UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ______
Commission File Number 0-29048
ACCENT COLOR SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1380314
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Connecticut Boulevard, East Hartford, Connecticut 06108
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (860) 610-4000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No
The number of shares outstanding of the registrant's common stock
as of October 30, 1998 was 12,680,806
ACCENT COLOR SCIENCES, INC.
FORM 10-Q
For The Quarterly Period Ended September 30, 1998
INDEX
Part I. Financial Information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $2,096,540 $4,005,563
Accounts receivable 1,004,521 439,934
Inventories (Note 3) 6,617,194 4,611,216
Prepaid expenses and other
assets 121,589 323,306
Total current assets 9,839,844 9,380,019
Fixed assets, net 2,224,469 2,974,422
Other assets, net 70,220 52,698
Total assets $12,134,533 $12,407,139
Liabilities and Shareholders'
Equity
Current liabilities:
Obligations under capital
leases 68,000 61,360
Accounts payable 857,184 859,693
Accrued expenses 625,974 1,041,383
Customer advances and deposits - 85,600
Deferred revenue 4,280,600 2,496,000
Total current liabilities 5,831,758 4,544,036
Obligation under capital leases 40,310 91,937
Long-term debt, net of discount
(Note 5) 2,202,542 -
Other long-term liabilities 557,715 501,644
Total non-current
liabilities 2,800,567 593,581
Shareholders' equity:
Preferred stock, no par value,
500,000 shares authorized, 3,800
and 0 shares issued and
outstanding (Note 4) 3,311,093 -
Common stock, no par value,
35,000,000 and 25,000,000
shares authorized,
12,450,404 and 11,989,855
shares issued and
outstanding 46,094,203 45,114,633
Deficit accumulated during the
development stage (45,903,088) (37,845,111)
Total shareholders'
equity 3,502,208 7,269,522
Total liabilities and
shareholders' equity $12,134,533 $12,407,139
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the
period
from
Three months ended Nine months ended inception
September 30, September 30, May 21,1993)
through
September 30,
1998 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C>
Revenue $664,689 $738,775 $2,002,939 $1,285,182 $3,580,447
Costs and expenses:
Costs of production 861,495 1,914,893 3,638,749 4,443,353 12,307,934
Research and
development 895,614 2,369,070 3,423,716 6,735,083 23,016,841
Marketing, general
and administrative 885,268 978,753 3,004,740 3,468,964 13,307,533
2,642,377 5,262,716 10,067,205 14,647,400 48,632,308
Other (income) expense:
Interest expense 81,740 59,702 96,833 201,399 1,093,213
Interest income
(31,427) (103,788) (103,122) (457,746) (815,289)
50,313 (44,086) (6,289) (256,347) 277,924
Net loss before (2,028,001)(4,479,855) (8,057,977) (13,105,871)(45,329,785)
extraordinary item
Extraordinary item:
Loss on early
extinguishment of debt,
net of income taxes of
nil - - - - (573,303)
Net loss (2,028,001)(4,479,855)(8,057,977) (13,105,871)(45,903,088)
Imputed dividend on
preferred stock (Note 4) - - (920,000) - (920,000)
Net loss applicable to
common stock $(2,028,001)$(4,479,855)$(8,977,977)$(13,105,871)$(46,823,088)
Net loss (basic &
diluted) per common
share (Note 2) $(.16) $(.44) $(.74) $(1.29)
Weighted average
common shares outstanding
(Note 2) 12,440,308 10,198,422 12,212,415 10,159,539
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the
period from
inception
(May 21, 1993)
through
Nine months ended September 30, September 30,
1998 1997 1998
<S>
Cash flows from operating
activities:
Net loss before imputed <C> <C> <C>
dividend $(8,057,977) $(13,105,871) $(45,903,088)
Adjustments to reconcile
net loss to net cash used in
operating activities:
Depreciation and
amortization 893,588 806,212 3,110,620
Write-off of deferred
offering costs - - 47,264
Expense related to
stock and options - 345,230 363,630
granted
Debenture issued for
services - - 50,000
Loss on disposal of
fixed assets 15,706 11,460 119,235
Conversion of accrued
interest to common stock - - 231,147
Extraordinary loss on
extinguishment of debt - - 573,303
Changes in assets and
