UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1997
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 6, 1998 was $22,812,938.
The number of shares outstanding of the registrant's common stock as of
March 6, 1998 was 11,989,855.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated April 1, 1998 to be
delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held May 8, 1998 are
incorporated by reference into Part III.
ACCENT COLOR SCIENCES, INC.
FORM 10-K
For The Year Ended December 31, 1997
INDEX
Part I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 29
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 30
Signatures 32
PART I
Item 1. Business
General
Accent Color Sciences, Inc. ("Accent Color" or the "Company") designs,
manufactures and sells innovative, high-speed, spot color printing systems
("Truecolor Systems") for integration with digital, high-speed, black-on-
white printers and sells related consumables. Spot color printing involves
the use of color to enhance traditional black-on-white documents by
accenting critical information, such as a balance due on a billing
statement, or by printing graphics, such as a company logo. The Company
believes its Truecolor Systems are the first, and only, printers capable of
cost-effectively printing or highlighting variable data (text or graphics
which may vary from page to page) in multiple standard and custom colors
with the speed and functionality of existing high-speed (more than 80 pages
per minute), black-on-white printers. Truecolor Systems are designed to
address what the Company believes is a substantial, unfulfilled demand for
spot color printing in the production printing and production publishing
segments of the digital printing market. Accent Color's strategy is to
rapidly penetrate these global markets through strategic relationships with
major original equipment manufacturers ("OEMs"). The primary OEMs that
serve these markets include International Business Machines Corporation
("IBM"), Oce Printing Systems GmbH. ("Oce") and Xerox Corporation
("Xerox").
Truecolor Systems are designed to print spot color in high-speed, high-
volume applications at a low incremental cost per page without diminishing
the speed or performance of the high-speed, black-on-white host printer or
affecting the end user's existing operational methods. Truecolor Systems
are capable of printing up to 501 pages per minute, utilizing up to eight
different colors, including custom colors, to print or highlight fixed or
variable data. Truecolor Systems combine the Company's proprietary paper
handling technology with patented ink jet technology from Spectra, Inc.
("Spectra"). The Company holds an exclusive right to supply products which
include Spectra ink jet printheads to print color on the black-on-white
output from specified high-speed printers from Xerox, IBM, Oce and certain
other parties through the year 2002. In connection with its arrangements
with the Company, IBM has adapted its existing high-speed, black-on-white
printers for integration with the Company's Truecolor Systems.
The Company's primary channel to market for its Truecolor Systems are OEMs
of high-speed, black-on-white printers and the Company is presently focused
on targeting the production printing segment of the overall market
opportunity. According to CAP Ventures, Inc. ("CAP Ventures"), a printing
industry market research firm, the 1996 year-end installed base of digital,
high-speed, black-on-white printers used in the production printing segment
of the digital printing market in the U.S. was approximately 15,200 and the
installed base of these printers is projected to grow at a five-year
compounded annual growth rate ("CAGR") of approximately 6% to 20,500
systems by the year 2001. In addition, approximately 3,200 digital, high-
speed, black-on-white printers were sold into this market segment in the
U.S. in 1996. Revenue from new system sales, supplies and service exceeded
$2.1 billion in 1996 and is expected to grow at a five-year CAGR of
approximately 7% to $2.9 billion by the year 2000. This growth is further
driven by the number of pages printed per year, which is projected to grow
at a five-year CAGR of approximately 7% by the year 2001.
To facilitate access to its target markets, the Company has entered into
agreements with IBM and Groupe SET International ("Groupe SET"), a European
provider of high-speed digital printing solutions headquartered in Paris,
France. It also has a relationship with Oce, which the Company expects to
result in a marketing agreement during 1998. IBM and SET are marketing,
selling and servicing Truecolor Systems under their respective corporate
logos and product identifications. Accent Color is taking an increasingly
active role in the general marketing of highlight color technology,
applications and benefits. The Company intends to continue to expand and
develop its marketing and sales capability.
The Company also sells consumables comprised of standard and custom color
wax-based inks, as well as spare parts used with Truecolor Systems. The
Company expects that consumables will generate recurring revenue, which the
Company believes will increase as the installed base and usage of Truecolor
Systems increase. According to Dataquest, continuous forms and cut sheet
high-speed, black-on-white printers servicing typical applications in the
production printing market produce approximately 2.2 million and 0.7
million pages per month respectively.
The Company was incorporated in Connecticut in May 1993. The Company's
principal executive offices are located at 800 Connecticut Boulevard, East
Hartford, Connecticut 06108, and its telephone number is (860) 610-4000.
The Company's World Wide Web site is located at www.accentcolor.com. The
information contained in the Company's World Wide Web site should not be
considered a part of this Form 10-K.
Products
ACS Truecolor System
The Company currently offers a continuous form version of Truecolor Systems
which is marketed under the corporate logos and product identifications of
the Company's OEM customers. The Company expects that Truecolor Systems
will be priced to the Company's OEM customers in the range of $100,000 to
$125,000, depending on model, options, and terms and conditions of
purchase.
The version of the Truecolor System sold by IBM as the "IBMr InfoPrintT Hi-
Lite Color post processor" attaches directly to the IBM 3900 and IBM
InfoPrint 4000 continuous form production printing systems. It is
configured to print at the same speed as the IBM production printing system
(up to 501 pages per minute) at 240 dots per inch resolution. The
continuous form version of the Truecolor System is designed to print up to
5,600,000 pages per month.
<TABLE>
<CAPTION>
TRUECOLOR SYSTEM FEATURES
<S> <C>
Host Printer IBM 3900; IBM InfoPrint 4000; SET M3056SF
Paper Handling Continuous form
Speed Up to 501 pages per minute (2 up images)
Resolution 240 dots per inch
Ink Reservoirs 4 standard, 8 optional
Paper Width 6.5 to 18.0 inches
Paper Length 6.0 to 17.0 inches
Paper Weights 16 to 28 pound bond
Paper Type Pre-printed or blank, fanfold or roll-fed
forms, some labels
Maximum Usage 5.6 million pages per month
</TABLE>
Consumables and Spare Parts
The Company's product offering includes consumables, such as standard and
custom color wax-based ink, and spare parts. Spot color printing with
Truecolor Systems requires the consumption of significant quantities of wax-
based ink and the replacement of certain parts that are subject to normal
wear and tear. The Company expects that sales of consumables will generate
recurring revenue, which the Company believes will increase as the
installed base and usage of Truecolor Systems increases.
Consumables. The wax-based ink used in the Truecolor Systems is sold in
six kilogram packages containing 60 individual wax-based ink blocks to the
Company's OEM customers. The Company purchases its wax-based ink from
Spectra. As long as the Company purchases its wax-based inks exclusively
from Spectra, Spectra is prohibited, through its agreement with the
Company, from knowingly supplying the wax-based ink directly to the
Company's OEM customers. Similarly, IBM and SET are currently prohibited
from purchasing wax-based ink from sources other than the Company, subject
to certain conditions.
Spare Parts. The Company expects that periodic preventive maintenance and
repair will need to be performed on Truecolor Systems and will include the
replacement of damaged or worn parts which are expected to be supplied
exclusively by Accent Color to the OEM customer. These replacement parts
are produced by subcontractors and suppliers according to the Company's
design specifications.
Product Development
The Company considers the enhancement of its present products to be its
research and development priority. Consequently, the Company currently
devotes a significant portion of its resources to product development. The
Company plans to commit substantial resources to enhance its technology in
the areas of (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 a page) and (iii) higher
resolution ink jet printing. The Company also plans to devote resources to
assure the quality and performance of its Truecolor Systems.
Accent Color considers its on-going efforts in engineering, research and
development to be a key component of its strategy. The Company believes
that its future success will depend in part on its ability to continue to
enhance its existing products and to develop new products. The Company's
research and development activities consist of both long-term efforts to
develop and enhance products and services and short-term projects to make
modifications to respond to the immediate needs of its OEM customers.
The Company's products are developed internally. The Company also purchases
technology, licenses intellectual property rights, and oversees third party
development for certain components of its products. Internal development
enables Accent Color to maintain closer technical control over the products
and gives the Company the freedom to designate which modifications and
enhancements are most important and when they should be implemented. The
Company has created development processes for creating and enhancing its
products. Product documentation is generally created internally in
coordination with its OEM customers.
The Company expended approximately $3.1 million, $6.9 million and $8.8
million on engineering and research and development in the years ended
December 31, 1995, 1996 and 1997, respectively. As the Company continues to
transition toward a commercial operation with increasing focus on
manufacturing and sales it anticipates it will be able to reduce its
research and development spending. As of March 6, 1998, Accent Color had 36
employees engaged in engineering and research and development.
Manufacturing and Assembly
The Company's manufacturing strategy has been to design a product based
upon a relatively small number of discrete modules that can be subassembled
and tested by other parties. Other than the patented ink jet printheads
supplied by Spectra, the Company believes these modules can be readily
procured on competitive terms. Initially, a substantial amount of assembly
will be done by the Company prior to the completion and implementation of
subcontract agreements with those suppliers of the major modules that the
Company has determined are suitably qualified. The Company is currently in
discussions with several such subcontract manufacturing companies to be the
primary manufacturers of the seven major modules of Truecolor Systems. The
Company believes that these companies have both the manufacturing and
quality assurance capabilities to satisfy the Company's supplier
qualification process, which initially qualifies and monitors ongoing
performance to the Company's cost, quality and schedule requirements. The
Company intends to implement a formal quality control program to inspect
parts received from subcontractors to determine whether they comply with
Company specifications. The Company intends to monitor adherence to these
procedures through site visits and direct supervision. The Company's
strategy is to subcontract the full assembly and final testing to turnkey
manufacturers when the volume of shipments reaches the level where this is
more cost effective.
The Company has made product assurance and quality a priority in its
business strategy. In pursuit of this goal, the Company intends to apply
for ISO 9001 registration. In preparation for this, the Company has adopted
a formal approach to documentation control, design, manufacturing and
business process definition and has implemented an integrated business
system software package to manage key processes. Accent Color also subjects
the component modules and each complete Truecolor System to extensive
testing during the assembly process. An important part of the testing
involves extensive print quality tests in which the Company uses a variety
of paper grades and test patterns designed to verify accuracy, color and
other performance characteristics prior to shipment.
Marketing, Product Support, Sales and Training
Accent Color has initially adopted a third-party distribution strategy that
employs OEM customers to address the global market. Currently, two such OEM
customers purchase Truecolor Systems for integration with their high-speed,
black-on-white printing systems and expect to market them for both
installed printers and new printers under their corporate logos and product
identifications. The goals of these relationships are to (i) rapidly
penetrate the market represented by both the existing installed base and
new sales of high-speed, black-on-white printers, (ii) substantially reduce
the cost and time required for the Company to develop a direct sales and
service organization of its own, (iii) quickly gain credibility and market
acceptance by meeting the technical requirements typically set by such OEM
customers and (iv) integrate the Company's Truecolor Systems with certain
hardware and supporting software marketed by these OEM customers. The
Company may enter into relationships with other OEM customers covering
additional segments of the digital, high-speed printing market. The Company
generally expects to receive monthly or quarterly, non-binding, rolling
forecasts of future orders for its products from its OEM customers. The
forecasts will usually cover the subsequent 12 months. The Company will
plan its future activities, in part, on the basis of these forecasts. OEM
customers are expected to place actual orders by submitting purchase
orders, generally on a monthly basis, which cover product requirements from
four months from the date of the purchase order.
