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 March 31, 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. /X/Yes No
The number of shares outstanding of the registrant's common stock
as of May 10, 1997 was 10,139,775.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
March 31, December 31,
1997 1996
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,250,390 $ 20,288,535
Accounts receivable 129,977 13,669
Due from officer 12,612 15,802
Inventories (Note 3) 4,232,148 3,362,252
Prepaid expenses and other assets 563,551 511,633
Total current assets 19,188,678 24,191,891
Fixed assets, net 3,127,688 2,727,220
Other assets, net 51,700 32,354
Total assets $ 22,368,066 $ 26,951,465
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt 2,000,000 1,000,000
Obligations under capital leases 55,863 47,555
Accounts payable 1,352,612 1,935,108
Accrued expenses 533,870 683,198
Customer advances and deposits 1,357,400 1,387,400
Deferred revenue 1,100,000 950,000
Total current liabilities 6,399,745 6,003,261
Obligation under capital leases 141,701 123,621
Long-term debt, net of discount 284,698 1,271,638
Other long-term liabilities 293,004 208,002
Total non-current liabilities 719,403 1,603,261
Shareholders' equity:
Common stock, no par value,
25,000,000
shares authorized, 10,139,775
shares issued and outstanding 38,499,490 38,499,490
Deficit accumulated during the
development stage (23,250,572) (19,154,547)
Total shareholders' equity 15,248,918 19,344,943
Total liabilities and $ 22,368,066 $ 26,951,465
shareholders' equity
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the period
from inception
For the quarter ended March 31, (May 21, 1993)
through
1997 1996 March 31, 1997
<S> <C> <C> <C>
Sales $- $- $-
Costs and expenses:
Costs of production 934,218 - 2,206,575
Research and development 2,128,450 1,406,024 12,935,358
Marketing, general and 1,157,769 532,895 6,916,784
administrative
Related party
administrative
expense - 25,000 105,260
4,220,437 1,963,919 22,163,977
Other (income) expense:
Interest expense 69,698 81,794 820,528
Interest income (194,110) - (307,236)
(124,412) 81,794 513,292
Net loss before
extraordinary item (4,096,025) (2,045,713) (22,677,269)
Extraordinary item:
Loss on early
extinguishment of debt,
net of income taxes of nil - - (573,303)
Net loss $ (4,096,025) $ (2,045,713) $ (23,250,572)
Net loss per common share
(Note 2) $ (.40)
Weighted average common
shares outstanding (Note 2) 10,139,775
Unaudited pro forma net loss
per common share (Note 2) $ (.30)
Unaudited pro forma weighted
average
common shares outstanding
(Note 2) 6,163,341
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the
period from
For the quarter ended inception
March 31, (May 21,
1993)
through
1997 1996 March 31,
1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $(4,096,025) $(2,045,713) $(23,250,572)
Adjustments to reconcile net loss to net cash
used in
operating activities:
Depreciation and amortization 235,779 115,875 1,324,278
Write-off of deferred offering costs - - 47,264
Options granted for services - - 18,400
Debenture issued for services - - 50,000
Loss on disposal of fixed assets - - 92,069
Conversion of accrued interest to common - - 231,147
stock
Extraordinary loss on extinguishment of - - 573,303
debt
Changes in assets and liabilities:
Accounts receivable and amount due from (113,118) - (142,589)
officer
Inventories (869,896) - (4,232,148)
Prepaid expenses and other assets (51,918) (142,775) (563,551)
Accounts payable and accrued expenses (731,824) (246,924) 1,708,961
Customer advances and deposits (30,000) 750,000 1,357,400
Deferred revenue 150,000 - 1,100,000
Other long-term liabilities
85,002 39,714 293,004
Net cash used in operating activities
(5,422,000) (1,529,823) (21,393,034)
Cash flows from investing activities:
Proceeds from sale of fixed assets - - 5,524
Purchases of fixed assets (571,712) (388,778) (3,737,716)
Cost of patent
(19,553) - (52,653)
Net cash used in investing activities
(591,265) (388,778) (3,784,845)
Cash flows from financing activities:
Payment of capital lease obligations (24,880) - (96,833)
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 - - 33,920,808
Proceeds from exercise of warrants - - 694,960
Net proceeds from issuance of preferred
stock through offerings and conversion of - - 1,430,634
debt
Increase (decrease) in notes payable - (50,000) -
Increase in long-term debt - 1,473,750 2,223,750
Deferred offering costs - - (47,264)
Repayment of debentures
- - (3,855,000)
Net cash provided by (used in) financing
activities (24,880) 1,955,000 39,428,269
Net increase (decrease) in cash and cash (6,038,145) 36,399 14,250,390
equivalents
Cash and cash equivalents at beginning
of period 20,288,535 967 -
Cash and cash equivalents at end of
period $ 14,250,390 $ 37,366 $14,250,390
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES
(a development stage company)
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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 - 56,631 - - - 56,631
with debt
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
Net loss - - - - (4,096,025) (4,096,025)
(unaudited)
March 31, 1997
(unaudited) 10,139,775 $38,499,490 - $ - $(23,250,572) $ 15,248,918
</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 March 31, 1997 and
the results of operations and cash flows for the quarters ended
March 31, 1997 and 1996 and the period from inception (May 21,
1993) through March 31, 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 quarter ended March 31, 1997
is 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.
