UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1997
OR
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ______
Commission File Number 0-29048
ACCENT COLOR SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1380314
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Connecticut Boulevard, East Hartford, Connecticut 06108
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:(860) 610-4000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes/X/No/ /
The number of shares outstanding of the registrant's common stock
as of November 10, 1997 was 11,989,855.
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,242,481 $ 20,288,535
Accounts receivable 459,750 29,471
Inventories (Note 3) 4,994,912 3,362,252
Prepaid expenses and other assets 420,451 511,633
Total current assets 11,117,594 24,191,891
Fixed assets, net 3,190,223 2,727,220
Other assets, net 51,565 32,354
Total assets $14,359,382 $ 26,951,465
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt $ 473,414 $ 1,000,000
Obligations under capital leases 63,480 47,555
Accounts payable 2,209,385 1,935,108
Accrued expenses 648,799 683,198
Customer advances and deposits 444,400 1,387,400
Deferred revenue 1,606,000 950,000
Total current liabilities 5,445,478 6,003,261
Obligation under capital leases 109,177 123,621
Long-term debt, net of discount - 1,271,638
Other long-term liabilities 436,839 208,002
Total non-current liabilities 546,016 1,603,261
Shareholders' equity:
Common stock, no par value, 25,000,000
shares authorized, 10,676,116 and 10,139,775
shares issued and outstanding 40,628,307 38,499,490
Deficit accumulated during the development (32,260,418) (19,154,547)
stage
Total shareholders' equity 8,367,889 19,344,943
Total liabilities and
shareholders' equity $14,359,382 $ 26,951,465
</TABLE>
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
period from
inception
Three months ended Nine months ended (May 21,
September 30, September 30, 1993)
through
1997 1996 1997 1996 September
30, 1997
<S> <C> <C> <C> <C> <C>
Sales $ 738,775 $ - $ 1,285,182 $ - $1,285,182
Costs and expenses:
Costs of production 1,914,893 570,301 4,443,353 570,301 5,715,686
Research and
development 2,369,070 1,616,054 6,735,083 5,088,646 17,542,017
Marketing, general and
administrative 978,753 1,403,729 3,468,964 2,895,058 9,333,245
5,262,716 3,590,084 14,647,400 8,554,005 32,590,948
Other (income) expense:
Interest expense 59,702 123,682 201,399 322,362 952,231
Interest income (103,788) (47,859) (457,746) (69,472) (570,882)
(44,086) 75,823 (256,347) 252,890 381,349
Net loss before
extraordinary item (4,479,855) (3,665,907) (13,105,871) (8,806,895) (31,687,115)
Extraordinary item:
Loss on early
extinguishment of debt,
net of income taxes of - - - - (573,303)
nil
Net loss $(4,479,855) $(3,665,907) $(13,105,871) $(8,806,895) $(32,260,418)
Net loss per common share $ (.44) $ (1.29)
(Note 2)
Weighted average common
shares
outstanding (Note 2) 10,198,422 10,159,539
Unaudited pro forma net
loss per
common share (Note 2) $ (.47) $ (1.28)
Unaudited pro forma
weighted average
common shares
outstanding (Note 2) 7,626,000 6,670,152
</TABLE>
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the
period from
Nine months ended September inception
30, (May 21,
1993)
through
1997 1996 September
<S> <C> <C> <C>
30,1997
Cash flows from operating activities:
Net loss $(13,105,871) $(8,806,895) $(32,260,418)
Adjustments to reconcile net loss to net cash
used in
operating activities:
Depreciation and amortization 806,212 520,049 1,894,711
Write-off of deferred offering costs - - 47,264
Expense related to stock and options
granted 345,230 - 363,630
Debenture issued for services - - 50,000
Loss on disposal of fixed assets 11,460 72,564 103,529
Conversion of accrued interest to common - - 231,147
stock
Extraordinary loss on extinguishment of
debt - - 573,303
Changes in assets and liabilities:
Accounts receivable (430,279) (677,354) (459,750)
Inventories (1,632,660) (2,301,021) (4,994,912)
Prepaid expenses and other assets 91,182 (712,607) (420,451)
Accounts payable and accrued expenses 239,878 1,965,859 2,680,663
Due to officers - (20,711) -
Customer advances and deposits (943,000) 837,400 444,400
Deferred revenue 656,000 900,000 1,606,000
Other long-term liabilities 228,836 70,232 436,838
Net cash used in operating activities $(13,733,012) $(8,152,484) $(29,704,046)
Cash flows from investing activities:
Proceeds from sale of fixed assets - 5,524 5,524
Purchases of fixed assets (1,186,459) (2,147,810) (4,352,463)
Cost of patent (19,553) - (52,653)
Net cash used in investing activities (1,206,012) (2,142,286) (4,399,592)
Cash flows from financing activities:
Payment of capital lease obligations (49,787) (60,188) (121,740)
Net proceeds from issuance of debentures - 393,218 4,839,101
Proceeds from issuance of warrants - 138,032 318,113
Net proceeds from issuance of common stock - 9,460,044 33,920,808
Proceeds from exercise of options & warrants 1,783,587 - 2,478,547
Net proceeds from issuance of preferred
stock through offerings and conversion of
debt - - 1,430,634
Increase (decrease) in notes payable - (50,000) -
Increase in long term debt - 2,223,750 2,223,750
Repayment of debentures (1,840,830) (405,000) (5,695,830)
Deferred offering costs - - (47,264)
Net cash provided by (used in) financing (107,030) 11,699,856 39,346,119
activities
Net increase (decrease) in cash and cash (15,046,054) 1,405,086 5,242,481
equivalents
Cash and cash equivalents at beginning 20,288,535 967 -
of period
Cash and cash equivalents at end of $ 5,242,481 $ 1,406,053 $ 5,242,481
period
</TABLE>
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Common Stock Preferred Stock Development
Shares Amount Shares Amount Stage Total
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sale 3,900 $ 21,800 - $ - $ - $ 21,800