At the beginning of 1998, Accent Color realigned its resources to provide a
substantial increase in marketing focus and sales support for its OEM
customers. This will include technical advice, as required, regarding the
optimal use of Truecolor Systems in demanding applications, the preparation
and production of custom print samples and participation in the formulation
of marketing initiatives to position and promote Accent Color's products
against any perceived or emerging competitors. The Company expects to
benefit from this interaction in three significant ways, (i) by being
directly involved in the sales process with end user customers, (ii) by
identifying market opportunities where there is a strong need for document
enhancement or other commercial benefit using the spot color printing
capabilities of Truecolor Systems and (iii) by receiving timely feedback on
end user needs and desires which will drive product enhancement and new
product development.
The OEM customers, including IBM and Groupe SET will also distribute wax-
based inks provided by Accent Color through their existing supply channels.
Accent Color currently expects to provide sales support to meet the end
user requests to create custom colors using the Company's wax-based inks.
IBM and Groupe SET will also distribute spare parts provided by Accent
Color for Truecolor Systems and will provide field service through their
established service organizations. This will provide end users with the
first three levels of customer support coverage, consisting of on site
field service for installation and maintenance, central technical support
at a national and international level and extensive stocking of spare parts
to ensure adequate responsiveness. In exceptional circumstances, Accent
Color's technical support group will assist IBM and Groupe SET to resolve
unusual maintenance situations, should the need arise, via 7-day/24-hour
telephone coverage. In addition, IBM and Groupe SET will also provide
training for their internal organizations and end users. To support this
activity, Accent Color has undertaken training course development and has
provided initial training classes to the education and training
organizations of IBM and Groupe SET.
Customers
The Company has entered into agreements with IBM and Groupe SET. The
Company also has a relationship with Oce. Under these arrangements, IBM and
Groupe SET intend to market, distribute and support Truecolor Systems under
their respective brand names. These agreements are significant in several
respects. First, according to CAP Ventures, IBM, along with Oce, is one of
the leading suppliers of high-speed, black-on-white printers and IBM's
AFP/IPDS architecture is continuing to emerge as an industry standard
particularly with large end user organizations. Second, the Company's
products are designed to be fully integrated with certain hardware and
supporting software products marketed by IBM. Third, Accent Color expects
that market acceptance of its Truecolor Systems will be accelerated since
sales and service will be provided by the well-established sales and
service organizations of IBM and Groupe SET. Fourth, the Color Enabler
Solution technology, which the Company expects to be developed under the
SET Agreements, will enable it to integrate Truecolor Systems more easily
with printing systems from other manufacturers avoiding the need for costly
and time consuming product development to accomplish integration.
International Business Machines Corporation. IBM's products are used in
corporate data centers and other high-speed printing applications. In April
1996, the Company and IBM entered into a Product Purchase Agreement (the
"IBM Agreement"). This agreement is for a term of three years with IBM
having the right to renew it for two additional one-year terms. The Company
has been informed that Truecolor Systems will be IBM's first product
targeted at spot color applications in high-speed printing. The integration
of color into IBM's AFP (Advanced Function Printing) protocol and the use
of the Truecolor System as an integrated post-processing device attached to
the IBM 3900 and IBM InfoPrint 4000 high-speed, black-on-white printers are
expected to be marketed worldwide by IBM's international operations.
Under the IBM Agreement, IBM has committed to purchase consumables from the
Company for one year from the date of general availability of Truecolor
Systems to IBM customers and, if certain conditions concerning competitive
pricing are met, thereafter as well. The IBM Agreement also requires the
Company to warrant its products against manufacturing defects for 90 days
after initial installation. Furthermore, under the IBM Agreement, the
Company has agreed to provide spare parts for its products to IBM at prices
which will yield a monthly parts cost per Truecolor System not to exceed a
specified amount. If the Company is unable to perform its obligations under
the agreement, after a cure period, the IBM Agreement affords IBM certain
backup manufacturing rights, including the right to manufacture, or have a
third party manufacture, the Company's Truecolor Systems. This right to
manufacture is limited to the specific types of units not properly
delivered and may be terminated if the Company is thereafter able to
deliver the units in question in compliance with the terms of the IBM
Agreement.
Groupe SET International. In August 1997, the Company and Groupe SET
entered into two Product Development and Distribution Agreements (the "SET
Agreements"). The SET Agreements have an initial term extending to
December, 2001. Under the first agreement, Groupe SET is expected to
market, sell and service Accent Color's Truecolor Systems with the SET-
M3056SF and other high speed black-on-white printing systems to target the
high speed continuous forms printing segment of the production printing
market for applications such as billing statements, brochures and direct
mail. Under the second agreement, Groupe SET has agreed to develop a
version of its "plug-and-play" Color Enabler Solution ("CES") data
interpreter and print controller technologies to allow Accent Color's
Truecolor Systems to interface to a wide variety of high speed continuous
form and cut sheet black-on-white printers which are not highlight color
enabled. In addition, the Color Lay Out ("CLO") software option is
expected to enhance customer applications by providing up to 8 colors of
highlight color capability without modifying the existing application
software.
Oce Printing Systems GmbH. In 1996, Oce van der Grinten N.V., purchased
the high-speed printing systems business from Siemens Nixdorf
Informationssysteme AG. At that time, the Company had already established
an initial relationship with Siemens Nixdorf Printing Systems L.P. to
provide Truecolor Systems for Siemens' high-speed printing products. The
Company is currently discussing a proposal with Oce for the development and
production of Truecolor Systems to be integrated with Oce's Printing
Systems using the CES technology to be developed under the SET Agreements.
Backlog
The Company measures backlog based on purchase orders for Truecolor
Systems, consumables and spare parts that have not yet been shipped. A
substantial amount of the Company's backlog can be modified or canceled
prior to 30 days before shipment without penalty, except for the recovery
of the Company's actual costs. Accordingly, the Company believes that
backlog cannot be considered a meaningful indicator of future financial
performance. As of December 31, 1997, the Company's total backlog was
approximately $2.4 million.
Competition
Although there are existing digital and offset color printing systems, the
Company believes there is no other product currently marketed that is
capable of cost-effectively printing variable data in multiple standard or
custom colors with the functionality of existing high-speed, black-on-white
printers.
Suppliers to the market compete on the basis of speed, print quality,
functionality, reliability, cost per page and color variety. The Company
competes, in significant part, on the basis of advanced proprietary
technology in the areas of paper handling, ink jet color printing and
interface software which allows the Company's products to print variable
data, in multiple standard or custom colors at high speeds. Products or
product improvements based on new technologies could be introduced by other
companies with little or no advance notice.
Competition in the markets for the Company's products is highly fragmented.
The Xerox 4890 (a similar product is also marketed by Xerox as the
DocuPrint 390HC) is a spot color printer which prints in black and one
color per job (out of a limited palette). It is capable of printing 92
pages per minute but does not offer custom colors. BESTE Bunch Systems
markets a color offset press used as a downstream add-on to Oce or IBM high-
speed, black-on-white printers. While it is capable of providing color
logos, it does not print variable data, requires a longer time to set up
and requires specialized skills. The use of this offset press also requires
additional processes of negative production and plate making. In addition,
there are production full process color digital printing systems available
which operate at print speeds of up to 70 pages per minute, including the
Xeikon DCP-32 and the Xerox DocuColor 40. These systems have relatively
high print costs per page and operate at much lower speeds than typical
applications in the production printing market segment require, making them
impractical for high-speed print jobs.
Scitex Digital Printing offers a product based on liquid ink-jet technology
which can print at high speed and in multiple colors. This system, though,
would require a potential user currently using electro-photographic systems
such as those from IBM, Xerox and Oce to completely change equipment and re-
train operators to use a different process. The Company believes that the
cost and disruption of such an implementation would be prohibitive except
in a few very large single applications.
In addition to direct competition from other firms utilizing high-speed
color technologies, there exists potential direct competition from firms
improving technologies used in low-speed to medium-speed color printers and
indirect competition from firms producing pre-printed forms. Manufacturers
of high-speed, black-on-white printers may also, in time, develop
comparable or more effective color capability within their own products
which may render the Company's products obsolete.
Intellectual Property
The Company's ability to compete effectively will depend, in part, on the
ability of the Company to maintain the proprietary nature of its
technology. The Company relies, in part, on proprietary technology, know-
how and trade secrets related to certain aspects of its principal products
and operations. To protect its rights in these areas, the Company generally
requires its OEM customers, its suppliers and its employees to enter into
nondisclosure agreements. On February 11, 1997, the U.S. Patent and
Trademark Office granted a patent with respect to an initial patent
application relative to the mechanical design of the Company's paper
handling and color printing system, which form the core of the Truecolor
Systems. In addition, the Company has filed applications for two additional
patents relative to certain enhancements of Truecolor Systems. The Company
has also filed foreign patent applications seeking patent protection in
several foreign countries.
The Company has an exclusive right to supply products which include
Spectra's ink jet printheads to print color on the black-on-white output
from specified high-speed printers marketed by Xerox, IBM, Oce and certain
other parties. To the extent that wax-based inks and ink jet printheads
purchased from Spectra are covered under patents or licenses, the Company
relies on Spectra's rights under such patents and licenses and Spectra's
willingness and ability to enforce its patents and maintain its licenses.
Employees
As of March 6, 1998, the Company employed 97 individuals, of whom 36
employees were engaged in engineering and research and development, 35
employees in manufacturing and operations, 10 employees in marketing and
service efforts, and 16 employees were working in an administrative
capacity. In addition, the Company had also retained one independent
contractor working in an administrative capacity. The Company's employees
are not represented by a collective bargaining organization, and the
Company has never experienced a work stoppage. The Company believes that
its relationship with its employees is good.
Item 2. Properties
The Company's facilities are located at 800 Connecticut Boulevard in East
Hartford, Connecticut and presently consist of approximately 69,000 square
feet. The Company believes that these facilities will meet the Company's
needs for at least the next 12 months. The Company leases this facility
under a lease that expires on December 31, 2000.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock began trading publicly on the National tier of
the Nasdaq Stock Market under the ticker symbol "ACLR" on December 18,
1996. Prior to this date, there was no public market for the Common Stock.
The table below sets forth the per share quarterly high and low sales
prices of the Common Stock since the Company's initial public offering on
December 18, 1996, as reported on the Nasdaq Stock Market.
COMMON STOCK INFORMATION
Year Ended 12/31/97 High Low
First Quarter $15 1/2 $4 7/8
Second Quarter $8 1/2 $3 7/8
Third Quarter $6 1/16 $3 3/8
Fourth Quarter $5 5/8 $2 1/4
Year Ended 12/31/96
Fourth Quarter $9 $8 1/4
As of March 6, 1998, there were approximately 2,566 stockholders of record
which includes those stockholders whose certificates were held by nominees.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the For the
period period
from from
inception inception
(May 21, (May 21,
1993) 1993)
through through
December 31, For the year ended December 31, December 31,
1993 1994 1995 1996 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Sales $ - $ - $ - $ - $ 1,578 $ 1,578
Costs and
expenses:
Costs of
production - - - 1,272 7,397 8,669
Research and
development 19 805 3,051 6,932 8,786 19,593
Marketing,
general and
administrative 26 336 1,003 4,394 4,439 10,198
Related party
administrative
expense - - 80 25 - 105
45 1,142 4,134 12,623 20,622 38,565
Other (income)
expense:
Interest
expense - 12 83 656 246 997
Interest
income - - - (113) (599) (712)
- 12 83 543 (353) 285
Net loss before
extraordinary
item (45) (1,154) (4,217) (13,166) (18,691) (37,272)
Extraordinary
item:
Loss on early
extinguishment of
debt, net of income
taxes of nil - - - (573) - (573)
Net loss $ (45) $(1,154) $(4,217) $(13,739) $(18,691) $(37,845)
Net loss (basic
and diluted)
per common
share: $ (.03) $ (.66) $ (2.33) $ (3.57) $ (1.77)
Weighted
average
common
Shares
outstanding 1,755,000 1,756,841 1,809,240 3,852,982 10,566,890
</TABLE>
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 1996 1997
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents $ - $ 165 $ 1 $20,289 $ 4,006
Working capital
(deficit) (24) (86) (1,862) 18,189 4,836
Total assets 1 246 728 26,951 12,407
Short-term debt - - 50 1,000 -
Long-term debt,less
current portion - - 2,020 1,272 -
Total shareholders'
equity (deficit) (24) (57) (3,164) 19,345 7,270
</TABLE>
Item 7. 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 printers. 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 GmbH ("Oce") in 1996) to enter into a formal development
relationship. 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, which
IBM will market as the IBM InfoPrint Hi-Lite Color post processor. The
product was announced for general worldwide availability on September 15,
1997.
