cannot be changed in short periods of time. Because a substantial portion of the Company's revenue in each quarter frequently results from orders booked and shipped in the final month of that quarter, revenue levels are extremely difficult to predict. If revenue levels are below expectations, net income will be disproportionately affected because only a small portion of the Company's expenses varies with its revenue during any particular quarter. In addition, the Company typically does not have material backlog as of any particular date.
As a result of the foregoing factors and potential fluctuations in operating results, the Company believes that its results of operations in any particular quarter should not be relied upon as an indicator of future performance. In addition, in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected.
Rapid Technological Change; Product Development. The market for the Company's products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The Company's success will depend in part upon its ability to enhance its existing products and to develop and introduce new products and features to incorporate new technologies and meet changing customer requirements and emerging industry standards in a timely and cost-effective manner. The Company is currently developing new products and product enhancements for its product lines. There can be no assurance that the Company will be successful in developing, manufacturing and marketing new products and product enhancements, that the Company will not experience difficulties that delay or prevent the successful development and introduction of these products and enhancements or that the Company's new products and product enhancements will achieve market acceptance. The Company's business, financial condition and results of operations would be materially and adversely affected if the Company were to experience delays in developing new products or product enhancements or if these products or enhancements did not gain market acceptance. In addition, the introduction of products embodying new technologies or the emergence of new industry standards can render existing products unmarketable. There can be no assurance that products or technologies developed by others will not render the Company's products non-competitive or obsolete. In such case, the Company's business, financial condition and results of operations would be materially and adversely affected.
The introduction of new products or product enhancements with reliability, quality or compatibility problems can result in reduced or delayed sales, delays in collecting accounts receivable or additional service and warranty costs. In the past, the Company has delivered certain new products to customers prematurely, and, as a result, such products have contained performance deficiencies. For example, in the first half of fiscal 1995, the Company first delivered its Axess(TM) to certain customers. The Company experienced technical problems with the introduction of Axess(TM), including delays in delivering additional functionality when originally requested by these customers. Similarly, the software component of the Company's products, particularly the ELSET(R) Virtual Set, may contain errors that may be detected at any point in the product's life cycle, including after product introduction. For example, the Company has from time to time needed to update the software for its products to address performance problems. The Company expects the software content of its products to increase in the future. There can be no assurance that the Company will not experience delays and software or hardware related technical problems in its current and future efforts to develop products and product enhancements. Any such delays or problems could have a material adverse effect on the Company's business, financial condition and results of operations.
Uncertainty as to Development and Market Acceptance of ELSET(R) Virtual Set. The ELSET(R) Virtual Set is still being further developed with respect to certain key features. There can be no assurance that the Company will be able to successfully complete these developments of the ELSET(R) Virtual Set in a timely manner. The failure to complete the development of the ELSET(R) Virtual Set successfully and in a timely manner would have a material adverse impact on the Company's business, financial condition and results of operations. In addition, the ELSET(R) Virtual Set represents a new approach to studio set creation, and its commercial success will depend on the rate at which potential end users transition from the use of traditional physical sets to virtual sets and whether this transition occurs at all. A potential end user's decision to purchase an ELSET(R) Virtual Set will depend on many factors that are difficult to
predict. For example, the ELSET(R) Virtual Set is based to a significant extent on new technology, including continuing enhancements to the Onyx. Therefore, potential end users such as broadcasters may be reluctant to purchase the ELSET(R) Virtual Set, especially for mission-critical functions, until the ELSET(R) Virtual Set's reliability in real time use has been demonstrated. In addition, a potential end user's decision to purchase the ELSET(R) Virtual Set may be subject to SGI's timing of shipments of its computer platforms and SGI's announcement of enhancements to its computer platforms. Potential end users may be unwilling to incur the significant cost of converting from physical sets to the ELSET(R) Virtual Set. Although the Company currently anticipates that broadcasters and post-production facilities will be the primary end users of virtual set systems, the Company has not conducted any formal market surveys to determine the potential market for and acceptance of the ELSET(R) Virtual Set. The Company expects that sales of the ELSET(R) Virtual Set will entail a longer sales cycle than with the Company's other products. Although the Company made its first commercial shipments of the ELSET(R) Virtual Set in March 1996, there can be no assurance that a significant market for virtual set systems will develop or that the Company will be able to successfully market the ELSET(R) Virtual Set over time. If this market development does not occur or occurs over an extended period, or if the ELSET(R) Virtual Set does not achieve market acceptance, the Company's business, financial condition and results of operations will be materially and adversely affected.
Dependence on Silicon Graphics, Inc. Some of the ELSET(R) Virtual Set products operate only on Silicon Graphics, Inc. ("SGI") computer platforms. Financial, market or other developments adversely affecting SGI could have an adverse effect on its ability to supply the Company with computer platforms or enhancements or upgrades, and, consequently, upon the Company's business, financial condition and results of operations. If the Company were unable to obtain sufficient quantities of the SGI platforms, or certain key enhancements or upgrades, on a timely basis or on commercially reasonable terms, or experienced defects or performance, compatibility or reliability problems with the SGI platforms, sales of the ELSET(R) Virtual Set and, therefore, the Company's business, financial condition and results of operations would be materially and adversely affected.
Dependence on Key Personnel. The Company's success depends in large part on the continued service of its key technical and senior management personnel and on its ability to attract, motivate and retain highly qualified employees. None of the Company's key technical and senior management personnel is bound by an employment agreement or an agreement not to compete with the Company following termination of employment. Competition for highly qualified employees is intense, and the process of identifying and successfully recruiting personnel with the combination of skills and attributes required to execute the Company's strategies is often lengthy. Accordingly, the loss of the services of key personnel could have a material adverse effect upon the Company's research and development efforts and on its business, financial condition and results of operations. There can be no assurance that the Company will be successful in retaining its key technical and management personnel and in attracting and retaining the personnel it requires for continued growth. The Company has key person life insurance covering certain of its management personnel.