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 outstanding 8.00% convertible subordinated
debentures, including accrued interest, 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 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 quarter ended
March 31, 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:
March 31, December
31,
1997 1996
(Unaudited)
Raw materials and
components $2,351,714 $2,242,756
Work-in-process 1,168,092 607,245
Finished goods
712,343 512,251
$4,232,149 $3,362,252
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.
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, it 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 a Xerox 4135 or Xerox 4635
cut sheet, high-speed, 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 Xerox
Corporation ("Xerox"), IBM and Siemens Nixdorf Printing Systems
USA, Inc. (which was acquired by an affiliate of 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 in the Xerox, IBM and Accent Color exhibits and
in the Xerox DocuTech Print Center. In November 1995, the Company
signed a memorandum of understanding with Oce, which the Company
expects to result in an agreement in 1997.
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. In February 1996, a Product
Development and Distribution Agreement was signed with Xerox, and
in April 1996, the Company entered into a Product Purchase
Agreement with IBM. At Xplor in October 1996, the Company
demonstrated its Truecolor Systems, as well as certain
enhancements planned for production in 1997.
In March 1997, Xerox informed the Company that it had decided not
to distribute Accent Color's cut-sheet version of the Truecolor
System designed for integration with Xerox's high-speed, black-on-
white printers ("Truecolor 135") as a Xerox product under the
terms of the Xerox agreement. The Company now intends to market
and distribute the Truecolor 135 directly to Xerox end users
through an alternate distribution method. The Company is
currently reviewing various distribution alternatives, but there
can be no assurance that the Company will be able to establish an
effective direct marketing, sales and distribution program
for the Truecolor 135 system.
On May 6, 1997, IBM announced availability of the Company's
Truecolor 390 which IBM will market as it's Infoprint High-
Lite Color post processor. The product will
have limited availability on June 27, 1997, and is planned to
be generally available on September 26, 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.
Accent Color expenses all research and development costs as they
are incurred, including costs associated with the manufacture of
prototypes. Accent Color produced the proof-of-concept and
prototype Truecolor Systems principally during 1994, 1995 and the
first six months of 1996, which resulted in significant research
and development expenses for those periods. In July 1996, the
Company began manufacturing pre-production Truecolor Systems for
delivery to customers. As a result, it began to allocate to costs
of production the manufacturing and other expenses associated
with the manufacture of pre-production Truecolor Systems.
Accent Color's marketing, general and administrative expenses
have increased to support the Company's anticipated revenue
growth and manufacturing activities. In 1996, in anticipation of
the production and sale of Truecolor Systems, the Company
expanded its accounting and other administrative functions to
support its manufacturing activities. The Company's strategy is
to distribute its products primarily through its OEM customers.
Accordingly, marketing expense is attributable primarily to the
development and support of the OEM customer relationships. The
Company also incurs marketing expenses in connection with product
promotional activities and certain indirect marketing activities
in conjunction with its OEM customers. As the Company moves
toward distributing it's Truecolor 135 product directly to end
users, it anticipates that marketing, sales, general and
administrative expenses will continue to increase.