In August 1997, the Company signed an agreement with Groupe SET
International ("Groupe SET"), a European provider of high speed digital
printing solutions headquartered in Paris, France. Pursuant to this
agreement, Groupe SET will market, sell and service the Company's Truecolor
Systems with the SET-M3056SF and other high speed black-on-white printing
systems. In addition, Groupe SET agreed to develop a version of its "plug-
and-play" Color Enabler Solution data interpreter and print controller
technologies to allow the Company's Truecolor Systems to interface with a
wide variety of high speed continuous form and cut sheet black-on-white
printers that are not highlight color enabled.
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 increases.
During the first and second quarters of 1997, the Company's efforts were
primarily directed at designing, developing, testing and manufacturing
prototype and pre-production systems. In the third and fourth quarters of
1997, the Company's efforts were primarily directed toward the commercial
introduction of its Truecolor Systems.
Results of Operations
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Total Net Sales. Total net sales were $1,578,000 for the year ended
December 31, 1997 compared to none for the year ended December 31, 1996.
Printer sales constituted 41.7% of total net sales for the year ended
December 31, 1997 while sales of consumables and spare parts constituted
58.3%.
Printers. Printer sales were $658,000 for the year ended December 31, 1997
compared to none for the year ended December 31, 1996. Sales for 1997
consisted of three pre-production systems and two production systems. A
total of 27 production systems were shipped during 1997, which were
recorded as deferred revenue in accordance with the revenue recognition
policy of the Company. As of December 31, 1997, the Company's backlog
consisted of 18 systems totaling $2,138,000.
Consumables and Spare Parts Sales. Consumables and spare parts sales were
$920,000 for the year ended December 31, 1997 compared to none for the year
ended December 31, 1996. These sales were primarily attributed to the
shipment of consumables in the second and third quarters of 1997 to fill
the channels of an OEM customer.
Costs of Production. Costs of production increased from $1,272,000 for the
year ended December 31, 1996 to $7,397,000 for the year ended December 31,
1997. This increase was attributed to three major factors: (i) ramp-up
manufacturing expenses related to the Company's launch of the commercial
production of its Truecolor Systems, (ii) cost of goods sold related to the
sale of printers, consumables and spare parts and (iii) a charge for
obsolete inventory due to the enhancement of the Company's product from
narrow to wide printhead systems and a cancellation charge related to
purchase commitments of inventory totaling $1,250,000 and $300,000,
respectively.
Research and Development Expenses. Research and development expenses
increased 26.7% from $6,932,000 for the year ended December 31, 1996 to
$8,786,000 for the year ended December 31, 1997. This increase was
primarily attributed to engineering and product ramp-up costs associated
with the development of the wide ink jet printhead in addition to an
increase in payroll costs for personnel retained to support such efforts.
This increase was partially offset by a decrease in materials procured for
research and development as in 1997, the Company's efforts were primarily
focused on production with a less significant emphasis on research and
development. During 1996, however, systems were built for research and
development purposes and the related components were utilized for design
improvements and testing.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses increased from $4,393,000 for the year ended
December 31, 1996 to $4,439,000 for the year ended December 31, 1997. This
increase was primarily attributed to the hiring of additional marketing and
administrative personnel, expenses associated with promotional activities
and costs incurred for professional services to support the Company's
anticipated revenue growth and manufacturing activities. This increase was
partially offset by expenses incurred in 1996 related to the recruiting of
personnel, system documentation, regulatory testing, deferred financing
costs and the Company's relocation to a new facility, which were not
incurred during the comparable time in 1997.
Interest Expense and Other (Income) Expense. Interest expense decreased
62.5% from $656,000 for the year ended December 31, 1996 to $246,000 for
the year ended December 31, 1997. This decrease was primarily attributed
to the elimination of interest expense related to extinguished debentures
originally issued in October 1995, February 1996 and October 1996.
Interest income increased by $486,000 from $113,000 for the year ended
December 31, 1996 to $599,000 for the year ended December 31, 1997. This
increase in interest income was attributed to a greater amount of cash
available for investment in 1997 as compared to 1996, primarily due to the
Company's initial public offering in December 1996.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Total Net Sales. The Company recognized no revenue for the years ended
December 31, 1996 and 1995. During 1996, the Company's efforts were
directed at designing, developing, testing and manufacturing prototype and
pre-production systems. During 1995, the Company's efforts were directed
at designing, developing, testing and manufacturing prototype systems only.
Costs of Production. Costs of production of $1,272,000 incurred during
1996 consist of the start-up manufacturing expenses related to the
Company's preparation for commercial production of its Truecolor Systems.
Research and Development Expenses. 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 increased 127% from
$3,050,000 for the year ended December 31, 1995 to $6,932,000 for the year
ended December 31, 1996. This increase 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. Research and development
expenses were offset by $300,000 and $614,000 in 1996 and 1995,
respectively, as a result of customer payments for prototype units.
Marketing, General and Administrative Expenses. 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 increased 338% from
$1,003,000 for the year ended December 31, 1995 to $4,393,000 for the year
ended December 31, 1996. This increase was primarily attributed to the
hiring of additional service, marketing and administrative personnel to
support the Company's anticipated revenue growth and manufacturing
activities.
Related Party Administrative Expense. Related party administrative expense
reflects financial advisory fees paid to an investment banker who was a
director of the Company. Total related party administrative expense
recorded by the Company in 1996 and 1995 was $25,000 and $80,000,
respectively.
Interest Expense and Other (Income) Expense. Interest expense increased by
$573,000 from $83,000 for the year ended December 31, 1995 to $656,000 for
the year ended December 31, 1996. This increase was primarily attributed
to the increase in debt outstanding during 1996 as a result of the issuance
of debentures in October 1995, the issuance of debentures in February 1996,
the issuance of short term notes in October 1996 and borrowings under a
loan from Xerox Corporation beginning in 1996. Interest income was
$113,000 for the year ended December 31, 1996 compared to none for the year
ended December 31, 1995.
Liquidity and Capital Resources
The Company's need for funding has increased from period to period as it
has continued its research and development activities for the 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 December 31, 1997, the Company had received $5.1 million from the
delivery of seven prototype, nine pre-production and twenty-seven
production systems to customers, net proceeds of $7.8 million from
borrowings and the sale of debt securities, net proceeds of $2.5 million
from the exercise of warrants and stock options and net proceeds of $39.5
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 $15.1 million was raised through the
private placement of equity securities.
On October 16, 1997, the Company completed a private placement offering
("Unit Offering") of 437,913 units of its common stock at a price of $10.95
per unit, or $3.65 per share. Each unit consisted of three shares of
common stock and a warrant exercisable into one share of common stock. The
offering resulted in net proceeds of approximately $4,486,000 to the
Company.
As of December 31, 1997, the Company's primary source of liquidity was cash
and cash equivalents totaling $4.0 million.
Operating activities consumed $18.9 million in cash in 1997 compared to
$12.5 million in 1996. This increase was primarily attributed to an
increase in the net loss of the Company, an increase in inventories and
accounts receivable, a decrease in customer advances and deposits and a
decrease in accounts payable as the Company began to ship Truecolor Systems
and reduced its outstanding liabilities accordingly. This was partially
offset by a decrease in prepaid expenses and other assets and an increase
in deferred revenue and other long-term liabilities.
Capital expenditures decreased 50% from $2.6 million for the year ended
December 31, 1996 to $1.3 million for the year ended December 31, 1997.
This decrease was primarily attributed to the Company's relocation to a new
facility in May 1996. Approximately $1.3 million was incurred by the
Company as a result of this relocation. Capital expenditures during 1997
primarily reflect acquisitions of equipment to support the Company's
anticipated growth in revenue, manufacturing activities and continued
engineering and development efforts.
Under an agreement with Spectra, the Company was obligated to pay $250,000
per calendar quarter through 1997 in order to maintain certain exclusive
rights. As of December 31, 1997, the Company had fulfilled its obligations
related to such exclusivity rights. Pursuant to the same agreement, the
Company must pay Spectra royalties and license fees upon achieving certain
volume purchase levels. In addition, the Company has a development
arrangement with Spectra that would require the Company to make additional
payments to support developing a wider printhead manufacturing capability.
Based on the current operating plan of the Company, the primary
requirements for cash through 1998 will be directed toward an increase in
the marketing and sales efforts of the Company, the optimization of
manufacturing and customer support resources to meet the demands of the
market, the commercial production of the enhanced Truecolor System and the
further development and enhancement of the Company's products. As part of
its growth efforts during 1998, the Company currently expects (i) to hire
approximately seven additional personnel within the areas of manufacturing,
sales and marketing, and customer service (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 wider ink jet printheads for greater color coverage per page and
higher resolution ink jet printing.
During 1997, the Company continued to adjust its staffing levels from a
high of 145 full-time, part-time and contract employees as of October 31,
1997 to 140 employees as of December 31, 1997. In January 1998, the
Company completed a realignment of its staffing in an effort to further
optimize its resources to meet the challenges and demands of the
marketplace. This realignment and other reductions decreased the Company's
staffing to 98 full-time, part-time and contract employees as of March 6,
1998.
On January 13, 1998, the Company completed a private equity financing
providing net proceeds to the Company of $3.9 million. Pursuant to the
financing, the Company issued 4,500 shares of Series B Convertible
Preferred Stock at a price of $1,000 per share and warrants to purchase the
Company's common stock. The warrants issued are exercisable into 300,000
shares of common stock with an exercise price of $2.75 and an expiration
date of January 9, 2008. Additionally, warrants exercisable into 115,385
shares of common stock with an exercise price of $2.50 and an expiration
date of January 9, 2003 were issued to the placement agent for services
provided.
Under the current operating plan, the Company believes that its existing
cash resources and the funds raised through the private placement completed
in January 1998 will be sufficient for the financing of its operations and
capital expenditures through at least the second quarter of 1998. The
Company is continuing to review various financing strategies, both debt and
equity, that would allow it to continue to fund operations and planned
capital expenditures through the remainder of 1998. In the event the
Company is unsuccessful in achieving its anticipated increased sales volume
or the Company fails to obtain additional financing, the Company would
expect to reduce costs and expenses through reduction in its planned
expansion, including a reduction in 1998 planned inventory increases,
capital expenditures and other costs, sufficient to fund cash requirements
through the end of 1998. The Company is a development stage company and it
is expected that quarterly net losses will continue through at least the
third quarter of 1998.