Management of Growth. Although the Company streamlined its operations during fiscal 1997, the Company's long-term success will depend in part on its ability to manage growth, both domestically and internationally. In addition, the Company will be required to enhance its
operational, management information and financial control systems. To manage the growth resulting from the acquisition of Scitex Digital Video in December 1998, the Company brought on board the following three senior level managers: Executive Vice President of Technology and Engineering, Vice President of Sales, and Vice President of Finance and Chief Financial Officer. The Company may be required at some point to recruit a substantial number of qualified employees to continue the development and marketing of the ELSET(R) Virtual Set and other products. To support growth, the Company will be required to increase the personnel in its sales, marketing and customer support departments. If the Company is unable to hire a sufficient number of employees with the appropriate levels of experience to increase the capacity of these departments in a timely manner, or if the Company is unable to effectively manage its growth, the Company's business, financial condition and results of operations could be materially and adversely affected.
International Operations. In fiscal 1998, 1997 and 1996, international sales accounted for 45%, 42%, and 38%, respectively, of the Company's total net sales. The Company expects that international sales will continue to represent a significant portion of its net sales in the future. The Company's results of operations may be adversely affected by fluctuations in exchange rates, difficulties in collecting accounts receivable, tariffs and difficulties in obtaining export licenses. Although the Company's sales are currently denominated in U.S. dollars, future international sales may result in foreign currency denominated sales. Gains and losses on the conversion to U.S. dollars of receivables and payables arising from international operations may contribute to fluctuations in the Company's results of operations. In addition, international sales are primarily made through distributors and result in lower gross margins than direct sales. Moreover, the Company's international sales may be adversely affected by lower sales levels that typically occur during the summer months in Europe and other parts of the world. International sales and operations are also subject to risks such as the imposition of governmental controls, political instability, trade restrictions and changes in regulatory requirements, difficulties in staffing and managing international operations, generally longer payment cycles and potential insolvency of international dealers. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition and results of operations.
Dependence on Distributors. The Company derives a majority of its revenues from sales through distributors. The Company depends on distributors for substantially all of its international sales. The loss of certain of these distributors could have a material adverse effect on the Company. Certain of the Company's distributors also act as distributors for competitors of the Company and could devote greater effort and resources to marketing competitive products. Because the Company's products are sold to high-end video professionals, effective distributors must possess sufficient technical, marketing and sales resources and must devote these resources to a lengthy sales cycle and subsequent customer support. There can be no assurance that the Company's current distributors will be able to continue to market and support the Company's existing products effectively or that economic conditions or industry demand will not adversely affect such distributors. The markets for new products such as the ELSET(R) Virtual Set and digital video disk based servers require a different marketing, sales, distribution and support strategy than markets for the Company's other products. In addition, the Company currently may expand its existing indirect sales channels to implement its strategy of broadening its lower-priced products. There can be no assurance that the Company's distributors will choose or be
able to effectively market and support these lower priced products or to continue to market the Company's existing products. In connection with the acquisition of Scitex Digital Video (SDV) in December 1998, the Company assumed certain contracts and relationships with SDV's distributors. Because the Company does not have a historical working relationship with many of such distributors, there can be no assurance that such distributors will continue to do business with the Company. A failure of the Company's distributors to successfully market and support the Company's products would have a material adverse effect on the Company's business, financial condition and results of operations.
Impact of Year 2000. The "Year 2000 Issue" is typically the result of software being written using two digits rather than four to define the applicable year. If the Company's software with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, interruptions in manufacturing operations, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
Status of Progress in Becoming Year 2000 Compatible: The Company has made a preliminary review of the most pertinent Year 2000 issues which have been identified as potentially having a material impact on the Company's operations and financial condition. More comprehensive study in certain areas is still to be undertaken.
The Company has identified three areas relating to Year 2000 issues which may materially affect the Company's business: 1) Information Technology, addressing internal software and business systems; 2) the Company's Products; and 3) Third Party, addressing the preparedness of suppliers.
Information Technology Program: Internal applications systems such as inventory and financial accounting software, computer network hardware and software, and software applications programs may have Year 2000 problems. As a result of the acquisition of Scitex Digital Video (SDV) on December 10, 1998, the Company decided to use the Man-Man software already in use at SDV as its main inventory and accounting software. The Man-Man software currently in use is version 10.2 which is not Year 2000 compliant. Version 11.0 of this software is Year 2000 compliant and currently is readily available for licensing by the Company. The Company intends to procure this version as soon as practical. Total cost of this upgrade is estimated to be less than $100,000. As of September 30, 1998, at least $11,000 of expected costs had been identified which related to replacement of Microsoft Office software (which currently is readily available for licensing by the Company) which the Company anticipates will take place in the first half of 1999. Related to these software upgrades, hardware on certain personal computers may also need to be replaced to make them compatible with the upgrade software. The estimated cost of replacing such hardware is $25,000. If required modifications to existing software and hardware and conversions to new software are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company due to the inability to accurately and effectively track inventory and other financial results.
Product Readiness Program: Certain products the Company sells have been identified to have Year 2000 problems which must be corrected to permit smooth operation by the user. The Year 2000 solution consists of software changes which will be transmitted to customers by way of CD-ROMs and floppy diskettes. Certain of these changes have been completed and transmitted to customers; others have been completed but not yet transmitted to customers, but should be transmitted in the first half of 1999. The Company believes the costs associated with these activities will be immaterial given the relatively low cost of the media and small amount of internal labor that will be utilized. The Company is currently assessing its exposure to contingencies related to the Year 2000 Issue for the products it has sold; however, it does not expect these to have a material impact on the operations of the Company.
Third Party Program: The Company relies on numerous vendors in the course of operating the business. If these vendors encountered Year 2000 problems which impacted their ability to deliver goods and services to the Company, the Company's business might be materially and adversely affected. The Company has not to date conducted a comprehensive survey of its vendors to determine their Year 2000 readiness, but anticipates doing so in the first half of 1999. The Company has not yet determined the extent to which the Company's operations are vulnerable to those third parties' failure to remediate their own Year 2000 issues. In order to protect against the acquisition of additional non-compliant products, the Company will require that certain hardware and software suppliers providing goods and services to the Company after January, 1999, to warrant that products sold or licensed to the Company are Year 2000 compliant. Finally, the Company is also vulnerable to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions.