liabilities:
Accounts receivable (564,587) (430,279) (1,004,521)
Inventories (2,005,978) (1,632,660) (6,617,194)
Prepaid expenses and
other assets 201,717 91,182 (121,589)
Accounts payable and
accrued expenses (417,918) 239,878 1,305,637
Customer advances and
deposits (85,600) (943,000) -
Deferred revenue 1,784,600 656,000 4,280,600
Other long-term
liabilities 56,071 228,836 557,715
Net cash used in
operating activities (8,180,378) (13,733,012) (43,007,241)
Cash flows from investing
activities:
Proceeds from sale of fixed
assets 6,875 - 12,399
Purchases of fixed assets (138,374) (1,186,459) (4,560,622)
Cost of patents (17,825) (19,553) (72,591)
Net cash used in
investing activities (149,324) (1,206,012) (4,620,814)
Cash flows from financing
activities:
Payment of capital lease
obligations (44,984) (49,787) (186,083)
Net proceeds from issuance
of debentures - - 4,839,101
Proceeds from issuance of
warrants 325,000 - 643,113
Net proceeds from issuance
of common stock - - 38,407,134
Proceeds from exercise of
options & warrants 44,625 1,783,587 2,523,172
Net proceeds from issuance
of preferred
stock through offerings
and conversion of debt 3,921,038 - 5,351,672
Increase in long term debt 2,175,000 - 4,398,750
Repayment of debentures - (1,840,830) (6,205,000)
Deferred offering costs - - (47,264)
Net cash provided by
(used in) financing
activities 6,420,679 (107,030) 49,724,595
Net increase
(decrease) in cash and cash
equivalents (1,909,023) (15,046,054) 2,096,540
Cash and cash
equivalents at beginning of
period 4,005,563 20,288,535 -
Cash and cash
equivalents
at end of period $2,096,540 $5,242,481 $2,096,540
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Deficit
Accumulated
During the
Common Stock Preferred Stock Development
Shares Amount Shares Amount Stage Total
<S> <C> <C> <C> <C> <C> <C>
Proceeds from
sale 3,900 $21,800 - $ - $ - $21,800
Net loss - - - - (45,398) (45,398)
December 31, 1993 3,900 21,800 - - (45,398) (23,598)
Stock split 1,751,100 - - - - -
Conversion of
debentures - - 74,360 371,804 - 371,804
Proceeds from
sale - - 160,000 643,770 - 643,770
Conversion of
promissory
notes 42,000 50,000 - - - 50,000
Reclassification - (20,500) - - - (20,500)
Shares issued for
services - - 15,000 75,000 - 75,000
Net loss - - - - (1,153,533)(1,153,533)
December 31, 1994 1,797,000 51,300 249,360 1,090,574 (1,198,931) (57,057)
Proceeds from
sale - - 75,000 340,060 - 340,060
Exercise of
warrants 297,840 694,960 - - - 694,960
Options granted
to service
Provider - 18,400 - - - 18,400
Warrants issued
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
Proceeds from
sale - - 4,500 3,921,038 - 3,921,038
Exercise of
options 37,500 44,625 - - - 44,625
Conversion of
Series B
Preferred
Stock 423,049 609,945 (700) (609,945) - -
Warrants issued
with debt - 325,000 - - - 325,000
Net loss before
imputed dividend - - - - (8,057,977) (8,057,977)
September 30,
1998 (unaudited) 12,450,404 $46,094,203 3,800 $3,311,093 $(45,903,088) $3,502,208
</TABLE>
The accompanying notes are an integral part of these financial statements.
1. Interim Condensed Financial Statements
In the opinion of the Company, the accompanying unaudited
condensed financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly its financial position as of September 30, 1998
and the results of operations and cash flows for the three and
nine months ended September 30, 1998 and 1997 and the period from
inception (May 21, 1993) through September 30, 1998. The
December 31, 1997 balance sheet has been derived from the
Company's audited financial statements at that date. These
interim condensed financial statements should be read in
conjunction with Management's Discussion and Analysis and
financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
The results of operations for the nine months ended September 30,
1998 are not necessarily indicative of the results to be expected
for the full year.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of
these financial statements are as follows:
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is 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.