Year 2000
The Corporation continues to assess its exposure related to the impact of
the Year 2000 date issue. The Year 2000 date issue arises from the fact
that many computer programs use only two digits to identify a year in a
date field. The Corporation's products and key financial operational
systems are being reviewed and, where required, plans have been developed
to ensure that the Company's products and computer systems continue to
function properly. Management does not expect these costs will have a
material adverse impact on the Corporation's financial position, results of
operations or cash flows. However, the Corporation could be adversely
impacted by the Year 2000 date issue if suppliers, customers and other
businesses do not address this issue successfully. Management continues to
assess these risks in order to reduce the impact on the Company.
Factors Affecting Future Results
The foregoing Management's Discussion and Analysis and discussion of the
Company's business contains various statements which are forward looking in
nature. 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.
The Company cautions readers that the following important factors, among
others, in some cases have affected and, in the future, could materially
adversely affect the Company's actual results and cause the Company's
actual results to differ materially from the results expressed in any
forward-looking statements made by, or on behalf of, the Company.
Limited Operating History; History Of Losses; Uncertainty Of Future
Financial Results. The Company was formed in May 1993 and is a development
stage company with a limited operating history. The Company incurred losses
in each year of existence and incurred a net loss of $18,691,000 for the
year ended December 31, 1997. As a result of these losses, as of December
31, 1997, the Company had an accumulated deficit of $37,845,000. It is
expected that quarterly net losses will continue through at least the third
quarter of 1998 and that the Company will incur a net loss for 1998. In
order to support the anticipated growth of its business, the Company
expects to expand its manufacturing capabilities, marketing and customer
service functions. The anticipated increase in the Company's operating
expenses caused by this expansion could have a material adverse effect on
the Company's operating results if revenue does not increase at an equal or
greater rate.
Uncertainty Of Market Development And Acceptance Of Accent Color's
Products. The digital, high-speed printing market has traditionally relied
mainly on black-on-white print. There can be no assurance that a market for
high-speed, variable data color printing will develop or achieve
significant growth. The failure of such market to develop or achieve
significant growth would have a material adverse effect on the Company's
future results.
Dependence On A Limited Number Of Customers; Revenue Concentration. The
Company anticipates that sales of its Truecolor Systems and consumables to
a limited number of OEM customers will account for substantially all of the
Company's revenue. As of December 31, 1997, the Company had contracts with
only two customers, IBM and Groupe SET, and was discussing a proposal with
a third customer, Oce. There can be no assurance that these customers will
purchase a significant volume of the Company's products.
Dependence On Third Party Marketing, Distribution And Support. A
significant element of the Company's marketing strategy is to form
alliances with third parties for the marketing and distribution of its
products. To this end, the Company has entered into the IBM Agreement and
the SET Agreements for the marketing, distribution and support of the
Company's products. There can be no assurance that (i) the Company will be
successful in maintaining such alliances or forming and maintaining other
alliances, (ii) the Company will be able to satisfy its contractual
obligations with its OEM customers or (iii) the Company's OEM customers
will devote adequate resources to market and distribute the Company's
products successfully.
Dependence On Spectra. The Company is dependent on Spectra, a wholly owned
subsidiary of Markem Corporation ("Markem"), as its sole source supplier of
ink jet printheads and the hot melt, wax-based inks included in and used by
Truecolor Systems. Spectra has agreed to supply the Company with ink jet
printheads and wax-based inks under a supply agreement, subject to a number
of conditions. The Company's reliance on Spectra involves several risks,
including a potential inability to obtain an adequate supply of required
printheads or inks, and reduced control over the quality, pricing and
timing of delivery of these items. To date, Spectra has only produced a
limited number of ink jet printheads. Accordingly, there can be no
assurance that Spectra will be able to provide a stable source of supply of
these components. Spectra has granted the Company the exclusive right to
supply products including Spectra printheads in the worldwide market for
printing color on the output from specified high-speed, black-on-white
printers from Xerox, IBM, Oce and certain other parties through December
31, 2002. To maintain such exclusive rights, the Company is required to
purchase a minimum number of ink jet printheads each year, to continue to
purchase its wax-based ink requirements from Spectra and to make certain
payments. There can be no assurance that the Company will be able to meet
the minimum purchase requirements or make these payments.
Dependence On Major Subcontractors And Suppliers. The Company relies on
subcontractors and suppliers to manufacture, subassemble and perform
certain testing of some modules and parts of Truecolor Systems. The Company
currently performs the final assembly and testing of various Truecolor
System components and of each complete Truecolor System, and the Company
plans to eventually outsource the full assembly and testing of the major
modules of the Truecolor Systems. There can be no assurance that
subcontractors or suppliers will meet the Company's price, quality,
quantity and delivery requirements or otherwise perform to the Company's
expectations.
Development Risks. The Company is a development stage company. The Company
has products in various stages of development, and minimal revenue has been
recognized from the sale of its products. The Company has developed and
plans to market new products and new applications of technology and,
accordingly, is subject to risks associated with such ventures. The Company
has delivered prototype, pre-production and production Truecolor Systems
and is entering the pre-production phase for the enhanced version of these
systems. The future results of the Company must be considered in light of
the expenses and delays frequently encountered in connection with the
operation of a new business, the development and production of new products
and the development of practical production techniques for the products.
Limited History Of Product Manufacturing. To date, the Company has
manufactured only limited quantities of Truecolor Systems. To be
profitable, the Company's products must be manufactured in sufficient
quantities and at acceptable costs. Future production in sufficient
quantities may pose technical and financial challenges for the Company, and
no assurance can be given that the Company will be able to reduce its
current product costs to an acceptable level and to make a successful
transition to high-volume production.
Significant Fluctuations In Quarterly Results. The Company's quarterly
operating results are likely to vary significantly in the future based upon
a number of factors. Historically, there has existed seasonality in the
purchase of major equipment such as the Company's Truecolor Systems, with
many companies experiencing higher sales in the fourth calendar quarter.
Furthermore, a significant portion of the Company's operating expenses are
relatively fixed in the short term, and planned expenditures are based on
sales forecasts. Sales forecasts by the Company's OEM customers are
generally not binding. If revenue levels are below expectations, operating
results may be disproportionately affected because only a small portion of
the Company's expenses vary with revenue in the short term, which could
have a material adverse effect on the Company's future results.
Need For Additional Funding For Operating And Capital Requirements. The
Company's currently anticipated levels of revenue and cash flow are subject
to many uncertainties and cannot be assured. Further, the Company's
business plan may change, or unforeseen events may occur, requiring the
Company to raise additional funds. The amount of funds required by the
Company will depend on many factors, including the extent and timing of the
sale of Truecolor Systems, the timing and cost associated with the
expansion of the Company's manufacturing, sales and marketing and customer
support capabilities and the Company's operating results. There can be no
assurance that, if and when needed, additional financing will be available,
or available on acceptable terms. The inability to obtain additional
financing or generate sufficient cash from operations could require the
Company to reduce or eliminate expenditures for research and development,
production or marketing of its products, or otherwise to curtail or
discontinue its operations, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Product Warranty; Limit On Prices For Spare Parts. The Company warrants
its Truecolor Systems to be free of defects in workmanship and materials
for 90 days from installation at the location of the end user. Furthermore,
under the IBM Agreement, the Company has agreed to provide spare parts for
its products at prices which will yield a monthly parts cost per Truecolor
System not to exceed a specified amount. There can be no assurance that the
Company will not experience warranty claims or parts failure rates in
excess of those which it has assumed in pricing its products and spare
parts. Any such excess warranty claims or spare parts failure rates could
have a material adverse effect on the Company's business, financial
condition or results of operations. The Company currently has minimal
experience with the volume or nature of warranty claims relating to its
products.
Dependence On A Single Product Line. The Company anticipates that it will
derive substantially all of its revenue in the foreseeable future from
sales of Truecolor Systems, related consumables and spare parts. If the
Company is unable to generate sufficient sales of Truecolor Systems due to
market conditions, manufacturing difficulties or other reasons or if
purchasers of Truecolor Systems were to purchase wax-based ink or spare
parts from suppliers other than the Company, there could be a material
adverse effect of the Company's future results.
Rapid Technological Change Requires Ongoing Product Development Efforts.
The high-speed printer industry is characterized by evolving technology and
changing market requirements. The Company's future success will depend on a
number of factors, including its ability to continue to develop and
manufacture new products and to enhance existing products. Consequently,
the Company considers the enhancement of its products to be a development
priority. Additionally, in a new and evolving market, customer preferences
can change rapidly and new technology could render existing technology
obsolete. Failure by the Company to respond adequately to changes in its
target market, to develop or acquire new technology or to successfully
conform to market preferences could have a material adverse effect on
future results of the Company.
Limited Protection Of Proprietary Technology And Risks Of Third-Party
Claims. The Company's ability to compete effectively will depend, in part,
on the ability of the Company to maintain the proprietary nature of its
technology. The Company relies, in part, on proprietary technology, know-
how and trade secrets related to certain aspects of its principal products
and operations. To protect its rights in these areas, the Company generally
requires its OEM customers, suppliers, employees and independent
contractors to enter into nondisclosure agreements. In addition, the
Company has received a patent, and has filed additional U.S. and foreign
patent applications to protect technology which the Company believes is
proprietary about its technology. There can be no assurance, however, that
these agreements, arrangements or patents will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information. A failure of such protection could have a material adverse
effect on future results of the Company.
Competition. The Company expects to encounter varying degrees of
competition in the markets in which it intends to compete. Products or
product improvements based on new technologies could be introduced by other
companies with little or no advance notice. Manufacturers of high-speed,
black-on-white printers may also, in time, develop comparable or more
effective color capability within their own products which may render the
Company's products obsolete. There can be no assurance that the Company
will be able to compete against future competitors successfully or that
competitive pressures faced by the Company will not have a material adverse
effect upon its future results.
Risks Associated With International Operations. The Company intends to
have its products marketed worldwide and therefore may enter into contracts
with foreign companies. International sales are subject to certain inherent
risks, including unexpected changes in regulatory requirements, tariffs and
other trade barriers, fluctuations in exchange rates, government controls,
political instability and potential adverse tax consequences. There can be
no assurance that these factors will not have a material adverse effect on
the Company's future results.
Inflation
Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial results to date.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Accent Color Sciences, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of cash flows and of changes in shareholders'
equity (deficit) present fairly, in all material respects, the financial
position of Accent Color Sciences, Inc. (a development stage company) at
December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995, and for the
period from inception (May 21, 1993) through December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The Company's plans for funding future operations are described in
Note 1.