The Company anticipates addressing and remedying the critical Year 2000 issues by the first half of 1999, which is prior to any anticipated impact on its operating systems and expects the Year 2000 project to continue beyond the year 2000 with respect to resolution of non-critical issues. These dates are contingent upon the timeliness and accuracy of software and hardware upgrades from vendors, adequacy and quality of resources available to work on completion of the project and any other unforeseen factors. There can be no assurance that the Company will be successful in its efforts to resolve any Year 2000 issues and to continue operations in the year 2000. The failure of the Company to successfully resolve such issues could result in a shut-down of some or all of the Company's operations, which would have a material adverse effect on the Company.
Contingency Plans.
The Company has not yet developed a contingency plan to address situations that may result if the Company is unable to achieve Year 2000 readiness of its critical operations, but anticipates developing such a plan during the first half of 1999. There can be no assurance that the Company will be able to develop a contingency plan that will adequately address issues that may arise in the year 2000. The failure of the Company to develop and implement, if necessary, an appropriate contingency plan could have a material impact on the operations of the Company.
Costs.
The total expense of the Year 2000 project is currently estimated to be less than approximately $200,000 which is not material to the Company's business operations or financial condition. The Company has not yet fully estimated all the Year 2000 costs, in particular those associated with the replacement of software running on personal computers and the costs of modifying, testing and distributing updates to ensure its own products are Year 2000 compliant.
There can be no assurance that these costs will not be material to the Company or that the Company will be able to resolve in a timely manner any issues that may arise in these areas. The expenses of the Year 2000 project are being funded through operating cash flows.
The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. There can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated.
Substantial Control by Existing Stockholders; Effect of Certain Anti-Takeover Provisions. As of December 29, 1998, the Company's executive officers and directors, and their affiliates, beneficially own approximately 21.4% of the Company's outstanding Common Stock. As a result, the Company's executive officers and directors and their affiliates will be able to exercise significant influence over the Company and its business and affairs as well as over the election of directors, regardless of how other stockholders of the Company may vote. Furthermore, acting together, such stockholders may be able to block any change in control of the Company.
In addition, a stockholder of the Company who owns 33.8% of the Company's outstanding stock has the right to become a director of the Company. In addition, the Board of Directors has the authority to issue up to 2,000,000 shares of undesignated Preferred Stock and to determine the rights, preferences, privileges and restrictions of such shares without further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for third parties to acquire a majority of the outstanding voting stock of the Company. In September 1996, the Company's Board of Directors adopted a stockholder rights plan, which entitles existing stockholders of the Company to certain rights (including the right to purchase shares of Preferred Stock) in the event of the acquisition of 15% or more of the Company's outstanding common stock, or an unsolicited tender offer for such shares. The existence of the rights plan could delay, prevent, or make more difficult a merger, tender offer or proxy contest involving the Company. Further, certain provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws and of Delaware law could delay or make difficult a merger, tender offer or proxy contest involving the Company.
Possible Volatility of Stock Price; Decreased Liquidity. The Company's stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts or others could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of, or be able to confirm, revenue or earnings
shortfalls until late in the fiscal quarter or following the end of the quarter, which could result in an even more immediate and adverse effect on the trading of the Company's common stock. On July 20, 1998, the Company's Common Stock was delisted from the Nasdaq National Market System and it is now quoted on the Over-the-Counter (OTC) Bulletin Board under the symbol ACMM. The OTC Bulletin Board may not provide as much liquidity for the Company's Common Stock as the Nasdaq National Market. Finally, the Company participates in a highly dynamic industry, which may result in significant volatility of the Company's common stock price.
Item 2.
Item 2. Properties
The Company's principal offices are located in Menlo Park, California and consist of approximately 30,000 square feet under a lease that expires in February, 2000. The Company believes that its existing facilities are adequate to meet its requirements for the near term and that additional space will be available on commercially reasonable terms if needed.
Item 3.
Item 3. Legal Proceedings
There is no material legal proceeding to which the Company is a party or to which any of its properties are subject. No material legal proceedings were terminated in the year ended September 30, 1998.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
Junaid Sheikh has served as the Chairman of the Company's Board of Directors since June 1988 and as the Company's President and Chief Executive Officer since November 1991.
Phillip Bennett joined the Company on December 11, 1998 as Executive Vice President, Technology and Engineering. Since 1993, Mr. Bennett has been a private investor and active in
image processing and television systems development. From 1982 to 1993 Mr. Bennett was a founder and Vice President of Engineering of Abekas Video Systems.
Donald K. McCauley joined the Company on December 11, 1998 as Vice President of Finance and Chief Financial Officer. Prior to joining the Company, Mr. McCauley served as the Vice President of Finance and CFO of Scitex Digital Video from 1994. Prior to that he was a founder and CFO of ImMix, a manufacturer of non-linear editors.
Ian Craven has served as Senior Vice President, Engineering since October 1991. From October 1991 to April 1995 he also served as a director of the Company.
William T. Ludwig joined the Company on December 21, 1998. From July 1996 to December 1998, Mr. Ludwig served as Vice President of Sales for Americas/Far East (AMFE) for Pinnacle Systems. From January 1996 to July 1996 he was the Director of Sales for FAST Electronics. From 1985 to 1993 he served in various sales capacities at Abekas Video Systems.
William Harris Rogers has served as Vice President, Sales and Marketing since May, 1998. From July 1995 to April 1998, he served as Vice-President, Marketing of the Company. He attended the Stanford University Graduate of Business from September 1994 to June 1995, earning a Master of Science Degree in Business Management. From July 1991 to October 1993, he was Director of Sales for Dynatech Video Group.
Donald W. Petersen has served as Vice President, Manufacturing of the Company since April 1990.
Each executive officer serves at the sole discretion of the Board of Directors.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
Prior to July 20, 1998, the Company's Common Stock was traded on the NASDAQ National Market under the symbol ACMM since the effective date of the Company's initial public offering on September 26, 1995. Prior to the initial public offering, no public market existed for the Common Stock. On July 20, 1998, the Company's Common Stock was delisted from the NASDAQ National Market System. The Common Stock is now quoted on the Over-the-Counter (OTC) Bulletin Board under the symbol ACMM. The price per share reflected in the table below represents, with respect to the period prior to July 20, 1998, the range of low and high closing sale prices for the Company's Common Stock as reported in the Nasdaq Stock Market for the quarters indicated and, with respect to the period after July 20, 1998, the range of low and high bid quotations for the Company's Common Stock as reported on the OTC Bulletin Board for the quarters indicated. The OTC Bulletin Board quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The Company had approximately 99 stockholders of record as of December 16, 1998 including several holders who are nominees for an undetermined number of beneficial owners.