Results of Operations
Quarter Ended March 31, 1997 compared to Quarter Ended March 31,
1996. The Company recognized no revenue for the quarters ended
March 31, 1997 and 1996. During 1997 and 1996, the Company's
efforts were directed at designing, developing, testing and
manufacturing prototype and pre-production systems. In the first
quarter of 1997, the Company shipped one Truecolor System to a
customer, that was recorded as deferred revenue.
Costs of production of $934,000 incurred during the quarter ended
March 31, 1997 consist of the start-up manufacturing expenses
related to the Company's preparation for commercial production of
its Truecolor Systems.
Research and development expenses primarily consist of the cost
of personnel and equipment needed to conduct the Company's
research and development efforts, including manufacturing
prototype systems. Research and development expenses for the
quarter ended March 31, 1997 increased by $700,000, or
approximately 50%, to $2.1 million from $1.4 million for the
quarter ended March 31, 1996. This increase in research and
development expenses reflects additional expenses associated with
the development, manufacturing and testing of prototype systems,
the increase in engineering and production personnel, and
upgrades and enhancements for pre-production 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 March 31, 1997 increased by $625,000 to $1,158,000
from $533,000 for the quarter ended March 31, 1996. This increase
in marketing, general and administrative expenses was primarily
attributable to the hiring of additional, marketing and
administrative personnel to support the Company's anticipated
revenue growth and manufacturing activities. The Company
anticipates that marketing and selling costs will increase as it
moves toward distributing its Truecolor 135 product directly to
end users.
Related party administrative expense reflects financial advisory
fees paid to an investment banker who was a director of the
Company. The Company had related party administrative expense of
$0 and $25,000 for the quarter ended March 31, 1997 and 1996,
respectively.
Interest expense for the quarter ended March 31, 1997 decreased
by $12,000 to $70,000 from $82,000 for the quarter ended March
31, 1996. This decrease in interest expense for the quarter
ended March 31, 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 quarter ended March 31, 1997 was $194,000, and the Company
had no interest income for the quarter ended March 31, 1996. 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.
On March 26, 1997, the Company was informed by Xerox that it
decided not to distribute the Truecolor 135 high-speed spot color
printing system as a Xerox product under the Company's
distribution agreement with Xerox. The Company is currently
reviewing alternate distribution strategies to market the product
directly to Xerox end-users. As of March 31, 1997, the Company
had a loan from Xerox, deposits from Xerox and inventories
specific to the Truecolor 135 system. The Company is currently
in discussion with Xerox concerning these and other matters.
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.
Through March 31, 1997, the Company has received $2.5 million
from the delivery of seven prototype and eight pre-production
systems to customers; net proceeds of $7.9 million from
borrowings and the sale of debt securities and net proceeds of
$35.9 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 $11.5
million was raised through the private placement of equity
securities.
At March 31, 1997, the Company's primary source of liquidity was
cash and cash equivalents totaling $14.25 million.
Operating activities consumed $5.4 million in cash during the
first quarter of 1997 compared to $1.5 million during the first
quarter of 1996. The increase is attributable to an increase in
the net loss of the Company, an increase in inventories as the
Company purchased parts for commercial units, 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.
Capital expenditures increased $183,000 from $389,000 for the
quarter ended March 31, 1996 to $572,000 for the quarter ended
March 31, 1997. The major components of this increase include
assets acquired as a result of the Company's expansion to support
the Company's anticipated revenue growth and manufacturing
activities and engineering development equipment and test
equipment. The Company has currently budgeted approximately $2.1
million for capital expenditures for the year ending December 31,
1997. The Company's currently planned capital expenditures are
primarily for 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. After 1997, the Company must continue
to make quarterly payments to continue to benefit from the
development efforts funded by the vendor's customers. The Company
currently anticipates making such payments over the term of the
Agreement. In addition, the Company is currently negotiating a
development agreement 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 $2,725,000 in development costs
and $675,000 in capital equipment expenditures. The Company
expects to incur all of these payments during 1997.