/s/ Price Waterhouse LLP
Hartford, Connecticut
March 12, 1998
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,005,563 $ 20,288,535
Accounts receivable 439,934 13,669
Due from officer (Note 11) - 15,802
Inventories (Notes 2 and 4) 4,611,216 3,362,252
Prepaid expenses and other
current assets 323,306 511,633
Total current assets 9,380,019 24,191,891
Fixed assets, net (Notes 2 and 3) 2,974,422 2,727,220
Other assets, net (Note 2) 52,698 32,354
Total assets $ 12,407,139 $ 26,951,465
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term
debt (Note 5) $ - $ 1,000,000
Obligations under capital
leases (Note 8) 61,360 47,555
Accounts payable 859,693 1,935,108
Accrued expenses 1,041,383 683,198
Customer advances and deposits 85,600 1,387,400
(Note 2)
Deferred revenue (Note 2) 2,496,000 950,000
Total current liabilities 4,544,036 6,003,261
Obligations under capital leases 91,937 123,621
(Note 8)
Long-term debt, net of discount - 1,271,638
(Note 5)
Other long-term liabilities 501,644 208,002
(Notes 7 and 8)
Total non-current
liabilities 593,581 1,603,261
Commitments and contingencies (Notes
8 and 12)
Shareholders' equity (Note 6 and 13):
Preferred stock, no par value,
500,000 shares authorized,
0 shares issued and outstanding - -
Common stock, no par value,
25,000,000 shares authorized,
11,989,855 and 10,139,775
shares issued and outstanding 45,114,633 38,499,490
Deficit accumulated during the
development stage (37,845,111) (19,154,547)
Total shareholders' equity 7,269,522 19,344,943
Total liabilities and
shareholders' equity $12,407,139 $26,951,465
</TABLE>
<TABLE>
<CAPTION>
For the period
from inception
For the year ended December 31, (May 21, 1993)
through
1997 1996 1995 December 31,
1997
<S> <C> <C> <C> <C>
Revenue $ 1,577,508 $ - $ - $ 1,577,508
Costs and expenses:
Costs of production 7,396,828 1,272,357 - 8,669,185
Research and
development 8,786,217 6,932,017 3,050,534 19,593,125
Marketing, general
and administrative 4,438,518 4,393,380 1,002,869 10,197,533
Related party
administrative
Expense (Note 11) - 25,000 80,260 105,260
20,621,563 12,622,754 4,133,663 38,565,103
Other (income) expense:
Interest expense 245,550 655,730 83,292 996,380
Interest income (599,041) (113,126) - (712,167)
(353,491) 542,604 83,292 284,213
Net loss before (18,690,564) (13,165,358) (4,216,955) (37,271,808)
extraordinary item
Extraordinary item:
Loss on early
extinguishment of debt,
net of income taxes of
nil - (573,303) - (573,303)
Net loss $(18,690,564) $(13,738,661) $(4,216,955) $(37,845,111)
Net loss (basic and
diluted) per common
share (Note 2): $ (1.77) $ (3.57) $ (2.33)
Weighted average common
shares Outstanding
(Note 2) 10,566,890 3,852,982 1,809,240
</TABLE>
<TABLE>
<CAPTION>
For the period
from inception
For the year ended December 31, (May 21, 1993)
through
1997 1996 1995 December 31, 1997
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss $(18,690,564) $(13,738,661) $(4,216,955) $(37,845,111)
Adjustments to
reconcile net loss
to net cash used in
Operating activities:
Depreciation and
amortization 1,128,533 974,184 111,127 2,217,032
Write-off of
deferred
offering costs - - 47,264 47,264
Expense related
to stock and
options granted 345,230 - 18,400 363,630
Debenture issued
for services - - 50,000 50,000
Loss on disposal of
fixed assets 11,460 82,691 9,378 103,529
Conversion of
accrued interest
to common stock - 231,147 - 231,147
Extraordinary loss
on extinguishment
of debt - 573,303 - 573,303
Changes in assets and
liabilities:
Accounts receivable
and amount due
from officer (410,463) (29,471) - (439,934)
Inventories (1,248,964) (3,362,252) - (4,611,216)
Prepaid expenses
and other assets 188,327 (502,776) (3,731) (323,306)
Accounts payable and
accrued expenses (717,230) 1,366,969 793,990 1,723,555
Due to officers - (20,711) (2,357) -
Customer advances
and deposits (1,301,800) 837,400 550,000 85,600
Deferred revenue 1,546,000 950,000 - 2,496,000
Other long-term
liabilities 293,642 133,091 74,911 501,644
Net cash used
in operating
activities (18,855,829) (12,505,086) (2,567,973) (34,826,863)
Cash flows from
investing activities:
Proceeds from sale
of fixed assets - 5,524 - 5,524
Purchases of
fixed assets (1,256,244) (2,611,891) (525,718) (4,422,248)
Cost of patents (21,666) (28,534) (1,207) (54,766)
Net cash used
in investing
activities (1,277,910) (2,634,901) (526,925) (4,471,490)
Cash flows from
financing activities:
Payment of capital
lease obligations (69,146) (71,953) - (141,099)
Net proceeds from
issuance of debentures - 3,049,768 1,789,333 4,839,101
Proceeds from issuance
of warrants - 261,482 56,631 318,113
Net proceeds from
issuance of
common stock 4,486,326 33,869,508 - 38,407,134
Proceeds from
exercise of options
and warrants 1,783,587 - 694,960 2,478,547
Net proceeds from
issuance of
preferred stock
through offerings
and conversion
of debt - - 340,060 1,430,634
Increase (decrease)
in notes payable - (50,000) 50,000 -
Increase in
long-term debt - 2,223,750 - 2,223,750
Deferred offering
costs - - - (47,264)
Repayment of
debentures (2,350,000) (3,855,000) - (6,205,000)
Net cash provided
by financing
activities 3,850,767 35,427,555 2,930,984 43,303,916
Net increase
(decrease) in
cash and cash
equivalents (16,282,972) 20,287,568 (163,914) 4,005,563
Cash and cash
equivalents at
beginning of
period 20,288,535 967 164,881 -
Cash and cash
equivalents at
end of period $ 4,005,563 $ 20,288,535 $ 967 $ 4,005,563
Supplemental disclosure
Cash paid for:
Interest $ 167,188 $ 246,509 $ - $ 413,697
Non-cash investing
activities (Note 8):
Capital lease obligations of
$51,268 were incurred
during the year ended
December 31, 1997,
reflecting new equipment
leases
</TABLE>
<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
warrants 394,091 1,445,000 - - - 1,445,000
Shares issued in
connection with
the Xerox
agreement 50,000 218,750 - - - 218,750
Proceeds from
sale 1,313,739 4,486,326 - - - 4,486,326
Net loss - - - - (18,690,564) (18,690,564)
December 31,
1997 11,989,855 $45,114,633 - $ - $(37,845,111) $ 7,269,522
</TABLE>
1. Formation and Operations of the Company
Accent Color Sciences, Inc. (the "Company") was incorporated in Connecticut
in May 1993. The Company designs, manufactures and sells innovative high-
speed, color printers ("Truecolor Systems") to attach to high-speed, black-
on-white printers. The Company also sells related consumables and spare
parts. The Company is considered a development stage company as defined in
Statement of Financial Accounting Standards No. 7.
Development and testing of a prototype began in January 1994, with a "proof-
of-concept" system developed in November 1994. During 1995, the Company
began negotiations with major original equipment manufacturers ("OEMs") to
enter into formal development relationships. At the same time, the Company
accelerated its engineering and development activities as its efforts were
focused on designing and building the next generation prototypes that were
completed in 1995. As of December 31, 1996, the Company received $1.5
million for the delivery of seven prototype machines to various OEMs. As
of December 31, 1997, the entire $1.5 million has been offset against
research and development expense. 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. During 1997, an OEM
announced general worldwide availability of the Company's continuous form
version of the Truecolor System designed for integration with their
production printing system and the Company launched into commercial
production. In 1997, all sales were attributable to a single customer.
Management believes that the existing cash on hand at December 31, 1997,
combined with proceeds from the January 1998 financing (Note 13),
additional anticipated financing and operating cash flows will be adequate
to fund the Company's planned cash requirements through the end of 1998.
In the event the Company is unsuccessful in achieving its anticipated
increased sales volume or the Company fails to obtain additional financing,
the Company would expect to reduce costs and expenses through reduction in
its planned expansion, including a reduction in 1998 planned inventory
increases, capital expenditures and other costs, sufficient to fund cash
requirements through the end of 1998.
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 generally recognized upon product shipment and customer
acceptance. The Company has established warranty policies that, under
specific conditions, enable customers to return products. The Company
establishes liabilities for estimated returns and allowances at the time of
revenue recognition. Until such time that the Company has adequate
information to estimate future returns, revenue resulting from Truecolor
Systems is deferred until the end of the warranty period. As of December
31, 1997 and 1996, the Company had deferred revenue of $2,496,000 and
$950,000 related to Truecolor Systems shipped.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks, as well as
short-term investments with original maturities of 90 days or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Fixed Assets
Fixed assets are stated at cost and are depreciated over their estimated
useful lives using the straight-line method. The estimated useful lives
are between three and five years. Leasehold improvements are amortized
over the shorter of the term of the lease or the useful life of the asset.
Patent
Patent costs of $53,875 and $33,100 at December 31, 1997 and 1996,
respectively, are capitalized as incurred and are amortized, once issued,
using the straight-line method over the shorter of the legal term or
estimated useful life. Accumulated amortization was $1,177, $746 and $338
at December 31, 1997, 1996 and 1995, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of
assets and liabilities.
Research and Development Expenditures
Research and development expenditures are charged to expense as incurred.
Customer Advances and Deposits
Customer Advances Under Research and Development Agreements
Amounts advanced pursuant to customer sponsored research and development
agreements are recognized as a liability until certain obligations (as
defined in the agreements, including delivery and acceptance of certain
test units) under the agreements have been met. When the obligations are
met, the amounts are offset against research and development expense.
Advances of $0 and $600,000 were deferred as of December 31, 1997 and 1996,
respectively. Amounts offset against research and development expense were
$600,000, $300,000, and $614,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
Customer Deposits
Based on sales contracts with certain customers, the Company was entitled,
for a limited time, to a percentage of the sales price upon receipt of
certain firm purchase orders. Customer deposits of $85,600, and $787,400
were deferred at December 31, 1997 and 1996, respectively.
Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its Stock Incentive Plan. Under APB 25, when the exercise
price of employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Additional disclosures required under Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation," are included in Note 7, Stock
Incentive Plan.
Net Loss Per Common Share
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," for all periods
presented. Basic earnings per share computations are determined based on
the weighted average number of shares outstanding during the period. The
effect of the exercise and conversion of all securities, including stock
options and warrants would be antidilutive and thus is not included in the
diluted earnings per share calculation.
3. Fixed Assets
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Equipment $1,564,611 $ 717,819
Computers 902,662 790,791
Furniture and fixtures 487,627 417,251
Leasehold improvements 953,699 795,230
Purchased software 369,606 319,381
Capital leases - equipment 294,397 243,129
4,572,602 3,283,601
Less: accumulated
depreciation and
amortization 1,598,180 556,381
$2,974,422 $2,727,220
</TABLE>
Amortization expense for capital leases amounted to $77,250, $42,454 and $0
for the years ended December 31, 1997, 1996 and 1995, respectively.
Depreciation expense was $971,601, $485,191 and $53,586 for the years ended
December 31, 1997, 1996 and 1995, respectively.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Raw materials and components $1,590,386 $2,242,756
Work-in-process 403,585 607,245
Finished goods 2,617,245 512,251
$4,611,216 $3,362,252
</TABLE>
5. Debt
The following table summarizes the Company's current outstanding debt:
<TABLE>
<CAPTION>
December 31,
Stated
Interest Maturity 1997 1996
Rate
<S> <C> <C> <C> <C>
Long-term debt, net
of unamortized
discount of $0 and
$78,362 8.00% 1997 - 1998 $ - $2,271,638
- 2,271,638
Less: current portion - 1,000,000
$ - $1,271,638
</TABLE>
Convertible Subordinated Debentures
On January 25, 1994, the Company issued $200,030 of 8.00% convertible
subordinated debentures (the "Series I Debentures"). On August 15, 1994,
the Company issued an additional $160,000 of the 8.00% convertible
subordinated debentures (the "Series II Debentures"). On September 20,
1994, all of the debentures, including accrued interest of $11,774, were
converted into 74,360 shares of the Company's Series A Preferred Stock at a
rate of $5.00 per share.
Notes Payable
The Company issued a $50,000 note payable in May 1995. The note was paid in
January 1996. Interest on the note accrued at 10.00%.