The Company has never paid cash dividends on its capital stock. The Company currently anticipates that it will retain all available funds for use in the operation and expansion of its business, and does not anticipate paying any cash dividends in the foreseeable future. However, the Board of Directors of the Company will review the dividend policy periodically to determine whether the declaration of dividends is appropriate. The Company must obtain the approval of its bank before declaring or paying dividends.
Item 6.
Item 6. Selected Consolidated Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements as of September 30, 1998 and 1997 and for the three fiscal years ended September 30, 1998, 1997 and 1996 included herein this Report on Form 10-K for the fiscal year ended September 30, 1998.
In addition, in order to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company hereby notifies readers that the factors set forth above in Item 1 under the sections entitled "Manufacturing and Supplies," "Competition," "Proprietary Rights and Licenses" and"Additional Factors That May Affect Future Results," as well as other factors, could in the future affect, and in the past have affected, the Company's actual results and could cause the Company's results for future periods to differ materially from those expressed in any forward looking statements made by or on behalf of the Company, including without limitation those made in the discussion below. Forward looking statements can be identified by forward looking words, such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words.
Overview
Accom designs, manufactures, sells, and supports a complete line of digital video signal processing, editing, and disk recording tools, and its ELSET(R) virtual set systems, primarily for the professional worldwide video and computer graphics production, post production and distribution marketplaces.
The following table summarizes the Company's products and the primary markets they address.
- -------------------------------------------------------------------------------- Primary Markets / Products --------------------------
Production: ELSET(R) Virtual Set Work Station Disk ("WSD(R)") 2Xtreme(TM) Computer Graphics Digital Disk Recorder Post Production: Editing: Digital Video Editors: Axial(R) 3000 on-line eeditor Sphere non-linear editor Digital Disk Recorders: Accom Professional Recorder ("APR(TM) ") Attache(TM) Digital Switcher: 8150 switcher Distribution: Axess(TM) Digital News Graphic and Clip Server Dveous and Brutus digital video effects systems - --------------------------------------------------------------------------------
In late fiscal 1995, the Company increased its ownership interest in ELSET Electronic-Set GmbH, a German limited liability company ("ELSET GmbH"), to 100% for approximately $7.6 million in cash, funded with a portion of the proceeds of the Company's fiscal 1995 initial public offering (the "ELSET(R) Acquisition"). The ELSET(R) virtual set system operates on either a Silicon Graphics, Inc. ("SGI") workstation or a Windows NT platform.
The Company's revenues are currently derived primarily from product sales. The Company generally recognizes revenue upon product shipment. If significant obligations exist at the time of shipment, revenue recognition is deferred until obligations are met. Beginning in the second quarter of fiscal 1996, the Company's revenues included revenues from licensing of ELSET(R) software. In the fourth quarter of 1996, revenues also included the resale of SGI workstations. The Company's gross margin has historically fluctuated from quarter to quarter and declined on an annual basis. If the Company resells a SGI workstation as part of the ELSET(R) Virtual Set, gross margins may decline. In the future, gross margins will be dependent on the mix of higher and lower-priced products and the percentage of sales made through direct and indirect distribution channels.
Software development costs are recorded in accordance with Statement of Financial Accounting Standards No. 86. To date, the Company has expensed all of its internal software development costs.
Results of Operations
Fiscal Years 1998 vs. 1997
Note: Special charges for fiscal 1997 represent $4.0 million pretax to streamline operations and provide valuation reserves against inventories, receivables and fixed assets.
Note: In fiscal 1997, charges of $4.0 million pretax were incurred to streamline operations and provide valuation reserves against inventories, receivables and fixed assets.
The following is a discussion comparing the results of operations for fiscal 1998 and fiscal 1997:
Net sales. The decrease in net sales during fiscal 1998 from fiscal 1997 levels was primarily due to decreased sales in the video post production, video broadcasting and computer graphics production marketplaces.
International sales in fiscal 1998 and 1997 represented 45% and 42% of net sales, respectively, as export sales to Europe increased, as a percentage of total sales, to 19% from 10% and export sales to the Pacific Rim decreased, as a percentage of total sales, from 27% to 22%.
Cost of sales. Cost of sales in fiscal 1998 decreased from fiscal 1997 levels due to the 1997 results including a special charge of $2.5 million for increasing inventory reserves and due to the lower level of sales in 1998.
Research and development. The decrease in research and development expenses from fiscal 1997 levels was primarily a result of decreases in headcount, bonuses earned, and depreciation.
Marketing and sales. The decrease in marketing and sales expenses from fiscal 1997 levels was due to the 1997 results including a special charge of $0.8 million for streamlining operations and providing reserves against fixed assets and due to decreases in commissions partially offset by increases in expenses relating to advertising, trade shows, and the marketing of virtual sets.
General and administrative. The decrease in general and administrative expenses from fiscal 1997 levels was due to the 1997 results including a special charge of $0.7 million for streamlining operations and providing reserves against receivables and due to reduced expenses for professional services.
Interest and other income, net. The increase in interest and other income, net during fiscal 1998, was primarily due to reduced levels of debt.
Provision for income taxes. In fiscal 1998, the provision for income taxes represents an estimate of the current foreign tax liability. No benefit related to U.S. losses incurred in fiscal 1998 has been recognized by the Company due to the inability to carryback net operating losses and a lack of earnings history. The deferred tax asset on the balance sheet has been fully offset by a valuation allowance. In fiscal 1997, no further net operating loss carrybacks were available and the Company was in a net operating loss carryforward position.
Net loss. As result of the factors noted above, the net loss decreased in fiscal 1998 from the net loss in fiscal 1997.