Net loss - - - - (45,398) (45,398)
December 31, 1993 3,900 21,800 - - (45,398) (23,598)
Stock split 1,751,100 - - - - -
Conversion of
debentures - - 74,360 371,804 - 371,804
Proceeds from sale - - 160,000 643,770 - 643,770
Conversion of
promissory
notes 42,000 50,000 - - - 50,000
Reclassification - (20,500) - - - (20,500)
Shares issued for
services - - 15,000 75,000 - 75,000
Net loss - - - - (1,153,533) (1,153,533)
December 31, 1994 1,797,000 51,300 249,360 1,090,574 (1,198,931) (57,057)
Proceeds from sale - - 75,000 340,060 - 340,060
Exercise of
warrants 297,840 694,960 - - - 694,960
Options granted to
service
Provider - 18,400 - - - 18,400
Warrants issued
with debt - 56,631 - - - 56,631
Net loss - - - - (4,216,955) (4,216,955)
December 31, 1995 2,094,840 821,291 324,360 1,430,634 (5,415,886) (3,163,961)
Warrants issued
with debt - 138,032 - - - 138,032
Proceeds from sale 2,625,000 9,460,044 - - - 9,460,044
Warrants issued
with debt - 123,450 - - - 123,450
Proceeds from
initial public
offering 3,450,000 24,409,464 - - - 24,409,464
Conversion of
Series III
debentures 607,626 2,116,575 - - - 2,116,575
Conversion of
Preferred
stock 1,362,309 1,430,634 (324,360) (1,430,634) - -
Net loss - - - - (13,738,661) (13,738,661)
December 31, 1996 10,139,775 38,499,490 - - (19,154,547) 19,344,943
Exercise of
options 92,250 465,067 - - - 465,067
Exercise of 394,091 1,445,000 - - - 1,445,000
warrants
Shares issued with
exercise 50,000 218,750 - - - 218,750
Net loss
(unaudited) - - - - (13,105,871) (13,105,871)
September 30, 1997
(unaudited) 10,676,116 $40,628,307 - $ - $(32,260,418) $ 8,367,889
</TABLE>
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Condensed Financial Statements
In the opinion of the Company, the accompanying unaudited
condensed financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly its financial position as of September 30, 1997
and the results of operations and cash flows for the three months
and nine months ended September 30, 1997 and 1996 and the period
from inception (May 21, 1993) through September 30, 1997. The
December 31, 1996 balance sheet has been derived from the
Company's audited financial statements at that date. These
interim condensed financial statements should be read in
conjunction with Management's Discussion and Analysis and
financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
The results of operations for the three months and nine months
ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year.
2. Summary Of Significant Accounting Policies
Significant accounting policies followed in the preparation of
these financial statements are as follows:
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized upon customer acceptance. Until such time
that the Company has adequate information to estimate future
returns and customer acceptance, revenue is deferred from the
date of product shipment until final customer acceptance, which
occurs at the end of the warranty period.
Net Loss Per Common Share
Net loss per common share is determined based on the weighted
average number of shares outstanding during the period. In
determining weighted average common shares outstanding, common
share equivalents are excluded from the computation as their
effect is anti-dilutive.
Unaudited Pro Forma Financial Data
The Company's 8.00% convertible subordinated debentures,
including accrued interest, were converted to Common Stock upon
the closing of the initial public offering of Common Stock in
December 1996. In addition, the Series A Convertible Voting
Preferred Stock was converted to Common Stock upon the
effectiveness of the initial public offering of Common Stock.
The unaudited pro forma net loss per common share data included
in the condensed statements of operations for the three and nine
months ended September 30, 1996 gives effect to these
conversions as if the shares were outstanding at the beginning of
the period, and as if the interest, amortization of discount and
amortization of deferred financing expenses associated with the
debentures were not incurred.
In determining pro forma weighted average common shares
outstanding, common share equivalents are excluded from the
computation as their effect is anti-dilutive, except that,
pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, Common Stock options and warrants issued and
Common Stock, convertible debt and convertible preferred stock
sold in the twelve months preceding the initial filing date of
the public offering and through the effective date have been
included in the calculation as if outstanding for the period
using the treasury stock method and at the initial public
offering price of $8.00 per share.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(unaudited)
<S> <C> <C> <C> <C>
Raw materials and components $ 2,158,664 $ 2,242,756
Work-in-process 859,842 607,245
Finished goods 1,976,406 512,251
$ 4,994,912 $ 3,362,252
</TABLE>
4. Commitments
On January 8, 1996, the Company signed a seven-year agreement
with a vendor for the supply of inks and printheads. The
agreement provides the Company with worldwide rights, as defined.
The Company must pay the vendor royalties and license fees upon
achieving certain volume purchase levels. The agreement also
includes certain exclusivity features which benefit the Company.
To maintain the exclusivity rights, quarterly payments of
$250,000 are required beginning January 1, 1996 and ending on
October 1, 1997, and the Company must purchase all ink and
printhead requirements from the vendor and purchase specified
minimum amounts each year. The Company has the option to
terminate the exclusive rights leaving all other aspects of the
agreement unchanged. Currently, it is the Company's intent to
maintain the rights.