Series III Debentures
On October 31, 1995, the Company completed an offering of 8.00% convertible
subordinated debentures (the "Series III Debentures") for net proceeds of
$1,668,443. During 1995, the Company converted $50,000 of accounts payable
to Series III Debentures. The Series III Debentures were convertible into
common stock at a rate of $3.67 per share. The carrying value of the
debentures, plus accrued interest of $231,147, converted into 607,626
common stock shares upon the closing of the initial public offering on
December 23, 1996.
At the time of issuance, each holder of a Series III Debenture received a
detachable warrant (the "Series III Warrants") to purchase common stock for
an amount of shares equal to the Series III Debentures' principal amount
divided by the conversion rate. Series III Warrants issued were exercisable
into 544,554 common shares at an exercise price of $3.67 per share with an
expiration date of August 15, 1997. The Series III Warrants were valued at
$56,631, and accordingly this amount was allocated to common stock with an
equivalent discount recorded on the Series III Debentures. The discount was
amortized over the term of the debentures until its conversion to common
stock on December 23, 1996. Amortization expense was $0, $30,226 and
$5,148 for the years ended December 31, 1997, 1996 and 1995, respectively.
The unamortized discount remaining at conversion was included as a
reduction in the carrying value of the related common stock.
Related deferred debt issuance costs of $278,157 were amortized using the
effective interest method over the term of the related debt until its
conversion to common stock on December 23, 1996. Amortization expense was
$0, $136,088 and $52,154 for the years ended December 31, 1997, 1996 and
1995, respectively. The unamortized cost remaining at conversion was
included as a reduction in the carrying value of the related common stock.
Series IV Debentures
During February 1996, the Company completed a private placement of 8%
subordinated debentures (the "Series IV Debentures") for net proceeds of
$405,000, of which $240,000 were issued to a director of the Company. The
Series IV Debentures were non-convertible. The Series IV Debentures were
due on August 31, 1996, and were repaid by the Company on August 29, 1996.
In addition, each holder received detachable warrants (the "Series IV
Warrants") to purchase common stock equal to the Series IV Debentures'
principal amount divided by $3.67. The Series IV Warrants were valued at
$0.11 per warrant. Accordingly, $11,782 was allocated to common stock,
with an equivalent discount recorded on the Series IV Debentures. The
entire discount was amortized in the year ended December 31, 1996. The
Series IV Warrants issued are exercisable into 110,454 shares of common
stock at an exercise price of $3.67 per share with an expiration date of
February 28, 2001.
Xerox Loan
In 1996, the Company and a customer finalized terms of a loan that provided
for a maximum commitment of $3,000,000, at an annual interest rate of
8.00%, through April 1, 1998. As part of the inducement to extend such
commitment, the Company agreed to issue detachable warrants. During 1996,
the Company received $2,350,000 in loan proceeds and issued detachable
warrants exercisable into 375,000 shares of common stock at $3.67 per
share. A warrant to purchase 125,000 shares was issued with an expiration
date of February 28, 1999 and a warrant to purchase 250,000 shares was
issued with an expiration date of April 19, 1999. Accordingly, $126,250 was
allocated to common stock with an equivalent discount recorded on the note.
Amortization expense was $78,362, $47,888 and $0 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company paid its first principal installment of $500,000 on July 1,
1997. During September 1997, the Company concluded an agreement with the
customer that superceded the prior production and loan agreements. Under
the new agreement, the customer exercised the warrants to purchase 375,000
shares of common stock. The exercise proceeds of $1,375,000 were applied
to reduce the outstanding debt and accrued interest. The principal balance
remaining after this reduction was paid in full in three equal installments
prior to the end of 1997.
In exchange for mutual releases from liability under the prior production
agreement, the Company issued 50,000 shares of common stock to the
customer. The Company's product deposits from the customer were offset
against the charge resulting from the issuance of 50,000 shares of common
stock and inventories specific to the project, resulting in no material
impact to the Statement of Operations.
Private Financing
On October 11, 1996, the Company completed a private financing (the
"Interim Financing") of discounted notes in an aggregate principal amount
of $3,450,000 bearing interest at a rate of 8.70% per annum (excluding debt
discount). This financing resulted in net proceeds to the Company of
$2,780,000. The Interim Financing was repaid upon the closing of the
initial public offering on December 23, 1996.
At the time of issuance, holders of notes of the Interim Financing received
warrants to purchase an aggregate of 45,000 shares of common stock at an
exercise price of $8.00 per share with an expiration date of October 11,
2001. The Interim Financing Warrants were valued at $123,450, and
accordingly this amount was allocated to common stock with an equivalent
discount recorded on the notes. The discount was amortized over the term of
the debentures until its extinguishment on December 23, 1996. Amortization
of the original issue discount and the warrant valuation was $0, $159,107
and $0 for the years ended December 31, 1997, 1996 and 1995, respectively.
The unamortized discount remaining at extinguishment is included in the
extraordinary loss due to early extinguishment of the debt.
Related deferred debt issuance costs of $220,000 were capitalized and were
amortized using the effective interest method over the term of the debt
until its extinguishment on December 23, 1996. Amortization expense was
$0, $61,040 and $0 for the years ended December 31, 1997, 1996 and 1995,
respectively. The unamortized cost remaining at extinguishment is included
in the extraordinary loss due to early extinguishment of the debt.
6. Shareholders' Equity
Capital Stock Transactions
On September 15, 1994, the following changes in the Company's capital
structure occurred: (i) the Company's Board of Directors declared a 450-for-
1 split of the common stock, effective upon the amendment of the Company's
Certificate of Incorporation, (ii) the authorized number of common shares
was increased to 1,000,000 and (iii) the par value of the common stock was
changed from $.01 to no par value.
In January 1995, the Company's Board of Directors amended the articles of
incorporation to increase the authorized shares of common stock from
1,000,000 to 2,000,000. In April 1996, under the consent of the Board of
Directors, the number of authorized shares of common stock was increased
from 2,000,000 shares to 25,000,000 shares.
On October 8, 1996, as authorized by the Board of Directors, the Company
split its common stock 3-for-1.
All shares and per share conversion amounts (unless otherwise indicated) in
the accompanying financial statements have been restated to reflect the
capital stock transactions described.
Common Stock
In June 1996, pursuant to a private placement offering, the Company issued
2,625,000 shares of common stock for $4.00 per share. This offering
resulted in net proceeds of $9,460,044 to the Company. Stock purchase
warrants exercisable into 300,000 common shares with an exercise price of
$4.00 and an expiration date of June 28, 2001 were issued to the placement
agent in connection with this offering.
On December 23, 1996, the Company completed an initial public offering
pursuant to which 3,450,000 common stock shares were issued at $8.00 each
resulting in net proceeds of $24,409,464 to the Company.
On October 16, 1997, the Company completed a private placement offering
("Unit Offering") of 437,913 units of its common stock at a price of $10.95
per unit, or $3.65 per share. Each unit consisted of three shares of
common stock and a warrant exercisable into one share of common stock.
The Unit Offering resulted in net proceeds of approximately $4,486,000 to
the Company. The warrants were issued with an exercise price of $4.74 per
share and an expiration date of October 16, 2002. Additionally, warrants
exercisable into 102,500 shares of common stock were issued to the
placement agents for services provided. These warrants were granted with
an exercise price of $4.74 per share and an expiration date of October 16,
2002.
Series A Preferred Stock
From a class of preferred stock with 500,000 authorized shares, the
Company's Board of Directors designated a series consisting of 300,000 of
such shares as Series A Preferred Stock. The Series A Preferred Stock is
nonredeemable, convertible and voting, with no par value. The holders shall
be entitled to receive noncumulative cash dividends when and as declared by
the Board of Directors. In the event of any voluntary or involuntary
liquidation of the Company, the preferred shareholders shall be entitled to
all unpaid dividends at the time of liquidation and $5.00 per share as a
liquidating distribution prior to any liquidating distribution to the
common shareholders.
In 1994, pursuant to a private placement offering (the "Preferred Stock
Offering"), the Company issued 160,000 shares of Series A Preferred Stock,
with net proceeds of $643,770. In February 1995, the Board of Directors
increased the authorized shares of Series A Preferred Stock from 300,000
shares to 350,000 shares. In 1995 the Company issued an additional 75,000
shares of Series A Preferred Stock, with net proceeds of $340,060. Series A
Preferred Stock purchase warrants exercisable into 23,500 preferred shares
with an exercise price of $5.50 and an expiration date of September 2000
for 8,000 shares and February 22, 2001 for 15,500 shares were issued to
the placement agent in connection with these Preferred Stock offerings. In
September 1994, the Company issued to a third party vendor 15,000 shares of
Series A Preferred Stock as partial payment for services rendered pursuant
to a development agreement between the third party vendor and the Company.
The fair market value of the stock was recorded as $75,000.
Upon effectiveness of the registration statement filed pursuant to the
initial public offering of the Company on December 18, 1996, the 324,360
outstanding shares of Series A Preferred Stock converted at a rate of 4.2
common shares for one share of Series A Preferred Stock for a total of
1,362,309 common stock shares. Additionally, outstanding Series A
Preferred Stock purchase warrants for 23,500 shares converted at a rate of
4.2 common stock warrants for one Series A Preferred Stock warrant for a
total conversion to 98,700 common stock purchase warrants.
Series B Preferred Stock
In December 1997, the Company's Board of Directors designated a series of
4,500 shares of the Company's previously authorized preferred stock, no par
value per share, to be designated as the Series B Convertible Preferred
Stock.
Warrants
As of December 31, 1997, the Company had outstanding common stock purchase
warrants exercisable into an aggregate of 1,143,227 shares. Such shares
have been authorized and reserved.
The following summarizes the activity of outstanding warrants:
<TABLE>
<CAPTION>
Shares under Exercise price Warrants
warrant (per share) Exercisable
<S> <C> <C> <C>
Outstanding at
December 31, 1994 - $ - -
Granted to employees 112,500 3.67
Granted to Series III
Debenture holders 544,554 3.67
Exercised (297,840) 2.33
Outstanding at
December 31, 1995 359,214 $ 3.67 359,214
Granted to Series IV
Debenture holders 110,454 3.67
Granted to noteholder 375,000 3.67
Granted to service
providers 13,635 3.67
Granted to service
providers 15,000 3.67
Granted to
placement agent 300,000 4.00
Conversion of preferred
stock warrants 98,700 1.31
Granted to former advisor
in settlement 32,433 4.40
Granted to former advisor
in settlement 554 8.80
Granted to Interim
Financing holders 45,000 7.40
Warrants surrendered (112,500) 3.67
Outstanding at
December 31, 1996 1,237,490 $1.31 - $8.80 1,237,490
Anti-dilution
adjustments
pursuant to
warrant agreements 673 $3.66 - $8.08
Exercised (394,091) 3.67
Expired (241,258) 3.67
Granted in Unit Offering 540,413 4.74
Outstanding at
December 31, 1997 1,143,227 $1.31 - $8.08 1,143,227
</TABLE>
In early December 1995, in order to raise cash for operations, the Company
reduced the exercise price of the Series III detachable warrants from $3.67
per share to $2.33 per share (a revised fair market value as of such date)
for a limited period of time (through December 15, 1995). Warrant holders
exercised 297,840 shares of common stock for $694,960.
Pursuant to provisions in certain warrant agreements, anti-dilution
adjustments are to be made to the exercise price and/or the number of
shares purchasable under the warrant in certain circumstances. During
1997, adjustments were made in connection with the Unit Offering. All
shares and per share conversion amounts are adjusted in the table above.