Fiscal Years 1997 vs. 1996
Note: In fiscal 1997, charges of $4.0 million pretax were incurred to streamline operations and provide valuation reserves against inventories, receivables and fixed assets. In
fiscal 1996, a $1.2 million pretax charge to write down demonstration inventory was offset by $0.8 million pretax reversal of acquired in process technology charges.
Note: In fiscal 1997, charges of $4.0 million pretax were incurred to streamline operations and provide valuation reserves against inventories, receivables and fixed assets. In fiscal 1996, a $1.2 million pretax charge to write down demonstration inventory was offset by $0.8 million pretax reversal of acquired in process technology charges.
The following is a discussion comparing the results of operations for fiscal 1997 and fiscal 1996:
Net sales. The decrease in net sales during fiscal 1997 from fiscal 1996 levels was primarily due to decreased sales in the video post production marketplace. That decrease was partially offset by increased sales in the video broadcasting and computer graphics production and post production marketplaces.
International sales in fiscal 1997 and 1996 represented 42% and 38% of net sales, respectively, as export sales to Europe decreased to 10% from 14%, respectively, and export sales to the Pacific Rim increased to 27% from 19%.
Cost of sales. Cost of sales, as a percentage of sales, increased in fiscal 1997 over levels in fiscal 1996 due to the special charge incurred in fiscal 1997 for increasing inventory reserves.
Research and development. Fiscal 1997's decrease in research and development expenses primarily was a result of decreases in headcount and related overhead expenses after the Company's streamlining of operations.
Marketing and sales. Fiscal 1997's decrease in marketing and sales expenses was primarily due to decreases in headcount, demonstration equipment refurbishment costs, and trade show and promotion expenses after the Company's streamlining of operations.
General and administrative. General and administrative expenses in fiscal 1997 increased over fiscal 1996 leveles due to the 1997 results including a special charge of $0.7 million for streamlining operations and providing for reserves against receivables partially offset by a decrease in headcount after the Company's streamlining of operations.
Interest and other income, net. The decrease in interest and other income, net during fiscal 1997, was primarily due to reduced average interest bearing cash and cash equivalent balances.
Provision for (benefit from) income taxes. Fiscal 1996's benefit from income taxes was due to the Company's ability to carry back federal and state net operating losses to prior periods. In fiscal 1997, no further net operating loss carrybacks were available and the Company is in a net operating loss carryforward position.
Net loss. As result of the factors noted above, the net loss increased in fiscal 1997 from fiscal 1996 levels.
Liquidity and Capital Resources
Since inception, the Company has financed its operations and expenditures for property and equipment through the sale of capital stock, borrowings under a bank line of credit and term loans. On September 29, 1995, the Company completed its initial public offering and received approximately $17.8 million in net proceeds. On September 29, 1995, it completed the acquisition of the shares of ELSET GmbH it did not already own for approximately $7.6 million. As of September 30, 1998, the Company had $3.2 million of cash and cash equivalents.
Operating activities used $1.5 million in net cash in fiscal 1998 and provided $1.5 million in net cash in fiscal 1997. Net cash used in fiscal 1998 was due primarily to the net loss and to an increase in inventories and decreases in accounts payable and accrued liabilities partially offset by decreases in accounts receivable and income tax refunds receivable. Additional net cash was used in investing activities for the acquisition of property and equipment. Net cash provided in fiscal 1997 was due primarily to decreases in accounts receivable and inventories partially offset by decreases in accounts payable and accrued liabilities. Additional net cash was used in investing activities for the acquisition of property and equipment.
There were no bank borrowings outstanding and the Company had no credit facilities available as of September 30, 1998. On December 10, 1998, the Company signed an agreement with LaSalle Business Credit, Inc., a member of the ABN AMRO group, for a $7.5 million revolving line of credit. The credit line is secured by all the assets of the Company. The availability under this line is primarily calculated based on the accounts receivable and inventory. As of December 23, the Company had an outstanding balance borrowed under the line of $4.2 million.
The Company believes that its existing cash, cash equivalents and credit facilities will be sufficient to meet its cash requirements for at least the next twelve months. Although operating activities may provide cash in certain periods, to the extent the Company grows in the future, its operating and investing activities may use cash and, consequently, such growth may require the Company to obtain additional sources of financing. There can be no assurance that any necessary additional financing will be available to the Company on commercially reasonable terms, if at all.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and supplementary financial information that are attached hereto.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Certain information required by Part III is omitted from this report and will be filed as an amendment to this Form 10-K not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of the Company will be filed as an amendment to this Form 10-K not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Information as to the Company's executive officers appears at the end of Part I of this report.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 will be filed as an amendment to this Form 10-K not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 11.
Item 11. Executive Compensation
Information with respect to executive compensation and related information will be filed as an amendment to this Form 10-K not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners and management will be filed as an amendment to this Form 10-K not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions will be filed as an amendment to this Form 10-K not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements and Report of Ernst & Young LLP, Independent Auditors
Report of Ernst & Young LLP, Independent Auditors.
Consolidated Balance Sheet as of September 30, 1998 and 1997.
Consolidated Statements of Operations - For the Fiscal Years ended September 30, 1998, 1997 and 1996.
Consolidated Statement of Shareholders' Equity - For the three Fiscal Years ended September 30, 1998.
Consolidated Statements of Cash Flows - For the Fiscal Years ended September 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Number Description - ------ -----------
3.1(1) Bylaws of the Company.
3.2(2) Amended and Restated Certificate of Incorporation of the Company filed with the Delaware Secretary of State upon the closing of the Company's initial public offering.
3.3 Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock. Reference is made to Exhibits 4.3, 4.4 and 4.5.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 4.3, 4.4 and 4.5.
4.2(1) Specimen Common Stock Certificate.
4.3(3) Preferred Shares Rights Agreement, dated as of September 13, 1996, between the Company and U.S. Stock Transfer Corporation, including the Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
4.4(4) Amendment No. 1 to Preferred Shares Rights Agreement, dated as of July 14, 1998, between the Company and U.S. Stock Transfer Corporation.
4.5(5) Amendment No. 2 to Preferred Shares Rights Agreement, dated as of December 10, 1998, between the Company and U.S. Stock Transfer Corporation.
10.1(6) Lease Extension dated October 25, 1996 by and between Menlo Business Park and Partician Associates, Inc. and the Company.