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. Inventories
Inventories consist of the following:
September 30, December 31,
1998 1997
Raw materials and components $1,924,150 $1,590,386
Work-in-process 291,808 403,585
Finished goods 4,401,236 2,617,245
---------- ----------
$6,617,194 $4,611,216
========== ==========
4. Shareholders' Equity
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 initially 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. 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.
On August 10, 1998, pursuant to the terms of the Certificate of
Designation and approval by the Board of Directors, the Company
increased the number of reserved shares of common stock for
issuance upon the conversion of the Series B Stock by 2,567,652
shares. This was done because the reserved amount had fallen
below 135% of the number of shares of common stock issuable upon
conversion of the then outstanding shares of Series B Stock for
three consecutive trading days. As a result, at September 30,
1998, there were 8,444,603 shares of common stock reserved for
issuance pursuant to the conversion of the remaining 3,800 shares
of Series B Stock issued and outstanding. The actual number of
shares issuable upon conversion could be materially less or more
than this 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 and (b) the Company's ability to maintain its
NASDAQ listing. As of September 30, 1998, 700 shares of Series B
Stock were converted into 423,049 shares of common stock at an
average conversion price of $1.60 per share.
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 was
treated as an imputed (non-cash) dividend for purposes of
calculating net loss per common share, although no assets of the
Company were expended. The imputed dividend is approximately
$920,000 and has the effect of increasing the net loss per common
share by $.08 per share for the nine months ended September 30,
1998. 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.
5. Long-term Debt
On July 21, 1998, the Company entered into a loan agreement with
International Business Machines Corporation ("IBM") to borrow
$2.5 million at a fixed interest rate of 10% per year. Interest
payments are due quarterly beginning October 1, 1998. The loan
is due in full on December 31, 2000 and is secured by the assets
and intellectual property of the Company. As part of the loan
agreement, the Company issued a warrant to IBM that provides the
right to purchase 500,000 shares of common stock at an exercise
price of $2.50 per share, until the warrant expires on July 21,
2003. The warrant was valued at $325,000, which was allocated to
common stock with an equivalent discount on the loan. The
discount is being amortized over the life of the loan resulting
in a non-cash charge to interest expense. Amortization expense
was $27,542 for the quarter ended September 30, 1998.
6. Stock Option Modification
On September 21, 1998, in an effort to retain key personnel, the
Board of Directors approved a modification of the outstanding
options under the 1995 Stock Option Plan for all active employees
and directors of Accent Color Sciences, Inc. Each option holder
could elect to continue to hold their existing options or could
have the Company re-price their options to an exercise price of
$1.00 per share, the fair market value of the common stock as of
September 29, 1998. In return for a lower exercise price, the
vesting period for such options was extended for one year. The
weighted average exercise price of all options outstanding was
reduced from $2.90 per share at June 30, 1998 to $1.26 per share
after the re-pricing. No compensation expense was recognized
pursuant to this modification because the exercise price of the
modified stock option equaled the market price of the common
stock on the date of the re-pricing.
7. Nasdaq Listing Requirement
As of September 30, 1998, the Company was not in compliance with
the net tangible asset requirement for continued listing on the
Nasdaq National Market. The Company is reviewing various
strategies to increase its net tangible assets and restore
compliance with this requirement. If its common stock cannot
remain listed on the Nasdaq National Market, the Company would
seek to have it listed on the Nasdaq Small Capitalization Market,
although the Company can give no assurance that this will occur.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Quarter Ended September 30, 1998 compared to Quarter Ended
September 30, 1997.
System Shipments. A total of sixteen systems were shipped in the
quarter ended September 30, 1998 compared to thirteen systems in
the quarter ended September 30, 1997. Shipments for the third
quarter of 1998 included fifteen Truecolor System upgrades and
one new system. These systems were recorded as deferred revenue
in accordance with the revenue recognition policy of the Company.
Backlog of Truecolor Systems as of September 30, 1998, consisted
of thirty-six systems totaling approximately $4,300,000 of which
nineteen are scheduled to be shipped during the fourth quarter.