5. New Agreement
During September 1997, the Company concluded an agreement with
Xerox Corporation ("Xerox") which supersedes the prior Product
Development and Distribution Agreement. Under the new agreement,
Xerox has exercised warrants to purchase 375,000 shares of common
stock and the exercise price of approximately $1.3 million was
applied to reduce the Company's outstanding debt with Xerox. The
remaining debt of $473,000 will be paid in full prior to the end
of 1997. In exchange for mutual releases from liability under
the prior Product Development and Distribution Agreement, the
Company issued to Xerox 50,000 shares of common stock. The
Company's product deposits from Xerox were offset against the
charge resulting from the issuance of 50,000 shares of common
stock and inventories specific to the project, with no material
impact to the Statement of Operations resulting.
6. Subsequent Event
On October 16, 1997, the Company completed a private equity
offering of 437,913 units of its common stock. Each unit
consists of three shares of common stock and a warrant for the
purchase of one share of common stock. Under the term of the
offering, each unit had a purchase price of $10.95 which
represented three multiplied by 83% of the average of the closing
bid prices of the common stock as reported by NASDAQ during the
five consecutive trading days preceding the closing. The
offering raised approximately $4.8 million before offering
expenses. The warrants are exercisable at $4.74 per share and
expire on October 16, 2002. Additional warrants were issued for
the purchase of a total of 102,500 shares of common stock at a
purchase price of $4.74 per share for services provided by
placement agents.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Accent Color Sciences, Inc. ("Accent Color" or the "Company") is
a development stage company that designs, manufactures and sells
innovative, high-speed, spot color printing systems ("Truecolor
Systems"). The Company was formed in 1993 initially to develop a
high-speed, color printer to attach to cut sheet, black-on-white
production printer. Development and testing of a prototype began
in January 1994 and was first announced at the On-Demand Trade
Show (a major printing industry trade show) in May 1994. In
November 1994, a "proof-of-concept" Truecolor System was shown at
the Xplor International Global Electronic Document Systems
Conference ("Xplor") (the primary production printing industry
trade show). After Xplor in November 1994, International Business
Machines Corporation ("IBM") approached the Company and requested
that the Company develop a version of its Truecolor System to
work in conjunction with the IBM 3900 continuous form production
printing system.
During 1995, the Company began negotiations with IBM and Siemens
Nixdorf Printing Systems USA, Inc. (which was acquired by an
affiliate of Oce Printing Systems USA, Inc. ("Oce") in 1996) to
enter into formal development relationships. During the same
period, the Company accelerated its engineering and development
activities as its efforts were focused on designing and building
the next generation prototypes which were demonstrated at Xplor
in November 1995.
During 1996, the Company was focused on refining the Truecolor
System design and preparing for the commencement of commercial
production in the first half of 1997. The Company entered into a
Product Purchase Agreement with IBM in April 1996. In October
1996 , the Company signed a memorandum of understanding with Oce.
At Xplor in October 1996, the Company demonstrated its Truecolor
Systems, as well as certain enhancements planned for production
in 1998.
On May 6, 1997, IBM announced the limited availability product
introduction phase of the Company's continuous form version of
the Truecolor System designed for integration with IBM's 3900
production printing system ("Truecolor 390"), which IBM will
market as its InfoPrint Hi-Lite Color post processor. The product
was announced for general worldwide availability on September 15,
1997.
Accent Color also sells related consumables and spare parts.
Currently, the only consumables sold by the Company are wax-based
inks, which it acquires from a vendor. The sale of consumables is
expected to generate recurring revenue which the Company believes
will continue to increase as the installed base and usage of
Truecolor Systems increase.
Results of Operations
Quarter Ended September 30, 1997 compared to Quarter Ended
September 30, 1996. The Company recognized $739,000 in sales for
the quarter ended September 30, 1997 as compared to none for the
quarter ended September 30, 1996. These sales represent the
recognition of revenue of three pre-production systems and
shipments of consumables and spare parts related to the Truecolor
Systems. During the first quarter of 1997 and all of 1996, the
Company's efforts were primarily directed at designing,
developing, testing and manufacturing prototype and pre-
production systems. In the second and third quarters of 1997, the
Company's efforts were primarily directed toward the commercial
introduction of its Truecolor Systems. Thirteen production
systems were shipped during the third quarter, which were
recorded as deferred revenue. The backlog, as of September 30,
1997, was twelve Truecolor Systems scheduled for shipment through
December 31, 1997.
Costs of production of $1,915,000 incurred during the quarter
ended September 30, 1997 consist of the ramp-up manufacturing
expenses related to the Company's launch of the commercial
production of its Truecolor Systems and costs of goods sold
related to the three pre-production systems recognized and the
sale of consumables and spare parts.
Research and development expenses primarily consist of the cost
of personnel, equipment and materials needed to conduct the
Company's research and development efforts, including
manufacturing prototype systems. Research and development
expenses for the quarter ended September 30, 1997 increased by
$753,000, or 47%, to $2,369,000 from $1,616,000 for the quarter
ended September 30, 1996. This increase in research and
development expenses was primarily attributable to costs
associated with future product enhancements, specifically the
design and development of wider ink jet printheads to increase
color coverage on a page. The Company intends to continue to
dedicate substantial resources to research and development
activities. Accordingly, the Company expects to continue to incur
additional expenses associated with the development,
manufacturing and testing of new prototype systems.