The Company believes that its existing cash resources will be
sufficient for the financing of its operations, repayment of
indebtedness and capital expenditures through the third quarter
of 1997. The Company is reviewing various financing strategies
that would allow it to continue to fund operations and research
and development activities through 1997 into 1998. 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 20 additional manufacturing, development,
engineering and customer support employees, (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.
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; (iii) the dependence of the Company on third party
marketing, distribution and support, including the control of 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 level of customer acceptance of the
Company's products; and (vi) 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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the first quarter of 1997.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Addendum dated April 23, 1997, to Product Purchase
Agreement dated April 11, 1996, with International Business
Machines Corporation
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 first quarter
ended March 31, 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 May 13, 1997 By Norman L. Milliard
President and Chief
Executive Officer
By Patrick J. Pedonti
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
AMENDMENT TO APRIL 1996 AGREEMENT
This Amendment to the April 1996 Agreement ("Amendment")
entered into this 23rd day of April, 1997, by and between
International Business Machines Corporation, a New York
corporation with its principal office at Old Orchard Road,
Armonk, New York 10504 ("IBM"), and Accent Color Sciences, Inc.,
a Connecticut corporation with its principal place of business at
800 Connecticut Boulevard, East Hartford, Connecticut 06108
("ACS").
WHEREAS, ACS and IBM entered into an agreement dated April
11, 1996 ("April 1996 Agreement") for the production of certain
Products, as that term is defined in the April 1996 Agreement;
AND WHEREAS IBM and ACS desire to describe in greater detail
the rights and obligations provided for in Section 13.1 of the
April 1996 Agreement, and to provide for an escrow of certain
confidential materials;
NOW THEREFORE, in consideration of the promises set forth
below and other valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows.
Introductory Note: Attached to this Amendment are three
attachments, which are incorporated into and made a part of this
Amendment:
A. Key Personnel Skills listing;
B. Letter dated April 23, 1997 from Spectra, Inc. to ACS;
C. Technology Escrow Agreement.
In the event IBM invokes its rights under Article 13.1, the
parties agree as follows:
(The following Key and Description shall apply to the
symbols referred to in Sections I, II and III:
OD Operations Directory
ED Engineering Directory
QD Quality Directory
ID Information Technology Directory
M MAX System
C Cad System
P Paper documents
D Dynamics System
FAS Fixes Asset System)
I. Business Agreements and Access to Information
ACS shall provide IBM with:
A. A listing of all of its suppliers and shall assign
all supplier contracts to IBM with the same terms
and conditions. (E.g. Spectra, Coates and the key
module suppliers. (P) With regard to Spectra, Inc., see
Attachment B.)
B. The latest detailed manufacturing cost table (M)
C. A listing of the key personnel with the skills
described in Attachment A to this Amendment.(D)
D. A listing of the infrastructure required to
replicate ACS's information technology network systems.
(P/D)
E. A listing of the ACS patents required to
manufacture the ACS products.(P)
F. The test data and documents covering all
environmental approvals worldwide.(P)
G. The latest supply/demand information, a listing of
all work in process and finished goods inventory and a
summary of all open purchase orders. (M)
II. Access to Technical Information and Intellectual Property
ACS shall provide IBM with:
A. An updated listing of machine level control by
serial number. (ED)
B. All functional specifications (ED)
C. A complete listing of the bill of material
highlighting all custom parts and all off the shelf
parts. (M)
D. All assembly drawings and artwork. (C)
E. All manufacturing procedures for build, test,
inspection, debug and final approval, including the key
vendor modules (QD/OD)
F. All quality control procedures covering ACS's
products and processes. (ED/OD)
G. ISO 9001 documentation and procedures (P)
H. A listing of all parts and the sources for all
parts, including all spare parts. (M)
I. A copy of all regulatory agency approvals and
letters of certification. (P)
J. A description of plans for future improvements,
cost reductions and sub-contracts with third parties,
including the timetable and current status. (ED/OD)
K. Engineering change documentation and procedures
(M/ED)
L. Problem logs and a summary of the status of fixes
in progress (ED)
M. Source code for the microcode, firmware, software
and production images, with the right to modify the
source code. (C/P)
N. All manufacturing routings (M)
O. The procedures for developing, building, testing
and adjusting the products to be provided under this
Agreement. (C)
P. Next generation engineering specifications and
parts drawings developed for IBM products. (C)
Q. A General Availability level tape, which shall
remain fixed.