Revenue Recognized. The Company currently sells its Truecolor
System with a 90-day warranty. Until such time that the Company
has adequate history to estimate future warranty costs, revenue
resulting from the shipment of Truecolor Systems will be deferred
until the end of the warranty period. The Company expects to
obtain a sufficient amount of history to estimate future warranty
costs by the end of the fourth quarter of 1998, which will then
allow the Company to recognize revenue on Truecolor Systems upon
shipment. Revenue recognition on consumables and spare parts
occurs upon shipment. The Company recognized revenue on one
system, totaling $140,000, for the quarter ended September 30,
1998 compared to three systems, totaling $450,000, for the
quarter ended September 30, 1997. As of September 30, 1998,
there were twenty-eight new systems and twenty-three upgrades,
totaling $4,280,000, in deferred revenue yet to be recognized as
revenue by the Company.
Consumables and spare parts sales were $525,000 for the quarter
ended September 30, 1998 compared to $289,000 for the quarter
ended September 30, 1997. Sales of consumables and spare parts
were higher in the third quarter of 1998 compared to the third
quarter of 1997 as our OEM customers have continued to fill their
sales and support channels for the wide-head version of the
Truecolor System.
Costs of Production. Costs of production decreased 55% from
$1,915,000 for the quarter ended September 30, 1997 to $861,000
for the quarter ended September 30, 1998. This decrease was
primarily attributed to (i) a decrease in system sales in the
third quarter of 1998 compared to the third quarter of 1997, (ii)
less manufacturing overhead payroll costs due to the reduction in
personnel, and (iii) a reduction in various operating costs
associated with production. These items were partially offset by
an increase in cost of sales for consumables and spare parts
totaling approximately $100,000 due to higher sales in the third
quarter of 1998 compared to the third quarter of 1997.
Research and Development Expenses. Research and development
expenses decreased 62% from $2,369,000 for the quarter ended
September 30, 1997 to $896,000 for the quarter ended September
30, 1998 as the Company directed its efforts toward production,
sales and market development with a less significant emphasis on
research and development. The decrease in research and
development expenses was primarily attributed to four major
factors: (i) a reduction in payroll related costs due to the
reduction in personnel during 1998, (ii) the Company's completion
of payments, in 1997, to Spectra, Inc. ("Spectra") to maintain
exclusivity rights, (iii) a reduction in design and development
costs paid to Spectra associated with the development of the ink
jet printheads for the enhanced wide-head version of the
Truecolor System, and (iv) a decrease in general design and
development expenses.
Marketing, General and Administrative Expenses. Marketing,
general and administrative expenses decreased 10% from $979,000
for the quarter ended September 30, 1997 to $885,000 for the
quarter ended September 30, 1998. This decrease was primarily
due to less payroll related costs as a result of the reduction in
personnel in addition to a reduction in professional fees and
other administrative expenses. These items were offset by an
increase in Marketing and Service costs of approximately
$140,000, which primarily encompassed costs incurred for travel
and consultants to support the increased sales and marketing
efforts and a reclassification of service related costs. Service
costs, consisting primarily of technical support, were classified
as costs of production during 1997. Beginning in the second
quarter of 1998, such costs are now classified as marketing,
general and administrative.
Interest Expense and Other (Income) Expense. Interest expense
increased 37% from $60,000 for the quarter ended September 30,
1997 to $82,000 for the quarter ended September 30, 1998. This
increase was primarily attributed to interest expense and
amortization of the debt discount associated with the loan
obtained from IBM in July 1998. Interest income decreased 70%
from $104,000 for the quarter ended September 30, 1997 to $31,000
for the quarter ended September 30, 1998. This decrease was
attributed to a greater amount of cash available for investment
in the third quarter of 1997 as compared to the third quarter of
1998, as the Company still retained funds from the initial public
offering in December 1996.
Nine Months Ended September 30, 1998 compared to Nine Months
Ended September 30, 1997.
System Shipments. A total of thirty-two systems were shipped in
the nine months ended September 30, 1998 compared to seventeen
systems in the nine months ended September 30, 1997. Shipments
for the first nine months of 1998 included twenty-three Truecolor
System upgrades and nine new systems. Upon shipment, such
systems were recorded as deferred revenue in accordance with the
revenue recognition policy of the Company.