Marketing, general and administrative expenses primarily consist
of (i) the marketing cost in connection with product promotional
activities and certain indirect marketing activities in
conjunction with the Company's OEM customers and (ii) general and
administrative costs related to the salaries of the Company's
executive, administrative and financial personnel and associated
costs. Marketing, general and administrative expenses for the
quarter ended September 30, 1997 decreased by $425,000, or 30%,
to $979,000 from $1,404,000 for the quarter ended September 30,
1996. A majority of this decrease is due to expenses incurred in
1996 related to ramp-up efforts in the transformation of the
Company that were not incurred during the comparable time in
1997. These expenses included costs associated with recruiting,
system documentation, regulatory testing, and the Company's move
to a new facility. The Company anticipates that marketing and
selling costs will increase as the Company expands to support
anticipated revenue growth and manufacturing activities and
becomes more involved in supporting its OEM customers.
Interest expense for the quarter ended September 30, 1997
decreased by $64,000, or 52%, to $60,000 from $124,000 for the
quarter ended September 30, 1996. This decrease in interest
expense for the quarter ended September 30, 1997 was attributable
to the elimination of related interest expense on extinguished
debentures originally issued in October 1995 and February 1996.
Interest income for the quarter ended September 30, 1997
increased by $56,000, or 117%, to $104,000 from $48,000 for the
quarter ended September 30, 1996. This increase in interest
income was attributable to earnings on short-term investments of
proceeds received from the Company's initial public offering in
December 1996 not currently needed for its operations.
Nine Months Ended September 30, 1997 compared to Nine Months
Ended September 30, 1996. The Company recognized $1,285,000 of
sales for the nine months ended September 30, 1997 as compared to
none for the nine months ended September 30, 1996. During the
first half of 1997 and all of 1996, the Company's efforts were
primarily directed at designing, developing, testing and
manufacturing prototype and pre-production systems. In the second
and third quarters of 1997, the Company recognized revenue on
three pre-production systems and began to ship consumables
related to the Truecolor Systems to fill the channels of an OEM
customer. In 1997, the Company has shipped two pre-production
and fifteen production Truecolor Systems, that were recorded as
deferred revenue.
Costs of production of $4,443,000 incurred during the nine months
ended September 30, 1997 consist of the ramp -up manufacturing
expenses related to the Company's preparation and launch of the
commercial production of its Truecolor Systems and costs of goods
sold related to the three pre-production systems recognized and
the sale of consumables.
Research and development expenses for the nine months ended
September 30, 1997 increased by approximately $1,646,000, or 32%,
to $6,735,000 from $5,089,000 for the nine months ended
September 30, 1996. This increase in research and development
expenses was primarily attributable to costs associated with
future product enhancements, specifically the design and
development of wider ink jet printheads to increase color
coverage on a page. The Company intends to continue to dedicate
substantial resources to research and development activities.
Accordingly, the Company expects to continue to incur additional
expenses associated with the development, manufacturing and
testing of new prototype systems.
Marketing, general and administrative expenses for the nine
months ended September 30, 1997 increased by $574,000 to
$3,469,000 from $2,895,000 for the nine months ended September
30, 1996. This increase in marketing, general and administrative
expenses was primarily attributable to the hiring of additional
marketing and administrative personnel, costs associated with
promotional activities and professional service costs to support
the Company's anticipated revenue growth and manufacturing
activities. This increase is partially offset by expenses
incurred in 1996 related to recruiting, system documentation,
regulatory testing, and the Company's move to a new facility
that were not incurred during the comparable time in 1997. The
Company anticipates that marketing and selling costs will
increase as the Company becomes more involved in supporting its
OEM customers.
Interest expense for the nine months ended September 30, 1997
decreased by $121,000 to $201,000 from $322,000 for the nine
months ended September 30, 1996. This decrease in interest
expense for the nine months ended September 30, 1997 was
attributable to the elimination of related interest expense of
extinguished debentures originally issued in October 1995 and
February 1996. Interest income for the nine months ended
September 30, 1997 increased by $388,000 to $458,000 from $70,000
for the nine months ended September 30, 1997. The increase in
interest income is attributable to earnings on short-term
investments of proceeds received in the Company's initial public
offering in December 1996 not currently needed for its
operations.
Liquidity and Capital Resources
The Company's need for funding has increased from period to
period as it has continued its research and development
surrounding Truecolor Systems, continued its research and
development activities for enhancement of Truecolor Systems,
increased its capital expenditures on equipment and commenced
production of Truecolor Systems. To date, the Company has
financed its operations through customer payments, borrowings and
sale of equity securities.
From inception through September 30, 1997, the Company has
received $4.2 million from the delivery of seven prototype, nine
pre-production systems and fifteen production systems to
customers; net proceeds of $7.9 million from borrowings and the
sale of debt securities, net proceeds of $2.5 million from the
exercise of warrants and employee stock options, and net proceeds
of $35.2 million from the sale of equity securities. Of the net
equity proceeds, $24.4 million was raised in the Company's
initial public offering in December 1996 and the balance of $10.8
million was raised through the private placement of equity
securities.
At September 30, 1997, the Company's primary source of liquidity
was cash and cash equivalents totaling $5.24 million.
Operating activities consumed $13.7 million in cash during the
nine months ended September 30, 1997 compared to $8.2 million
during the nine months ended September 30, 1996. This increase
was primarily attributable to an increase in the net loss of the
Company, an increase in inventories and a decrease in customer
deposits and advances as the Company began to ship Truecolor
Systems, and a decrease in accounts payable as the Company
reduced its outstanding liabilities. This was partially offset
by an increase in deferred revenue and other long-term
liabilities and a decrease in accounts receivable, prepaids and
other assets.