III. Right to Assignment and/or Acquisition of Assets
IBM shall have the right to purchase any of the assets set
forth below at fair market value and/or replicate any asset by
utilizing the escrowed documents. In the event that IBM elects
to purchase any of these assets, ACS shall be allowed to
replicate them at ACS's expense.
A. All inventory, including work in process and
finished goods to be provided under this Agreement.(M)
B. One set of the capital equipment tools, fixtures
and drawings used to develop, manufacture and test the
240 and 300 dpi models, including printhead alignment
tools, alignment tools for input/output paper path
modules, belt break in fixtures, Print Quality lab
equipment and its code. (C)
C. All information technology infrastructure required
to develop and manufacture the Products under this
Agreement. (P/ID)
D. Emergency parts. (N)
E. One set of any custom tools and fixtures required
for IBM or a third party to get into production.
F. ACS shall provide IBM a world wide, royalty free,
non-exclusive license to the ACS patents required to
manufacture the ACS Products.
IV. Disaster Recovery.
Within sixty (60) days ACS shall enter into a disaster
recovery plan with a third party. The plan shall include, at a
minimum, all of the items listed in this Amendment.
V. Failures Caused by Spectra
In addition to the provisions contained in Attachments B and
C to this Amendment, ACS and IBM agree that IBM will not invoke
the provisions of Article 13.1 in the event that ACS's failure to
provide Products, Spare Parts and/or Supplies within the
requisite thirty (30) days is: 1) caused by Spectra, and 2)
beyond ACS's reasonable control.
IN WITNESS WHEREOF, the parties have executed this Amendment
to the April 1996 Agreement as of the day and year first set
forth above.
INTERNATIONAL BUSINESS MACHINES
CORPORATION
By: /s/ Gregory F. Fleming
Title: Director of Business
Alliances
Date: April 23, 1997
ACCENT COLOR SCIENCES, INC.
By: /s/ Richard J. Coburn
Title: Chairman
Date: April 23, 1997
ATTACHMENT A
Key Personnel Skills Listing
Quantity Description
2 Information Technology Skills (Network
Specialist/Application Specialist)
1 Financial Analyst
2 Electrical Engineers (Circuit Board Design/
Power Design)
4 Mechanical Engineers (Paper-Path, Printhead
Operations, I/O Modules and Manufacturing
Engineer covering suppliers)
1 Print Quality (expertise in printhead and its
alignment)
1 Standards, Safety and Compliance Administrator
2 Software/Micro Coders (Functional Code/
Firmware and Operator Panel expertise)
1 Service Engineer (Parts/Process and
Documentation expertise)
2 Manufacturing Ass'y Test Technician
2 Vendor Specialist and Procurement
Administrator
2 Production Planners (Eng. Change Administrator
and Production Control Administrator)
SPECTRA, INC.
Etna Road
P.O. Box 68C
Hanover, NH 03755
April 23, 1997
Mr. Richard J. Coburn, Chairman
Accent Color Sciences, Inc.
800 Connecticut Boulevard
East Hartford, Connecticut 06108
Re: Rights of IBM Under OEM Supply Agreement with
Accent Color Sciences, Inc.
Dear Dick:
This will confirm and expand on our conversation of
yesterday concerning the ability of International Business
Machines Corporation ("IBM") to purchase products under the OEM
Supply Agreement dated January 8, 1996 between Spectra, Inc.
("Spectra") and Accent Color (the "OEM Supply Agreement") in the
event that IBM has become entitled under its agreements with
Accent Color to manufacture or have manufactured or distributed
by Spectra pursuant to the OEM Supply Agreement.
We wish to facilitate your arrangements with IBM which are
in our mutual interest. To that end, Spectra hereby agrees as
follows:
1. Upon either (a) written notice by IBM and ACS that IBM
is properly exercising its rights to manufacture or have
manufactured ACS Hardware Products and/or purchase ink from
Spectra, or (b) a certified copy of a final arbitration award
that states IBM is entitled to exercise those rights, Spectra
agrees to supply to IBM those Spectra Products Spectra is
supplying to ACS.