10.2(7) 1997 Non-Executive Stock Option Plan and Form of Option Agreement.
10.3(1)* 1995 Stock Option/Stock Issuance Plan and Form of Option Agreement.
10.4(8) Asset Purchase Agreement, dated as of December 10, 1998, by and among the Company, Scitex Digital Video, Inc., Scitex Digital Video (Europe), Inc., Scitex Digital Video (Asia Pacific), Inc., Scitex Development Corp. and Scitex Corporation Ltd.
10.5 Loan and Security Agreement, dated December 10, 1998, between the Company and LaSalle Business Credit, Inc.
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Report of Ernst & Young LLP, Independent Auditors, on Financial Statement Schedule (reference is made to page of this Report)
24.1 Power of Attorney (reference is made to page 39 of this Report).
27.1 Financial Data Schedule.
- ----------------
(1) Incorporated by reference to exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto (File No. 33-95728), which became effective on September 26, 1995.
(2) Incorporated by reference from an exhibit filed with the Company's Annual Report on 10-K for the fiscal year ended September 30, 1995 (File No. 0-26620).
(3) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form 8-A (File No. 0-26620) to register Preferred Share Purchase Rights under the Company's stockholder rights plan, adopted by the Company's board of directors on September 3, 1996.
(4) Incorporated by reference from an exhibit filed with the Company's Amendment No. 1 to Registration Statement on Form 8-A/A (File No. 0-26620), filed on September 21, 1998.
(5) Incorporated by reference from an exhibit filed with the Company's Amendment No. 2 to Registration Statement on Form 8-A/A (File No. 0-26620), filed on December 23, 1998.
(6) Incorporated by reference from an exhibit filed with the Company's Annual Report on 10-K for the fiscal year ended September 30, 1997 (File No. 0-26620).
(7) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 333-23635), filed on March 20, 1997
(8) Incorporated by reference from an exhibit filed with the Company's Current Report on Form 8-K (File No. 0-26620), filed on December 23, 1998.
* Management Compensatory Plan
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Menlo Park, California on this 29th day of December 1998.
ACCOM, INC.
By: /s/ JUNAID SHEIKH --------------------------------------------- Junaid Sheikh Chairman of the Board of Directors, President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Junaid Sheikh and Donald K. McCauley, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
SCHEDULE II
ACCOM, INC.
Accom, Inc. Consolidated Financial Statements As of September 30, 1998 and 1997 and For the three fiscal years ended September 30, 1998, 1997 and 1996 with Report of Independent Auditors
Accom, Inc. Consolidated Financial Statements As of September 30, 1998 and 1997 and For the three fiscal years ended September 30, 1998, 1997 and 1996 with Report of Independent Auditors
Contents
Report of Ernst & Young LLP, Independent Auditors ........................
Consolidated Financial Statements:
Consolidated Balance Sheets .....................................
Consolidated Statements of Operations ...........................
Consolidated Statement of Stockholders' Equity ..................
Consolidated Statements of Cash Flows ...........................
Notes to Consolidated Financial Statements ......................
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders Accom, Inc.
We have audited the accompanying consolidated balance sheets of Accom, Inc. as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended September 30, 1998. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14(a) in Form 10-K. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Accom, Inc. as of September 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Ernst & Young LLP
Palo Alto, California October 30, 1998, except for Note 9, as to which the date is December 10, 1998
Accom, Inc. Notes to Consolidated Financial Statements
1. Nature of the Business and Basis of Presentation
Accom, Inc. (the "Company") designs, manufactures, sells, and supports a complete line of digital video signal processing, editing, and disk recording tools, and virtual set systems, primarily for the professional worldwide video and computer graphics production, post production and distribution marketplaces.
The Company incurred a net loss of $2.9 million in fiscal 1998. The Company also incurred a net loss of $4.5 million in fiscal 1997 and a net loss of $916,000 in fiscal 1996. There can be no assurance that the Company will be profitable on a quarterly or annual basis in the future. Management continues to believe, based on its current operating plan, including the acquisition and financing executed subsequent to September 30, 1998 (see note 9), that the Company has sufficient financial resources for its operations through the next 12 months.
One customer accounted for 16% and 13% of net sales in fiscal 1998 and 1997, respectively. No customers accounted for 10% or more of net sales in fiscal 1996. Export sales for fiscal 1998, 1997, and 1996 were approximately 45%, 42%, and 38%, respectively. Export sales to Europe and the Pacific Rim as a percentage of total sales were 19% and 22%, respectively for fiscal 1998, 10% and 27%, respectively, for fiscal 1997, and 14% and 19%, respectively, for fiscal 1996.
2. Summary of Significant Accounting Policies
Reclassifications
Certain amounts in the prior years' financial statements have been reclassified to conform with the fiscal 1998 presentation.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany transactions and balances.
Cash and Cash Equivalents
Cash equivalents consist of financial instruments having maturities of 90 days or less at the time of acquisition that are readily convertible into cash and have insignificant accounts and municipal notes. Cash and cash equivalents are held primarily by one major
Accom, Inc. Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
national bank and two major investment brokerage companies.
Concentration of Credit and Other Risks
The Company sells its product primarily in North America, Europe and the Pacific Rim. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for potential credit losses and such losses have historically been within management's expectations.
Dependence on key suppliers: The Company purchases certain key components from single source suppliers. Any significant component supply delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company's financial condition and results of operations.
Dependence on distributors: Currently, a significant amount of the Company's revenues from product sales are derived from sales to distributors. Loss, termination or ineffectiveness of distributors to effectively promote the Company's products could have a material adverse effect on the Company's financial condition and results of operations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Software Development Costs
Product development costs include costs related to software products that are expensed as incurred until the technological feasibility of the product is established. After technological feasibility is established, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed." The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. No software development costs have been capitalized in 1998, 1997, and 1996, as costs incurred subsequent to the establishment of technical feasibility have not been significant.
Accom, Inc. Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the assets' estimated useful lives, which generally ranges from three to five years.
Revenue Recognition
The Company generally recognizes revenue upon shipment of its systems. Estimated costs for insignificant post shipment obligations are accrued for at the time of shipment. If significant post shipment obligations exist or there are concerns about collection at the time of shipment, revenue is deferred until obligations are met or collection occurs.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed in Note 7, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the marker price of the underlying stock on the date of the grant, no compensation expense is recognized.