Capital expenditures decreased $900,000, or 43%, from $2.1
million for the nine months ended September 30, 1996 to $1.2
million for the nine months ended September 30, 1997. For the
nine months ended September 30, 1996, the Company incurred
approximately $1.3 million in capital expenditures associated
with the Company's move to its new facility in May 1996. For the
nine months ended September 30, 1997, capital expenditures were
primarily attributable to equipment acquisitions related to the
Company's expansion to support anticipated revenue growth and
manufacturing activities and continued engineering and
development efforts. The Company has currently planned to spend
approximately $1.5 million for capital expenditures for the year
ending December 31, 1997. The Company's currently planned capital
expenditures are primarily for the continued expansion of the
Company's development and manufacturing capabilities.
Under a vendor Agreement, the Company is obligated to pay
$250,000 per calendar quarter through 1997 in order to maintain
certain exclusive rights. In addition, the Company has a
development arrangement with the vendor that would require the
Company to make additional payments to support developing a wider
printhead manufacturing capability. The Company estimates that
these payments will total approximately $2.6 million in
development costs and $675,000 in capital equipment expenditures.
The Company has incurred $1.6 million in development costs and
$284,000 in capital expenditures for the nine months ending
September 30, 1997 related to development of wider ink jet
printheads and expects to incur the remainder of these costs by
the end of the first quarter of 1998 .
During September 1997, the Company concluded an agreement with
Xerox which supersedes the prior Product Development and
Distribution Agreement. Under the new agreement, Xerox has
exercised warrants to purchase 375,000 shares of common stock and
the purchase price of approximately $1.3 million was applied to
reduce the Company's outstanding debt with Xerox. The remaining
debt of $473,000 will be paid in full prior to the end of 1997.
In exchange for mutual releases from liability under the prior
Product Development and Distribution Agreement, the Company
issued to Xerox 50,000 shares of common stock. The Company's
product deposits from Xerox were offset against the charge
resulting from the issuance of 50,000 shares of common stock and
inventories specific to the project.
Based on the Company's current operating plan, the Company's
primary requirements for cash through 1997 will be for the
repayment of indebtedness, the expansion of its manufacturing,
development, engineering and customer support capabilities, the
commercial production of additional Truecolor Systems and the
further development and enhancement of the Company's products. As
part of its expansion during 1997, the Company currently expects
(i) to hire approximately 5 additional manufacturing,
development, engineering and customer support employees for the
remainder of 1997, (ii) to acquire inventories of modules,
components and wax-based inks for Truecolor Systems and (iii) to
invest in additional printhead manufacturing capacity. The
Company's currently planned research and development activities
are focused on developing (i) wider ink jet printheads for
greater color coverage per page, (ii) advanced paper handling
functionality particularly duplex printing (the ability to print
on both sides of the page) and (iii) higher resolution ink jet
printheads. The Company believes that its existing cash resources
will be sufficient for the financing of its operations, repayment
of indebtedness and capital expenditures into at least the first
quarter of 1998. On October 16, 1997 the Company completed a
private placement of equity securities. Under the terms of the
placement, the investors purchased 1.3 million shares of common
stock and received 435,000 common stock warrants for a total
value of $4.8 million.
The Company is continuing to review various financing strategies,
both debt and equity, that would allow it to continue to fund
operations and research and development activities through 1998.
The Company is a development stage company and it is expected
that quarterly net losses will continue through at least the
first quarter 1998.
Forward-Looking Statements
The foregoing statements and analysis contain forward-looking
statements and information including information with respect to
the Company's plans and strategy for its business. Such forward-
looking statements are made pursuant to the "safe harbor"
provisions of Section 21E of the Securities Exchange Act of 1934,
as amended, which were enacted as part of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
contained in the foregoing analysis include marketing, revenue
and expenditure expectations, and other strategies and
anticipated events. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause actual
events or the Company's actual results to differ materially from
those indicated by such forward-looking statements. These
factors include, without limitation, (i) the ability of the
Company to develop and maintain sales and distribution agreements
with OEM customers; (ii) the ability of the Company to develop a
market for its product; (iii) the dependence of the Company on
third party marketing, distribution and support, including the
control by the Company's OEM customers over the timing of the
introduction of its products and the need for the Company to
complete and satisfy extensive testing requirements of its
products on a timely basis; (iv) the dependence of the Company
on third party manufacturers and suppliers; (v) the ability of
the Company to raise sufficient capital on reasonable terms;
(vi) the level of customer acceptance of the Company's products;
and (vii) potential fluctuations in the company's quarterly
results of operations. Further information on factors that could
cause actual results to differ from those anticipated is detailed
in the Company's Annual Report on Form 10-K for 1996 as filed
with the Securities and Exchange Commission. Any forward-looking
information contained herein should be considered in light of
these factors.
Part II. Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
On September 22, 1997, the Company concluded an agreement with
Xerox which supersedes the prior Product Development and
Distribution Agreement. In exchange for mutual releases from
liability under the prior Product Development and Distribution
Agreement, the Company issued to Xerox 50,000 shares of common
stock for the aggregate value of $218,750. The stock issued to
Xerox was issued under an exemption from registration in reliance
on section 4(2) of the Securities Act of 1933. The Company's
product deposits from Xerox were offset against the charge
resulting from the issuance of 50,000 shares of common stock and
inventories specific to the project. The issuance of the stock
was therefore not a public sale of stock by the Company.
The following information is being provided pursuant to Rule 463
under the Securities Act of 1933 concerning the use of proceeds
following the effective date of the first registration statement
of the Company. This information is supplemental to the
information provided in Form SR filed for the period ended March
17, 1997.