2. Terms of supply will be the terms of the OEM Supply
Agreement, including, without limitation, all applicable license
terms, all ink purchase requirements and all forecasting terms,
except:
2.1 "Customer Product" will mean those
ACS Products being supplied to IBM at the
time of notice of exercise.
2.2 Sections 9.2 and 9.3 will not apply
to IBM. Spectra will give ACS credit under
these sections for product supplied directly
to IBM by Spectra provided ACS is also
ordering Spectra Products from Spectra under
the OEM Agreement for IBM or other customers.
Very truly yours,
SPECTRA, INC.
/s/ Jeffrey B. Miller
Jeffrey B. Miller
President
TECHNOLOGY ESCROW AGREEMENT
This Technology Escrow Agreement ("Escrow Agreement"),
entered into this 23rd day of April, 1997, by and between
International Business Machines Corporation, a New York
corporation with its principal office at Old Orchard Road,
Armonk, New York 10504 ("IBM"), Accent Color Sciences, Inc., a
Connecticut corporation with its principal place of business at
800 Connecticut Boulevard, East Hartford, Connecticut 06108
("ACS"), and Murtha, Cullina, Richter and Pinney, a professional
partnership with its principal office at 185 Asylum Street,
Hartford, Connecticut 06103 ("MCRP" or "Escrow Agent").
WHEREAS, ACS and IBM entered into an agreement dated
April 11, 1996 ("April 1996 Agreement") for the purchase of
certain Products, as that term is defined in the April 1996
Agreement;
AND WHEREAS IBM desires to have access to the technology,
contracts and certain related documents, as set forth in greater
detail below, under specified conditions;
AND WHEREAS the parties wish to use an escrow agent to
facilitate IBM's access to the technology, contracts and certain
related documents;
AND WHEREAS MCRP is willing to act as the Escrow Agent on
behalf of the parties;
NOW THEREFORE, in consideration of the promises set forth
below and other valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows.
1. Definitions.
1.1 "Confidential Materials" shall mean those items of
software (in object code or source code), drawings, diagrams,
processes, formulas, procedures, patents, specifications, test
plans, data, reports, manufacturing documents, manufacturing
costs and other materials and documents listed in Sections I and
II of Addendum I and its attachments, dated April 23, 1996, to
which this Escrow Agreement is attached.
2. Deposit of Confidential Materials.
2.1 On or before April 30, 1997, ACS will deposit the
Confidential Materials with the Escrow Agent.
2.2 ACS shall update the Confidential Materials at the end
of each month, so that the Confidential Materials reflect the
current status of development for and manufacturing information
regarding the Products.
3. IBM's Right to Inspect Confidential Materials.
3.1 Upon seven (7) day written notice to ACS and Escrow
Agent, IBM shall have the right to inspect the Confidential
Materials at the office of Escrow Agent. This inspection shall
be for the purpose of determining that the Confidential Materials
contain the current status of the technology relating to the
Products. IBM shall not make any copies of the Confidential
Information, nor make notes in such detail as to allow it to
recreate the Confidential Materials or any portion of them.
4. Conditions for Release from Escrow.
4.1 IBM shall be entitled to obtain the Confidential
Materials from the Escrow Agent in the event that ACS shall fail
or be unable for any reason to provide Products, Spare Parts
and/or Supplies within thirty (30) days following receipt of
written notice of default from IBM pursuant to 13.1 of the
April 1996 Agreement; provided, however, that if ACS objects to
the release of the Confidential Materials as set forth below, the
Escrow Agent shall not release them and the matter shall be taken
to arbitration.
4.2 Notwithstanding anything to the contrary in Section
4.1, IBM shall not exercise its rights under this Escrow
Agreement in the event that ACS's failure to provide Products,
Spare Parts and/or Supplies within the requisite thirty (30) days
is: 1) caused solely by Spectra, or 2) beyond ACS's control.
5. Procedure for Release of Confidential Materials.
5.1 In the event that IBM believes the conditions for
release from escrow have been met, it may send a written "Notice
of Default" to Escrow Agent, stating in detail the facts
supporting IBM's demand for the Confidential Materials. To the
extent that IBM relies on any documents, such as purchase orders,
it shall attach the same to its Notice of Default.