7. Stock Incentive Plan
In January 1995, the Company's Board of Directors adopted and approved the
1995 Stock Incentive Plan (the "Plan") for directors, officers, key
employees and other persons. The Plan permits the granting of incentive
stock options, non-statutory stock options, stock appreciation rights and
restricted stock awards to purchase up to 300,000 shares of common stock.
In April 1996, the number of shares increased to 1,500,000. During 1997,
the number of shares increased to 2,000,000, subject to shareholder
approval. Such shares have been authorized and reserved.
Initially, options vested 20% each year, so that the options, or any
unexercised portion thereof, would be fully exercisable after a period of
five years following the date of their grant. In April 1996, the original
vesting period of five years was modified to three years with options
vesting 33% each year following the date of their grant. All options
previously granted are subject to this modification. In certain
circumstances, at the discretion of the Board of Directors, options are
granted with a vesting schedule of other than three years. Stock options
under the Plan have terms ranging from five to ten years.
The 1995 Stock Incentive Plan activity is summarized as follows:
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1997 December 31, 1996
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
<S> <C> <C> <C> <C>
Outstanding at
beginning of period 1,280,850 $ 3.53 301,500 $ 2.58
Granted 302,675 6.44 1,016,850 3.80
Exercised (92,250) 3.67 - -
Canceled (172,425) 6.12 (37,500) 3.20
Outstanding at period
end 1,318,850 3.85 1,280,850 3.53
Options exercisable
at period end 629,960 3.44 439,000 3.41
Weighted average fair
value of options
granted during the
period $ 5.20 $ 2.87
</TABLE>
The following summarizes additional information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable at Average
at December Contractual Exercise December 31, Exercise
Exercise Prices 31, 1997 Life Price 1997 Price
<C> <C> <C> <C> <C> <C>
$1.19 154,500 6.17 $ 1.19 113,010 $ 1.19
3.67 397,750 6.96 3.67 227,000 3.67
4.00 550,150 7.29 4.00 269,950 4.00
4.34 - 8.50 216,450 8.31 5.70 20,000 6.18
1,318,850 7.23 $ 3.85 629,960 $ 3.44
</TABLE>
Had compensation expense been recognized based on the fair value of the
options at their grant dates, as prescribed in Financial Accounting
Standard No. 123, the Company's net loss and net loss (basic and diluted)
per share would have been as follows:
<TABLE>
<CAPTION>
Year ended Year ended
<S> December 31, 1997 December 31, 1996
Net loss: <C> <C>
As reported $ (18,690,564) $ (13,738,661)
Pro forma under FAS 123 $ (20,052,460) $ (14,716,233)
Pro forma net loss (basic and
diluted) per share (unaudited):
As reported $ (1.77) $ (3.57)
Pro forma under FAS 123 $ (1.90) $ (3.82)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants during the applicable period: dividend yield of 0% for both
periods; risk-free interest rates ranging from 5.97% to 6.73% for options
granted during the year ended December 31, 1997and 5.26% to 6.96% for
options granted during the year ended December 31, 1996; expected
volatility factors of 87% for the year ended December 31, 1997 and 45% to
50% for the year ended December 31, 1996; and an expected option term
ranging from 5 to 10 years for both periods.
Compensation expense of approximately $550,725 has been attributed to
common stock options granted in August 1996. This compensation expense will
be recognized over the three year vesting period, of which $174,420 and
$60,993 was recognized as of December 31, 1997 and 1996, respectively.
Additionally, compensation expense of approximately $126,000 is included in
1997 for options whose vesting was accelerated in 1997.
8. Leases
Operating Leases
At December 31, 1997, the Company was committed under operating leases for
equipment, vehicles and facilities with initial terms of more than one
year. The vehicle leases contain a fair value purchase option at the end
of the lease term. The facility lease agreement provides for escalation of
the lease payments over the term of the lease, however, rent expense is
recognized using the straight-line method. Accrued rent related to this
facility lease was $264,480 and $147,000 as of December 31, 1997 and 1996,
respectively. Rent expense related to operating leases was $740,772 in
1997, $468,862 in 1996 and $108,800 in 1995.
Minimum lease payments under the noncancelable leases are as follows:
1998 $ 748,908
1999 815,928
2000 815,928
2001 -
2002 -
Total minimum obligations $2,380,764
Capital Lease Obligations
The Company is obligated under capital leases for certain office equipment
that expire on various dates through the year 2000. Future minimum lease
payments under these leases are as follows:
1998 $ 94,740
1999 84,914
2000 25,389
2001 -
2002 -
Total minimum obligations 205,043
Less: amount representing
interest 51,746
Present value of minimum
lease payments 153,297
Less: current portion 61,360
$ 91,937
9. Income Taxes
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Gross deferred tax assets:
Carryforwards:
Research tax
credits $ 447,000 $ 314,000
Net operating
losses 13,841,000 6,517,000
Other assets 1,316,000 1,164,000
Gross deferred tax assets 15,604,000 7,995,000
Gross deferred tax
liabilities (21,000) (44,000)
Valuation allowance (15,583,000) (7,951,000)
$ - $ -
</TABLE>
The Company has provided a valuation allowance for the full amount of
deferred tax assets in excess of deferred tax liabilities since the
realization of these future benefits cannot be reasonably assured as of the
end of each related period. If the Company achieves profitability, the
deferred tax assets may be available to offset future income taxes.
At December 31, 1997, the Company had approximately $34 million of federal
net operating loss carryforwards that expire in years 2008 through 2012,
approximately $34 million of state net operating loss carryforwards that
expire in years 1998 through 2002 and research and development tax credit
carryforwards of approximately $447,000 that expire in years 2009 through
2012.
As defined in the Internal Revenue Code, certain ownership changes limit
the annual utilization of federal net operating loss and tax credit
carryforwards. During 1996, the Company experienced such an ownership
change that limits the amount of federal net operating loss carryforwards
and research tax credits that can be utilized in any one taxable year. At
December 31, 1997 the approximate Section 382 annual limitation is $4.6
million for net operating loss carryforwards and research tax credits
incurred prior to the ownership change.
10. Disclosure about Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, amounts due from officer,
prepaid expenses, current maturities of long-term debt, accounts payable,
accrued expenses, customer advances and deposits and deferred revenue
approximates fair value because of the short-term nature of those
instruments.
The fair value of long-term debt is estimated based upon management
estimates and current interest rates offered to the Company on similar
debt. The estimated fair value of the Company's debt (see Note 5)
approximates its carrying value as of December 31, 1996.
11. Related Party Transactions
In connection with certain debt and equity offerings described in Notes 5
and 6, the Company engaged Knickerbocker Securities, Inc.
("Knickerbocker"), whose president is a shareholder and was a director of
the Company during 1994 and a portion of 1995, as their investment banker.
Amounts attributed to debt and equity offerings in 1996 and 1995 for
Knickerbocker's services were $150,000 and $214,126, respectively.
The Company entered into an agreement with Knickerbocker on September 20,
1994, in which Knickerbocker would advise the Company with regard to
financial matters and methods of financing for a three-year period
commencing on January 1, 1996 for a fee of $1,000 per month. In March 1996,
the Company terminated this agreement as well as all previous agreements
with Knickerbocker. Amounts expensed relating to the advisory agreement and
the termination of all existing agreements were $25,000 and $80,260 for the
year ended December 31, 1996 and 1995, respectively. Additionally, 32,433
and 554 common stock purchase warrants were granted in 1996 as settlement
for a compensation claim. These warrants expire on June 27, 2001 and
October 10, 2001, respectively.
Amounts recorded as "Due from officer" represent an advance for relocation
costs.
A member of the Company's Board of Directors is a partner with the
Company's primary legal firm.
In connection with the Interim Financing (see Note 5), a director and a
director's spouse purchased $250,000 and $100,000 of the notes, and
received 3,750 and 1,500 of the related warrants, respectively.
12. Commitments and Contingencies
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 that 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.
Effective January 1994, the Company entered into employment agreements with
two of its executive officers reflecting a five-year term and a three-year
term with an automatic three-year renewal period, respectively. These
agreements are subject to termination by either party, and provide for
salary continuation and benefits for a specified period under certain
circumstances including a change in control (as defined) of the Company.
As of December 31, 1997, if all of the employees under contract were to be
terminated by the Company without cause (as defined), the Company's
liability would be approximately $470,000.
13. Significant Fourth Quarter Event
In the fourth quarter of 1997, the Company took a charge for obsolete
inventory due to the enhancement of the Company's product from narrow to
wide printhead systems and a cancellation charge related to purchase
commitments of inventory totaling $1,250,000 and $300,000, respectively.
14. Subsequent Events
On January 13, 1998 the Company completed a private equity financing
providing net proceeds to the Company of $3.9 million. In connection with
the financing, the Company issued 4,500 shares of Series B Convertible
Preferred Stock at a price of $1,000 per share and warrants to purchase the
Company's common stock. The warrants issued are exercisable into 300,000
shares of common stock with an exercise price of $2.75 and an expiration
date of January 9, 2003. Additionally, warrants exercisable into 115,385
shares of common stock with an exercise price of $2.50 and an expiration
date of January 9, 2003 were issued to the placement agent for services
provided. In connection with the sale of the units, the Company agreed to
register the common stock issuable upon the conversion of the Series B
Convertible Preferred Stock and the execution of the warrants.
The Series B Convertible Preferred Stock ("Series B Stock"), no par value
per share, is convertible into such number of shares of common stock as is
determined by dividing the stated value ($1,000) of each share of Series B
Stock (as such value is increased by an annual premium of 6%) by the then
current conversion price of the Series B Stock (which is determined,
generally, by reference to 85% of the average of the closing market price
of the common stock during the five consecutive trading days immediately
preceding the date of determination) subject to certain restrictions and
adjustments. The Series B Stock has voting rights as defined in the
Company's Certificate of Incorporation, bears no dividends and ranks prior
to the Company's Common Stock and Series A Preferred Stock. In the event of
any voluntary or involuntary liquidation of the Company, the Series B
holders shall be entitled to a liquidation preference equal to the stated
value of the stock plus the accrued premium through the date of final
distribution. Upon occurrence of specific events, as defined in the
agreement, the holder may redeem the Series B Stock for cash or shares at
the option of the Company. The Company also has optional redemption
rights.
The Company has reserved 6,300,000 shares of common stock for issuance
pursuant to the conversion of the Series B Stock. This number of shares
represents an estimate based on 200% of the number of common shares that
would have been issuable upon conversion with an exercise price of $1.875
per share (4,800,000) and 1,500,000 shares issuable under the terms of the
Certificate of Designation in the event of certain failures by the Company
to comply with various provisions thereof. The actual number of shares
issuable upon conversion could be materially less or more than such
estimated number depending on factors that cannot be predicted by the
Company. The number of shares issuable upon conversion is dependent on (a)
the market price of the common stock at the time of the conversion, (b) the
Company's ability to maintain its NASDAQ listing and (c) the Company's
ability to obtain shareholder approval for the issuance of common stock
upon the conversion of Series B Stock and the related warrants. In
addition, 415,385 shares of common stock, subject to adjustments in
accordance with the terms of each warrant, were reserved for issuance
pursuant to the exercise of the warrants described above.
The terms of conversion of the Series B Stock issued in January 1998
afforded the holders a conversion price lower than the market price of the
common stock at the time of issuance. The difference between the
conversion price and market price will be treated as an imputed (non-cash)
dividend for purposes of calculating earnings per common share, although no
assets of the Company will be expended. The imputed dividend is
approximately $920,000 and will have the effect of increasing the 1998 net
loss per common share. The imputed dividend will be given no other
accounting treatment in the 1998 financial statements of the Company and
beyond.