From the effective date of the registration statement through
September 30, 1997, net offering proceeds have been used by the
Company for the following:
<TABLE>
<CAPTION>
Payments Payment to
to others
director
s,
officers
or 10%
owners
<S> <C> <C>
Construction of
plant, building
and facilities 379,000 Estimate
Purchase and
installation of
machinery and
equipment 906,300 Estimate
Repayment of
indebtedness 409,484 3,693,833
Working Capital 18,108,100 Estimate
</TABLE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
During September 1997, the Company concluded an agreement with
Xerox which supersedes the prior Product Development and
Distribution Agreement. Under the new agreement, Xerox has
exercised warrants to purchase 375,000 shares of common stock and
the purchase price of approximately $1.3 million was applied to
the Company's outstanding debt with Xerox.
On October 16, 1997 the Company completed a private placement of
equity securities. Under the terms of the placement, the
investors purchased 1.3 million shares of common stock and
received 435,000 common stock warrants for a total value of $4.8
million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Xerox Agreement dated September 22, 1997 (supersedes
Product Development and Distribution Agreement dated February 16,
1996)
Exhibit 11 - Computation of per share earnings
Exhibit 27 - Financial data schedule
(b) Reports filed on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACCENT COLOR SCIENCES, INC.
Date November 14, 1997 By /s/ Norman L. Milliard
Norman L. Milliard
President and Chief
Executive Officer
By /s/ Patrick J. Pedonti
Patrick J. Pedonti
Vice President and Chief
Financial Officer
Principal Financial and
Accounting Officer)
AGREEMENT
This Agreement is entered into by and between Xerox Corporation,
a corporation organized under the laws of the State of New York
("Xerox") and Accent Color Sciences, a corporation organized
under the laws of the State of Connecticut ("ACS") and amends
certain agreements between the parties as more specifically
described herein. This Agreement shall be effective on the date
the last signature is affixed hereto ("Effective Date").
WHEREAS, the parties have certain rights and obligations under
certain agreements currently in force between them; and
WHEREAS, Xerox has notified ACS that Xerox does not wish to
distribute the cut-sheet version of the ACS 135 printer as an OEM
product; and
WHEREAS, the parties are interested in engaging in a Finishing
Partner relationship; and
WHEREAS, the parties desire to amicably resolve the situation;
NOW, THEREFORE, in consideration of the mutual promises and
undertakings hereinafter set forth, the parties agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following terms have the following
meanings:
1.1 "Development Agreement" shall mean that certain agreement
between the parties styled a Product Development and Distribution
Agreement which was effective February 16, 1996.
1.2 "Financial Institution" shall mean a bank, trust company,
national banking association, savings bank, industrial bank,
private banker, foreign banking corporation, federal savings and
loan association, a savings institution chartered and supervised
as a savings and loan or similar institution under federal law or
the laws of a state, a federal credit union, or a credit union
chartered and supervised under the laws of a state.
1.3 "Loan Agreement" shall mean that certain agreement between
the parties styled a "Loan Agreement and Promissory Note" dated
February 29, 1996.
1.4 "Registration Rights Agreement" shall mean that certain
agreement between the parties styled a "Registration Rights
Agreement" dated February 29, 1996.
1.5 "Security Agreement" shall mean certain agreement between the
parties styled a "Security Agreement" effective February 29,
1996.
1.6 "Warrant Agreements" shall mean those certain agreements
between the parties each styled a Warrant to Purchase the Common
Stock of Accent Color Sciences, one effective February 29, 1996
and the other effective April 19, 1996.
SECTION 2. DEVELOPMENT AGREEMENT TERMINATED
2.1 The Development Agreement is terminated as of the Effective
Date and neither party shall hereafter have any rights or
obligations arising therefrom or with respect thereto.
2.2 Xerox will consider an application from ACS to become a Xerox
Finishing Partner on and subject to Xerox's customary terms and
conditions.
SECTION 3. EXERCISE OF WARRANTS/ISSUANCE OF ADDITIONAL SHARES
3.1 Xerox hereby exercises its right to purchase shares of ACS
common stock as set forth in each of the Warrant Agreements and
with respect to all 375,000 shares of ACS common stock subject
thereto (the "Warrant Shares"). Xerox and ACS hereby acknowledge
and agree that the exercise price for the purchase of the Warrant
Shares, in the aggregate amount of $1,375,000 (the "Warrant
Shares Purchase Price"), under the Warrant Agreements shall be
paid by reducing ACS indebtedness to Xerox under the Loan
Agreement as of the Effective Date. The Warrant Shares Purchase
Price shall be applied to reduce the indebtedness under the Loan
Agreement in the manner set forth in Section 5 of the Loan
Agreement. ACS hereby acknowledges the application of such
purchase price in reduction of its indebtedness under the Loan
Agreement as full payment for the Warrant Shares pursuant to the
Warrant Agreements and agrees to promptly cause a certificate
evidencing such 375,000 shares of its common stock to be issued
and delivered to Xerox.
3.2 Upon the Effective Date and in partial consideration of the
agreements of Xerox set forth herein, ACS will issue to Xerox
50,000 shares of its common stock, no par value (the "New Common
Shares". Xerox represents that it is acquiring these shares for
investment and without a view to the distribution thereof (other
than in connection with a registration thereof under the
Registration Rights Agreement) and acknowledges that the
certificate representing such shares will bear a legend
restricting the transfer of such shares in accordance with
applicable securities laws. The New Common Shares shall be
deemed to be "Registrable Securities" as defined in the
Registration Rights Agreement and entitled to all the benefits
applicable to "Shares" under and as defined in the Registration
Rights Agreement.