5.2 Upon receipt of the Notice of Default, the Escrow Agent
shall send a copy, by certified mail or by overnight delivery,
receipt requested, to ACS. If ACS disputes IBM's right to
receive the Confidential Materials from escrow, it shall, within
ten (10) days following its receipt of the Notice of Default from
Escrow Agent, provide the Escrow Agent with an affidavit signed
by an officer of the company stating that no default has
occurred. Upon receipt of the affidavit, Escrow Agent shall send
a copy to IBM and the provisions of Section 6 shall become
applicable.
6. Dispute Resolution.
6.1 In the event that ACS has objected to the release of
the Confidential Materials pursuant to Section 5, IBM and ACS
shall refer the matter to binding arbitration before the American
Arbitration Association. The Commercial Arbitration Rules of the
American Arbitration Association shall apply. The arbitration
panel shall consist of three persons. IBM and ACS shall each
select one arbitrator and the appointed arbitrators shall select
a third, who shall be the chair of the panel. The arbitration
shall be held in Hartford, Connecticut.
6.2 The arbitrators shall be authorized only to determine
whether or not the conditions authorizing the release of the
Confidential Materials, as set forth in Section 4, have been met.
If the arbitrators determine the conditions for release have been
met, they shall order the Escrow Agent to release the
Confidential Materials to IBM. The arbitrators may not award
damages to either party.
6.3 The award of the arbitrators may be entered into any
court having competent jurisdiction.
6.4 Each party shall be responsible for its own attorneys
fees. The parties shall each pay one-half of the cost of the
arbitration.
7. IBM's Right to Use Confidential Materials.
7.1 In the event that IBM obtains the Confidential
Materials from escrow, its right to use them shall be as set
forth in the April, 1996 Agreement and its Addendum I.
8. Appointment of Escrow Agent.
8.1 IBM and ACS hereby appoint Murtha, Cullina, Richter and
Pinney to act as Escrow Agent.
8.2 IBM and ACS acknowledge that MCRP has agreed to act as
Escrow Agent as an accommodation to them because of their need to
have an Escrow Agreement in place on or before April 25, 1997.
It is the intent of IBM and ACS that a third-party escrow agent
shall be selected within thirty to sixty days to replace MCRP.
8.3 IBM expressly acknowledges that MCRP is general counsel
to ACS and is involved in negotiating the agreements between ACS
and IBM. In the event that IBM and ACS shall become involved in
arbitration or litigation involving this Escrow Agreement or any
other agreement or matter between them, IBM expressly waives any
conflict of interest that MCRP might otherwise have by virtue of
its role as Escrow Agent. In the event of any such litigation or
arbitration, IBM expressly consents to MCRP acting as counsel to
ACS adverse to IBM.
8.4 MCRP shall act as Escrow Agent without compensation.
9. Term.
9.1 This Escrow Agreement shall remain in effect until the
earlier of the appointment of another escrow agent by IBM and
ACS, or July 1, 1997.
9.2 In the event that another escrow agent is appointed,
MCRP shall arrange for the shipment of the Confidential Materials
to the new escrow agent. The parties shall be liable for the
cost of shipment.
10. Limitation on Escrow Agent's Responsibility and
Liability.
a. The Escrow Agent shall not be obligated or
required to examine or inspect the Confidential Materials. The
Escrow Agent's obligation for safekeeping shall be limited to
providing the same degree of care for the Confidential Materials
as it maintains for its valuable documents and those of its
clients. However, the parties agree and acknowledge that the
Escrow Agent shall not be responsible for any loss or damage to
any of the Confidential Materials due to changes in such
atmospheric conditions (including, but not limited to, failure of
the air conditioning system), unless such changes are proximately
caused by the gross negligence or malfeasance of the Escrow
Agent. If the Confidential Materials are damaged in any way,
ACS shall immediately upon notice from the Escrow Agent provide
the Escrow Agent with an undamaged copy of the Confidential
Materials.
b. The Escrow Agent shall be protected in acting upon
any written notice, request, waiver, consent, receipt, or other
paper or document furnished to it, and may assume its due
execution and the validity and effectiveness of its provisions.