Depending on the number of shares of Series B Stock converted into common
shares and the timing of such conversions, the transactions may result in
further Section 382 annual limitations of net operating loss carryforwards.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors may be found under the caption
"Election of Directors" on pages 2 and 3 of the Company's Proxy Statement
dated April 1, 1998, for the Annual Meeting of Shareholders to be held May
8, 1998 (the "Proxy Statement"). Such information is incorporated herein by
reference.
The executive officers of Accent Color as of March 6, 1998 were as follows:
Name Age Position with the Company
Richard J. Coburn 66 Chairman of the Board
Norman L. Milliard 55 President and Chief Executive Officer
Patrick J. Pedonti 46 Vice President, Treasurer and Chief
Financial Officer
Martyn R. Jones 41 Vice President, Corporate Development
George T. Dolan 42 Vice President, Operations
Richard J. Coburn has been Chairman of the Board since May 1996 and
cofounded the Company in May 1993. Mr. Coburn served as President of the
Company from May 1993 until May 1996 and served as Chief Executive Officer
of the Company from May 1993 until August 1996.
Norman L. Milliard has been President of the Company since May 1996, has
been Chief Executive Officer of the Company since August 1996 and was
elected a director of the Company in 1995. Mr. Milliard served as Vice
President of the Company from January 1994 until May 1996. Mr. Milliard
joined the Company in January 1994.
Patrick J. Pedonti has been Vice President and Chief Financial Officer of
the Company since March 1997. Mr. Pedonti joined the Company in March 1997.
Martyn R. Jones has been Vice President of the Company since May 1996. He
served as Director of Marketing from November 1995 to May 1996. Mr. Jones
joined the Company in November 1995.
George T. Dolan has been Vice President of the Company since January 1998.
He served as Director of Operations from July 1996 to January 1998. He
served as Director of Materials and Quality from April 1996 to July 1996.
Mr. Dolan joined the Company in April 1996.
Item 11. Executive Compensation
The information in the Proxy Statement set forth under the captions
"Executive Compensation" on pages 7 through 10 and "Compensation of
Directors" on page 5 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Principal Shareholders and Key
Personnel" on page 5 of the Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" on page
11 of the Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report on
Form 10-K are incorporated herein by reference.
Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1997.
(c) Exhibit Listing
Exhibit
Number Description
3.1, 4.1 Restated Certificate of Incorporation of the Company, as
amended.(2)
3.2, 4.2 Bylaws of the Company, as amended December 29, 1997.(2)
10.1 Product Development and Distribution Agreement dated
February 16, 1996 between the Company and Xerox
Corporation.(1)
10.2 Letter of Understanding dated July 2, 1996 between the
Company and Xerox Corporation supplementing the Product
Development and Distribution Agreement.(1)
10.3 Amendment to Product Development and Distribution
Agreement between the Company and Xerox Corporation dated
February 29, 1996.(1)
10.4 Loan Agreement Promissory Note dated February 29, 1996
between the Company and Xerox Corporation.(1)
10.5 Product Purchase Agreement dated April 16, 1996 between
the Company and International Business Machines
Corporation.(1)
10.6 Letter Agreement supplementing Product Purchase Agreement
between the Company and International Business Machines
Corporation dated February 23, 1996.(1)
10.7 OEM Supply Agreement dated January 8, 1996 between the
Company and Spectra, Inc.(1)
10.8 Amendment No. 1 to the OEM Supply Agreement dated July
12, 1996 between the Company and Spectra, Inc.(1)
10.9 Lease Agreement dated February 16, 1996 between the
Company John Hancock Mutual Life Insurance Company.(1)
10.10 Memorandum of Understanding dated October 10, 1996
between the Company and Oce van der Grinten, N.V.(1)
10.11 Accent Color Sciences, Inc. 1995 Stock Incentive
Plan.(1)
10.12 Employment Agreement dated December 14, 1993 between
the Company and Norman L. Milliard.(1)
10.13 Amendment No. 1 to Employment Agreement between the
Company and Norman L. Milliard dated as of January 1, 1995.(1)
10.14 Employment Agreement dated December 14, 1993 between
the Company and Richard J. Coburn.(1)
10.15 Consulting Agreement dated August 2, 1994 between
the Company and Peter Teufel.(1)
10.16 Consulting Agreement dated May 3, 1996 between the
Company and Raymond N. Smith.(1)
10.17 Consulting Agreement Dated August 2, 1994 between
the Company and Klaus Werding.(1)
10.18 Letter Agreement dated February 28, 1996 between the
Company and Pennsylvania Merchant Group Ltd.(1)
10.19 Letter Agreement dated May 6, 1996 between the
Company and Pennsylvania Merchant Group Ltd.(1)
10.20 Termination Agreement dated August 20, 1996 between
the Company and Pennsylvania Merchant Group Ltd.(1)
10.21 Termination Agreement dated March 29, 1996 between
the Company and Knickerbocker Securities, Inc.(1)
10.22 Form of nondisclosure agreement between the Company
and its employees.(1)
10.23 Form of Registration Rights Agreement Relating to
sale of Preferred Stock of the Company.(1)
10.24 Form of Registration Rights Agreement Relating to
sale of Series III Debentures of the Company.(1)
10.25 Form of registration Rights Agreement Relating to
warrants issued in connection with Series III Debentures of
the Company.(1)
10.26 Form of Registration Rights Agreement Relating to
Warrants issued in connection with Series IV Debentures of the
Company.(1)
10.27 Form of Registration Rights Agreement Relating to
sale of Common Stock of the Company.(1)
10.28 Registration Rights Agreement Relating to Warrants
issued by the Company to Xerox Corporation.(1)
10.29 Form of Registration Rights Agreement Relating to Warrants
issued pursuant to sale of Interim Notes.(1)
10.30 Form of Securities Purchase Agreement dated as of 1/09/98.(3)
10.31 Certificate of Designations, Preferences and Rights of Series
B Convertible Preferred Stock.(3)
10.32 Form of Warrant issued in connection with the 1998 Private
Placement.(3)
10.33 Form of Registration Rights Agreement dated as of 1/09/98.(3)
23 Consent of Price Waterhouse LLP
24 Power of Attorney pursuant to which this Registration
Statement has been signed on behalf of certain Directors.
27 Financial Data Schedule
________________
(1) Incorporated by reference to Registration Statement 333-14043 on Form
S-1.
(2) Incorporated by reference to Registration Statement 333-43467 on Form
S-3.
(3) Incorporated by reference to Registration Statement 333-45321 on Form
S-3.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of East Hartford, State of Connecticut, on March 26, 1998.
ACCENT COLOR SCIENCES, INC.
By /s/ Norman L. Milliard
Norman L. Milliard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated on March 26, 1998.
Signature Title Date
/s/ Norman L. Milliard
Norman L. Milliard President and Chief Executive March 26, 1998
Officer(Principal Executive Officer)
/s/ Patrick J. Pedonti
Patrick J. Pedonti Vice President, Treasurer March 26, 1998
and Chief Financial Officer
(Principal Financial and Accounting Officer)
*
Richard J. Coburn Director March 26, 1998
*
Robert H. Steele Director March 26, 1998
*
Richard Hodgson Director March 26, 1998
*
Willard F. Pinney, Jr. Director March 26, 1998
*By: Norman L. Milliard
Norman L. Milliard
Attorney-in-fact
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of
the Prospectuses constituting part of the Registration Statements
on Form S-3 (No. 333-43467 and No. 333-45321) of Accent Color
Sciences, Inc. of our report dated March 12, 1998 appearing on
page 14 of this Form 10-K.
/s/ Price Waterhouse LLP
Hartford, CT
March 12, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
does hereby appoint and constitute Richard J. Coburn and
Norman L. Milliard and each of them as his agent and attorney-in-
fact to execute in his name, place and stead (whether on behalf
of the undersigned individually or as an officer or director of
Accent Color Sciences, Inc. or otherwise) the Annual Report on
Form 10-K of Accent Color Sciences, Inc. for the fiscal year
ended December 31, 1997 an any and all amendments thereto and to
file such Form 10-K and any such amendment thereto with the
Securities and Exchange Commission. Each of the said attorneys
shall have the power to act hereunder with or without the other.
IN WITNESS WHEREOF, the undersigned have executed this
instrument this 23rd day of March, 1998.
/s/ Richard J. Coburn
Richard J. Coburn
/s/ Richard Hodgson
Richard Hodgson
/s/ Norman L. Milliard
Norman L. Milliard
/s/ Willard F. Pinney, Jr.
Willard F. Pinney, Jr.
/s/ Robert H. Steele
Robert H. Steele
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,005,563
<SECURITIES> 0
<RECEIVABLES> 439,934
<ALLOWANCES> 0
<INVENTORY> 4,611,216
<CURRENT-ASSETS> 9,380,019
<PP&E> 4,572,602
<DEPRECIATION> 1,598,180
<TOTAL-ASSETS> 12,407,139
<CURRENT-LIABILITIES> 4,544,036
<BONDS> 91,937
0
0
<COMMON> 45,114,633
<OTHER-SE> (37,845,111)
<TOTAL-LIABILITY-AND-EQUITY> 12,407,139
<SALES> 1,577,508
<TOTAL-REVENUES> 1,577,508
<CGS> 7,396,828
<TOTAL-COSTS> 7,396,828
<OTHER-EXPENSES> 8,786,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 245,550
<INCOME-PRETAX> (18,690,564)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,690,564)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,690,564)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<CASH> 5,242,481 9,854,465 14,250,390 20,288,535
<SECURITIES> 0 0 0 0
<RECEIVABLES> 459,750 215,769 129,997 13,669
<ALLOWANCES> 0 0 0 0
<INVENTORY> 4,994,912 4,106,275 4,232,148 3,362,252
<CURRENT-ASSETS> 11,117,594 14,696,063 19,188,678 24,191,891
<PP&E> 4,504,932 4,329,782 3,906,582 3,283,601
<DEPRECIATION> 1,314,709 1,036,195 778,894 556,381
<TOTAL-ASSETS> 14,359,382 18,041,283 22,368,066 26,951,465
<CURRENT-LIABILITIES> 5,445,478 6,699,093 6,399,745 6,003,261
<BONDS> 109,177 125,578 426,399 1,395,259
0 0 0 0
0 0 0 0
<COMMON> 40,628,307 38,499,490 38,499,490 38,499,490
<OTHER-SE> (32,260,418)(27,780,563)(23,250,572) (19,154,547)
<TOTAL-LIABILITY-AND-EQUITY> 14,359,382 18,041,283 22,368,066 26,951,465
<SALES> 1,285,182 546,407 0 0
<TOTAL-REVENUES> 1,285,182 546,407 0 0
<CGS> 4,443,353 2,528,436 0 0
<TOTAL-COSTS> 4,443,353 2,528,436 0 0
<OTHER-EXPENSES> 6,735,083 4,366,039 3,062,668 8,204,374
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 201,399 141,699 69,698 655,730
<INCOME-PRETAX> (13,105,871) (8,626,016) (4,096,025) (13,165,358)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (13,105,871) (8,626,016) (4,096,025) (13,165,358)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 (573,303)
<CHANGES> 0 0 0 0
<NET-INCOME> (13,105,871) (8,626,016) (4,096,025) (13,738,661)
<EPS-PRIMARY> (1.29) (.85) (.40) (1.93)
<EPS-DILUTED> (1.29) (.85) (.40) (1.93)
</TABLE>