Acquired In-Process Technology
In-process technology acquired in an acquisition accounted for under the purchase method is expensed upon acquisition.
Income Taxes
The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Accom, Inc. Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Net Loss Per Share
In 1997, the FASB issued Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements.
The Company has securities outstanding that could dilute basic earnings per share in the future that were not included in the computation of net loss per share in the periods presented as their effect is antidilutive. For additional disclosures regarding potentially dilutive stock options, warrants, and convertible preferred stock, see Note 8.
New Accounting Guidelines
In fiscal 1999, the Company will be required to adopt newly issued accounting guidelines addressing the reporting of comprehensive income. The adoption is expected to have no significant impact on the Company's net income (loss) or shareholders' equity. The guidelines require any unrealized gains and losses on available-for-sale securities or foreign currency translation adjustments to be included in other comprehensive income. Prior to adoption of the new guidelines, such items, if present, are reported as a separate component of stockholders' equity.
Also in fiscal 1999, the Company will be required to adopt newly issued accounting guidelines addressing disclosures about segment and related information. As the Company operates in one segment, the adoption of the new guidelines is not expected to have a significant impact on the Company's results of operations, financial position, or disclosure of segment information.
In October, 1997, the Accounting Standards Executive Committee issued Statement of Position 97-2, as amended by SOP 98-4, "Software Revenue Recognition." These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions that are effective for the Company's transactions entered into subsequent to October 1, 1998. Under the Company's current policy, license fees on software are recognized when customer acceptance has been
Accom, Inc. Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
achieved. However, the Company has not yet fully assessed what the impact of the implementation of SOP 97-2 and SOP 98-4 will be on the recognition of revenues in the 1999 financial statements.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
3. Inventories
Inventories consist of the following: As of September 30, ------------------- 1998 1997 ---- ---- (In thousands)
Purchased parts and materials $ 256 $ 225 Work-in-process 445 204 Finished goods 181 182 Demonstration inventory 645 369 ---------------------------------------- $ 1,527 $ 980 ========================================
4. Property and Equipment
Property and equipment consist of the following: As of September 30, ------------------- 1998 1997 ---- ---- (In thousands)
Machinery and equipment $ 2,038 $ 1,768 Furniture and fixtures 219 207 Computer equipment 1,409 1,070 ---------------------------------------- 3,666 3,045 Less accumulated depreciation (2,628) (2,078) ---------------------------------------- Net property and equipment $ 1,038 $ 967 ========================================
Accom, Inc. Notes to Consolidated Financial Statements
5. Accrued Liabilities and Customer Deposits
Accrued liabilities and customer deposits consist of the following:
As of September 30, ------------------- 1998 1997 ---- ---- (In thousands)
Accrued compensation $ 199 $ 275 Accrued acquisition liabilities 126 208 Accrued streamlining expenses 305 379 Other 380 476 ---------------------------------------- $1,010 $1,338 ========================================
6. Commitments
Leasing Arrangements
The Company leases its primary office and manufacturing facility an under an operating lease which expires in February, 2000. Rent expense for fiscal years 1998, 1997 and 1996 was approximately, $465,000, $448,000 and $ 424,000, respectively.
Future minimum rental payments under noncancelable leases at September 30, 1998 are as follows (in thousands):
1999 $ 504 2000 215 2001 10 ---------------------- Total $ 729 ======================
The Company is sublessor for a portion of its primary office and manufacturing facility. Sublease rental income for fiscal 1998, 1997, and 1996 was approximately $175,000, $84,000, and $0.
Accom, Inc. Notes to Consolidated Financial Statements
7. Stockholders' Equity
Stock Options
The 1995 Stock Option/Stock Isuance Plan (the "1995 Plan") increased the number of shares available for grant up to 2,000,000, inclusive of options granted under the predecessor plan, plus automatic annual increases in 1996, 1997 and 1998. Under the 1995 Plan, options may be granted and shares may be issued at a price not less than 85% of the fair value of the Company's common stock on date of grant.
During Fiscal 1997, the Company adopted the 1997 Non-Executive Stock Option Plan (the "1997 Plan"), under which options for up to 500,000 shares of common stock are available for grant to employees other than officers and directors at a price not less than 100% of the fair value of the Company's common stock on date of grant.
Accom, Inc. Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Stock Options (continued)
During fiscal 1998, the Company repriced, through cancellation and regrant, options on 1,176,020 shares having original exercise prices ranging from $1.06 to $1.88 with new options having an exercise price of $1.03. The vesting terms of the repriced options were changed from five years to four years. In addition, repriced options vest 25% after one year and then the remaining 75% is vested proportionately on a monthly basis. Previously, the options vested 20% per year. In addition, the change in vesting terms also applied to 266,693 options which were not repriced because the original exercise price was less than the new exercise price. There were 17,500 options granted to Company directors which were not subject to repricing or the change in vesting terms.
During fiscal 1997, the Company repriced, through cancellation and regrant, options on 989,494 shares having original exercise prices ranging from $1.63 to $4.80 with new options with an exercise price of $1.31. The repriced options had the same vesting terms as the original options.
As of September 30, 1998, the Company has reserved 1,261,348 shares of common stock for issuance upon the exercise of stock options under all of its plans.
Accom, Inc. Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Employee Stock Purchase Plan
In July 1995, the Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted which authorizes the issuance of 250,000 shares of common stock. Shares may be purchased under the Purchase Plan at 85% of the lesser of the fair market value of the common stock on the grant or purchase date.
Pro Forma Disclosure of Employee Stock-Based Compensation
Pro forma information regarding net income and earnings per share is required by FASB 123 for awards granted after March 31, 1995 as if the Company had accounted for its stock-based awards to employees under the fair value method of FASB 123. The fair value of the Company's stock-based awards to employees was estimated using the minimum value model for awards prior to the Company's initial public offering in 1995 and the Black-Scholes model subsequent to the initial public offering. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming the following weighted-average assumptions:
Fiscal Year Ended September 30, 1998 1997 ---- ----
Risk-free interest rates 4.7% 6.0% Dividends paid -- -- Volatility factors - Company's common stock expected market price 0.80 0.80 Expected option life 4.00 years 4.83 years
The weighted average "fair value" of stock options granted during fiscal 1998 and 1997 was $0.55 and $0.56, respectively.