c. In no event shall the Escrow Agent be liable for
any act or failure to act under the provisions of this Escrow
Agreement, except where its acts are the result of its gross
negligence or malfeasance. The Escrow Agent shall have no duties
except those which are expressly set forth herein, and it shall
not be bound by any notice of a claim, or demand with respect
thereto, or any waiver, modification, amendment, termination, or
rescission of this Escrow Agreement, unless in writing received
by it, and, if its duties under this Escrow Agreement are
affected, unless it shall have given its prior written consent
thereto.
d. The parties to this Agreement hereby jointly and
severally indemnify the Escrow Agent against any loss, liability,
or damage (other than any caused by the gross negligence or
malfeasance of the Escrow Agent), including reasonable costs of
litigation and counsel fees, arising from and in connection with
the performance of its duties under this Agreement.
11. Waiver, Amendment, or Modification
This Escrow Agreement shall not be waived, amended, or
modified except by the written agreement of all the parties
hereto. Any invalidity, in whole or in part, of any provision of
this Escrow Agreement shall not affect the validity of any other
of its provisions.
12. Notifications regarding this Escrow Agreement shall be
sent to: Greg Flemming, Director of Business Alliances, 6300
Diagonal Highway, Boulder, Colorado 60301; Norman Milliard,
President, Accent Color Sciences, Inc., 800 Connecticut
Boulevard, East Hartford, Connecticut 06108; and Willard F.
Pinney, Esq., Murtha, Cullina, Richter and Pinney, CityPlace I,
185 Asylum Street, Hartford, Connecticut 06103.
13. This Escrow Agreement shall be governed by the laws of
the State of Connecticut, without regard to its choice of law
provisions.
IN WITNESS WHEREOF, the parties have executed this Escrow
Agreement as of the day and year first set forth above.
Attest INTERNATIONAL
BUSINESS MACHINES CORPORATION
By: Gregory F. Flemming
Title:Director Business Alliances
ACCENT
COLOR SCIENCES, INC.
By: Richard J. Coburn
Title: Chairman
MURTHA,
CULLINA, RICHTER AND PINNEY
By: Willard F. Pinney, Jr.
Title: Partner
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT RE COMPUTATION OF LOSS PER COMMON SHARE
For the quarter For the quarter
ended March 31, ended March 31,
1997 1996
(Pro Forma)
<S> <C> <C>
Net loss ......................... $ (4,096,025) $ (2,045,713)(1)
Calculation of weighted average common
shares outstanding (2):
Common Stock ...................... 10,139,775 2,094,840
Cheap Stock 3).................... - 2,422,751
Conversion of Series A Preferred
Stock ........... - 1,362309
Conversion of Series III Debentures,
including accrued interest (4).. - 575,789
Total ........................ 10,139,775 6,455,689
Net loss per common share $ (.40) $ (.30)
</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 March 31,
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.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CALCULATION OF CHEAP STOCK
Shares Price Total
<S> <C> <C> <C>
Quarter ended March 31, 1996
Common Stock purchased - private
placement ....... 2,625,000 $ 4.00 $ 10,500,000
Options issued ..................... 605,250 3.67 2,219,250
Options issued ..................... 647,850 4.00 2,591,400
Warrants issued (net of exercised) 569,505 3.67 2,088,185
Warrants issued ................... 45,000 8.00 360,000
Placement agent warrants issued 300,000 4.00 1,200,000
Total ...................... 4,792,605 $ 18,958,835
Initial public offering price $ 8
Shares assumed repurchased 2,369,854
Less: shares assumed issued 4,792,605
Cheap stock ...................... 2,422,751
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,250,390
<SECURITIES> 0
<RECEIVABLES> 129,997
<ALLOWANCES> 0
<INVENTORY> 4,232,148
<CURRENT-ASSETS> 19,188,678
<PP&E> 3,906,582
<DEPRECIATION> 778,894
<TOTAL-ASSETS> 22,368,066
<CURRENT-LIABILITIES> 6,399,745
<BONDS> 284,698
0
0
<COMMON> 38,499,490
<OTHER-SE> (23,250,572)
<TOTAL-LIABILITY-AND-EQUITY> 22,368,066
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 934,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,698
<INCOME-PRETAX> (4,096,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,096,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,096,025)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