3.3 ACS hereby represents and warrants that when issued each of
the Warrant Shares and the New Common Shares will be duly
authorized, validly issued, fully paid and nonassessable.
3.4 Xerox hereby exercises its right under Section 2.2 of the
Registration Rights Agreement to require ACS to effect the
registration of the Warrant Shares and the New Common Shares
(collectively the 425,000 shares making up the Warrant Shares and
the New Common Shares may be hereinafter referred to as the
"Registrable Shares") for public sale pursuant to a registration
statement to be filed with the Securities and Exchange Commission
in accordance with the Registration Rights Agreement. Xerox
agrees that, without intending to modify any other rights or
obligations under the Registration Rights Agreement, ACS shall be
deemed in compliance with the Registration Rights Agreement if it
shall file a registration statement within 90 days following the
Effective Date or December 31, 1997, whichever is later. ACS
hereby acknowledges Xerox's right to demand registration of the
Registrable Shares and receipt of the demand for such
registration. ACS agrees to use its best efforts to file the
registration statement within the time frame set forth above and
will provide to Xerox a draft of such registration statement on
or before December 1, 1997. ACS hereby waives any rights it may
have to delay the filing of a registration statement as set forth
in Section 2.2(c) of the Registration Rights Agreement.
SECTION 4. AMENDMENT TO LOAN AGREEMENT
4.1 The Loan Agreement is amended to the extent that after giving
effect to the repayment of principal to Xerox under the Loan
Agreement as set forth in paragraph 3.1 above, commencing on the
first day of the first full month after the Effective Date to and
including December 1, 1997, ACS shall in equal consecutive
monthly installment payments pay the remaining principal and
accrued interest under the Loan Agreement.
4.2 In all other respects the Loan Agreement remains in full
force and effect.
4.3 Except as otherwise disclosed by ACS to Xerox in writing,
each of the representations and warranties contained in Section
11 of the Loan Agreement and in Section 3 of the Security
Agreement will be true and correct in all material respects on
the Effective Date as though such representations and warranties
were made on and as of the Effective Date.
SECTION 5. AMENDMENT TO SECURITY AGREEMENT
5.1 The Security Agreement is amended to the extent that the
first priority security interest in the Collateral (as such term
is defined in the Security Agreement) granted by ACS to Xerox
pursuant to section 2.1 (a) of the Security Agreement (the "Xerox
Security Interest") is hereby subordinated to any other security
interest in the Collateral granted by ACS to a Financial
Institution for the purpose of securing financing extended to ACS
by such Financial Institution (s) for the purpose of the
continuation or expansion of ACS' business (the "Financial
Institution Security Interest"), provided, however, in the event
that there is an Event of Default (as defined in either the Loan
Agreement or the Security Agreement) then the Xerox Security
Interest will not be subordinated to any Financial Institution
Security Interest granted after the date such Event of Default
occurs and during the period of time such Event of Default is
continuing and provided further, that, if, prior to such Event of
Default occurring, ACS has not granted a Financial Institution
Security Interest, the Xerox Security Interest shall remain a
first priority security interest.
5.2 Xerox waives its rights under section 2.1 (b) of the Security
Agreement insofar as it is necessary for paragraph 5.1 above to
be implemented.
5.3 Except as provided above, the terms of the Security Agreement
remain in full force and effect.
SECTION 6. RELEASE FROM LIABILITY
6.1 Except for the obligations of Xerox hereunder, ACS, on behalf
of itself and all of its affiliated companies, and their
respective shareholders, officers, directors, employees, agents,
successors and assigns, hereby releases, acquits, remises and
forever discharges Xerox and all of Xerox' affiliated companies,
and their respective shareholders, officers, directors,
employees, agents, heirs, successors, and assigns, from all
claims, damages, liabilities, equities, costs, attorney fees,
causes of action of any kind, suits, debts, dues, sums of money,
accounts, bonds, bills, covenants, contracts, controversies,
agreements, promises, judgments, executions, and demands
whatsoever, whether known or unknown, in law, admiralty, or
equity, which they ever had, now have or may have, from the
beginning of the world to the Effective Date, which arise from or
relate to the Development Agreement.
6.2 Except for the obligations of ACS hereunder and under the
Loan Agreement. the Registration Rights Agreement and the
Security Agreement, as amended by this Agreement, Xerox, on
behalf of itself and all of its affiliated companies, and their
respective shareholders, officers, directors, employees, agents,
successors and assigns, hereby releases, acquits, remises and
forever discharges ACS and all of ACS' affiliated companies, and
their respective shareholders, officers, directors, employees,
agents, heirs, successors, and assigns, from all claims, damages,
liabilities, equities, costs, attorney fees, causes of action of
any kind, suits, debts, dues, sums of money, accounts, bonds,
bills, covenants, contracts, controversies, agreements, promises,
judgments, executions, and demands whatsoever, whether known or
unknown, in law, admiralty, or equity, which they ever had, now
have or may have, from the beginning of the world to the
Effective Date, which arise from or relate to the Development
Agreement.
6.3 The parties agree that, except as may be necessary for
compliance with law or as may be necessary to be disclosed to
their respective attorney or accountants in order for such
persons to discharge their professional responsibilities, the
terms of this Agreement may not be made public without the prior
written consent of the other party. It is the intent of the
parties, however, that ACS will issue a mutually acceptable
announcement in the form of a news release on the Effective Date.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 Remedies, Non-Waiver. No failure or delay by either party in
exercising any right, power or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right,
power or privilege. No right or remedy in this Agreement is
intended to be exclusive but each shall be cumulative and in
addition to any other remedy referred to herein or otherwise
available to the parties at law or in equity; and the exercise by
Lender of any one or more of such remedies shall not preclude the
simultaneous or later exercised by the parties of any or all such
other remedies.