Accom, Inc. Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Pro Forma Disclosure of Employee Stock-Based Compensation (continued)
For employee purchase rights under the Employee Stock Purchase Plan, the "fair value" of those rights was estimated at the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used: Fiscal Year Ended September 30, ------------- 1998 1997 ---- ----
Risk-free interest rates 4.7% 6.0% Dividends paid -- -- Volatility factors - Company's common stock expected market price 0.80 0.80 Expected option life 0.50 years 0.50 years
The weighted average "fair value" of employee purchase rights issued under the Employee Stock Purchase Plan during fiscal 1998 and 1997 was $1.47 and $0.85, respectively.
The pro forma effect of applying the estimated "fair value" for employee stock-based compensation plans on net loss and net loss per share is as follows:
Fiscal Year Ended September 30, 1998 1997 ---- ---- Pro forma net loss (in thousands): $(3,477) $(5,753) Pro forma net loss per share: $ (0.52) $ (0.87)
Because FASB 123 is applicable only to awards granted subsequent to March 31, 1995, its pro forma effect will not be fully reflected until approximately 1999.
Stockholder Rights Plan
In September 1996, the Company's Board of Directors adopted a stockholder rights plan, which entitles existing stockholders of the Company to certain rights (including the right to purchase shares of Preferred Stock) in the event of the acquisition of 15% or more of the Company's outstanding common stock, or an unsolicited tender offer for such shares.
Accom, Inc. Notes to Consolidated Financial Statements
8. Income Taxes
As of September 30, 1998, the Company had federal net operating loss carryforwards of approximately $5,000,000. The Company also had federal research and development tax credit carryforwards of approximately $230,000. The federal net operating loss and credit carryforwards will expire at various dates beginning on 2012 through 2013.
Utilization of the Company's net operating loss carryforwards and credits may be subject to an annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are:
As of September 30, ------------------- 1998 1997 ---- ---- (In thousands) Deferred tax assets: Net operating losses $ 1,747 $ 735 R&D Credits 334 186 Capitalized R&D 2,801 2,711 Nondeductible reserves and accruals 683 354 Inventory valuation 913 1,055 Other individually immaterial items 92 437 ------------------------------------ 6,570 5,478 Valuation allowance (6,570) (5,440) ------------------------------------ Net deferred tax assets $ - $ 38 ====================================
The net valuation allowance increased by $1,130,000 and $5,241,000 during fiscal years ended September 30, 1998 and September 30, 1997, respectively.
Accom, Inc. Notes to Consolidated Financial Statements
8. Income Taxes (continued)
The provision (benefit) for income taxes consists of the following:
Fiscal Year Ended September 30, ------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Federal: Current $ -- $(705) $(231) Deferred -- 705 (231) ----- ----- ----- -- (462) ----- ----- ----- State: Current -- -- 11 Deferred -- -- (45) ----- ----- ----- -- (34) ----- ----- ----- Foreign: Current 19 9 -- ----- ----- ----- Total $ 19 $ 9 $(496) ===== ===== =====
A reconciliation of the income tax provision (benefit) at the federal statutory rate to the income tax provision at the effective tax rate is as follows:
Fiscal Year Ended September 30, ------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Income taxes computed at the federal statutory rate $(1,033) $(1,524) $ (480) State taxes (net of federal benefit) (125) (370) (23) Foreign taxes 19 9 -- Research and development tax credit (71) (123) (18) Technology basis step-up -- (2,867) (204) Foreign losses not currently benefitted 163 -- -- Valuation allowance 1,130 5,440 199 Other (64) (556) 30 ------- ------ ----- Total $ 19 $ 9 $(496) ======= ====== =====
Accom, Inc. Notes to Consolidated Financial Statements
9. Events Subsequent to September 30, 1998
On December 10, 1998, Accom, Inc. (the "Company"), acquired substantially all of the assets of Scitex Digital Video, Inc., a Massachusetts corporation ("SDV"). The Company also acquired substantially all of the assets of Scitex Digital Video (Europe) Limited, a private limited company incorporated in England and Wales ("SDVE"), and Scitex Digital Video (Asia Pacific), Inc., a California corporation ("SDVAP"). In addition, the Company acquired certain intangible personal property of Scitex Corporation Ltd., an Israel corporation ("Scitex Corporation"), related to SDV's business. These acquisitions were consummated pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of December 10, 1998, by and among the Company, SDV, SDVE, SDVAP, Scitex Development Corp., a Massachusetts corporation ("Scitex Development"), and Scitex Corporation. The Company acquired these assets in exchange for: (i) $7,893,400 in cash, (ii) a warrant for 250,000 shares of the Company's common stock, (iii) a warrant for 750,000 shares of the Company's common stock, and (iv) non-negotiable subordinated promissory notes of the Company in the aggregate amount of $2,065,000. As further consideration, the Company assumed certain liabilities of SDV. There were three sources for the cash consideration paid to SDV. First, the Company entered into a Loan and Security Agreement (the "Loan Agreement"), dated as of December 10, 1998, with LaSalle Business Credit, Inc. The Company borrowed approximately $3,340,000 under the Loan Agreement which constituted a portion of the cash consideration. The obligations of the Company under the Loan Agreement are secured by substantially all the assets of the Company. The second source for the cash consideration paid to SDV was approximately $3,050,000 from the Company's current cash assets. The third source for the cash consideration was $1,500,000 which the Company raised from the private placement of its common stock, on December 10, 1998, in which the Company sold 2,500,000 unregistered shares of common stock at a price of $0.60 per share. The assets acquired by the Company were used by SDV, SDVE and SDVAP in connection with SDV's business of developing, manufacturing, marketing and selling digital video manipulation equipment and non-linear video workstations for the video industry. The Company currently intends to continue this use of such assets. The Company entered into an investor rights agreement with each of SDV and the investor, which, among other things, grants certain registration rights with respect to the common stock of the Company issuable upon exercise of the warrants and the common stock held by the investor.