7.2 Notices. All notices, requests and demands to or upon any
party hereto shall be deemed duly given or made when hand
delivered or sent by United States Registered mail, postage
prepaid, receipt requested, addressed to such party at its
address set forth below:
If to Xerox:
Xerox Corporation
PO Box 1600
800 Long Ridge Road
Stamford, Connecticut 06904
Attention: Richard S. Palmer
Director, Corporate Business Development
with a copy to:
Xerox Corporation
PO Box 1600
800 Long Ridge Road
Stamford, Connecticut 06904
Attention: Senior Vice President and General Counsel
If to ACS:
Accent Color Sciences, Inc.
800 Connecticut Boulevard
East Hartford, CT 06108
Attention: Chief Financial Officer
7.3 Amendment, Modification. This Agreement may be amended or
modified only by a written agreement of the parties hereto
specifically referring to this Agreement.
7.4 Binding Provision. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective
successors and assigns.
7.5 Titles. Heading of sections are for convenience only, are
not part of this Agreement and shall not be deemed to affect the
meaning or construction of any of the provisions hereof.
7.6 Severable Provisions. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or
unenforceability shall not invalidate or rendered unenforceable
such provision in any other jurisdiction.
7.7 Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York
without reference to the choice of law principles thereof.
IN WITNESS WHEREOF, the parties have duly executed and
delivered this Agreement as of the date the last signature is
affixed hereto.
ACCENT COLOR SCIENCES, INC. XEROX CORPORATION
By:__________________________
By:__________________________________________
Title:President and CEO Title:VP,GM High End Systems
Printing, XEROX
Date: September 22, 1997 Date: September 22, 1997
ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT RE COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September September 30, September 30, September 30,
30, 1997 1996 1997 1996
(Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C>
Net loss....................... $(4,479,855) $(3,575,625)(1) $(13,105,871) $(8,560,088)(1)
Calculation of weighted average
common shares
outstanding (2):
Common Stock ............... 10,198,422 4,719,840 10,159,539 2,808,144
Cheap Stock(3).............. - 957,761 - 1,913,609
Conversion of Series A
Preferred Stock ............ - 1,362,312 - 1,362,312
Conversion of Series III
Debentures, including accrued
interest (4) - 586,087 - 586,087
Total.................. 10,198,422 7,626,000 10,159,539 6,670,152
Net loss per common share..... $ (.44) $ (.47) $ (1.29) $ (1.28)
</TABLE>
(1) Adjusted to give effect to the conversion of Series III Debentures
at the beginning of the period, as if the interest, amortization of
the discount and amortization of other financing expenses were not
incurred.
(2) Common share equivalents (stock options and warrants) are excluded
from the computation as their effect is anti-dilutive, except that,
pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock options and warrants issued and common
stock, convertible debt and convertible preferred stock sold in the
twelve months preceding the initial filing date of the offering's
registration statement have been included in the calculation as if
outstanding for the period January 1, 1996 through September 30,
1996 using the treasury stock method and the initial public offering
price of $8.00 per share.
(3) See attached calculation.
(4) Included as if the conversion of the Series III Debentures occurred
at the beginning of the period, including shares issued for
settlement of accrued interest.
ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CALCULATION OF CHEAP STOCK
<TABLE>
<CAPTION>
Shares Price Total
<S> <C> <C> <C>
For the three months ended September
30, 1996
Options issued ..................... 605,250 3.67 $ 2,219,250
Options issued ..................... 647,850 4.00 2,591,400
Warrants issued (net of exercised).... 287,985 3.67 1,055,945
Warrants issued ................... 45,000 8.00 360,000
Placement agent warrants issued ..... 300,000 4.00 1,200,000
Total .................... 1,886,085 $ 7,426,595
Initial public offering price........ $ 8
Shares assumed repurchased ........... 928,324
Less: shares assumed issued........... 1,886,085
Cheap stock ...................... 957,761
For the nine months ended September
30, 1996
Common Stock purchased - private
placement ...... 1,911,696 $ 4.00 $7,646,784
Options issued ..................... 605,250 3.67 2,219,250
Options issued ..................... 647,850 4.00 2,591,400
Warrants issued (net of exercised) ... 287,985 3.67 1,055,945
Warrants issued ................... 45,000 8.00 360,000
Placement agent warrants issued ...... 300,000 4.00 1,200,000
Total ...................... 3,797,781 $15,073,379
Initial public offering price ........ $ 8
Shares assumed repurchased .......... 1,884,172
Less: shares assumed issued ......... 3,797,781
Cheap stock ...................... 1,913,609
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<CURRENCY> U.S. DOLLARS
<PERIOD-START> JUL-01-1997
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,242,481
<SECURITIES> 0
<RECEIVABLES> 459,750
<ALLOWANCES> 0
<INVENTORY> 4,994,912
<CURRENT-ASSETS> 11,117,594
<PP&E> 4,504,932
<DEPRECIATION> 1,314,709
<TOTAL-ASSETS> 14,359,382
<CURRENT-LIABILITIES> 5,445,478
<BONDS> 0
0
0
<COMMON> 40,628,307
<OTHER-SE> (32,260,418)
<TOTAL-LIABILITY-AND-EQUITY> 14,359,382
<SALES> 1,285,182
<TOTAL-REVENUES> 1,285,182
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,443,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,399
<INCOME-PRETAX> (13,105,871)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,105,871)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,105,871)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
</TABLE>