Revenue Recognized. System sales were $827,000 for the nine
months ended September 30, 1998 compared to $450,000 for the nine
months ended September 30, 1997. Sales for the first nine months
of 1998 consisted of revenue recognized on nine systems, of which
two were Truecolor System upgrades.
Consumables and spare parts sales were $1,176,000 for the nine
months ended September 30, 1998 compared to $835,000 for the nine
months ended September 30, 1997. This increase was attributed to
our OEM customers continuing to fill their sales and support
channels for the enhanced wide-head Truecolor System.
Costs of Production. Costs of production decreased 18% from
$4,443,000 for the nine months ended September 30, 1997 to
$3,639,000 for the nine months ended September 30, 1998. This
decrease was primarily attributed to less payroll costs due to
the reduction in personnel in addition to a decrease in
recruiting costs and other production related expenses. These
items were partially offset by an increase in cost of sales for
systems and spare parts totaling approximately $605,000 due to
higher sales in the first nine months of 1998 compared to the
first nine months of 1997.
Research and Development Expenses. Research and development
expenses decreased 49% from $6,735,000 for the nine months ended
September 30, 1997 to $3,424,000 for the nine months ended
September 30, 1998 as the Company directed its efforts toward
production, sales and market development with a less significant
emphasis on research and development. The decrease in research
and development expenses was primarily attributed to four major
factors: (i) a reduction in payroll related costs due to the
reduction in personnel during 1998, (ii) the Company's
completion, in 1997, of payments to Spectra to maintain
exclusivity rights, (iii) a reduction in design and development
costs paid to Spectra related to the development of the ink jet
printheads for the enhanced wide-head version of the Truecolor
System, and (iv) a decrease in design and development expenses
and materials procured for research and development.
Marketing, General and Administrative Expenses. Marketing,
general and administrative expenses decreased 13% from $3,469,000
for the nine months ended September 30, 1997 to $3,005,000 for
the nine months ended September 30, 1998. This decrease was
primarily attributed to a reduction in related payroll costs due
to the reduction in personnel during 1998 in addition to a
decrease in costs incurred for professional services, primarily
legal and consulting fees. Marketing and Service costs, however,
increased by approximately $390,000, which encompassed costs
incurred for trade shows, travel and consultants to support the
increased sales and marketing efforts in 1998 and a
reclassification of service related costs. Service costs,
consisting primarily of technical support, were classified as
costs of production during 1997. Beginning in the second quarter
of 1998, such costs are now classified as marketing, general and
administrative.
Interest Expense and Other (Income) Expense. Interest expense
decreased 52% from $201,000 for the nine months ended September
30, 1997 to $97,000 for the nine months ended September 30, 1998.
This decrease was primarily attributed to the elimination of
interest expense resulting from the final payment of outstanding
debt with Xerox Corporation in the second half of 1997. Interest
income decreased 78% from $458,000 for the nine months ended
September 30, 1997 to $103,000 for the nine months ended
September 30, 1998. This decrease in interest income was
attributed to a greater amount of cash available for investment
in the first nine months of 1997 as compared to the first nine
months of 1998, primarily due to the Company's initial public
offering in December 1996.
Liquidity and Capital Resources
The Company's need for funding has continued from period to
period as it has increased its marketing and sales efforts,
continued its research and development activities for the
enhancement of Truecolor Systems and increased production of
Truecolor Systems. To date, the Company has financed its
operations through customer payments, borrowings and sale of
equity securities.
Through September 30, 1998, the Company had received $7.8 million
from the delivery of Truecolor Systems to customers, net proceeds
of $10.3 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 $43.4 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 $19.0 million was raised through the private
placement of equity securities.
As of September 30, 1998, the Company's primary source of
liquidity was cash and cash equivalents totaling $2.1 million.
Operating activities consumed $8.2 million in cash during the
first nine months of 1998 compared to $13.7 million in the first
nine months of 1997. This decrease was primarily attributed to a
decrease in the net loss of the Company, a reduction in prepaid
expenses and an increase in deferred revenue due to system
shipments. This was partially offset by an increase in
inventories and a decrease in accounts payable and other long-
term liabilities.
Capital expenditures decreased 89% from $1.2 million for the nine
months ended September 30, 1997 to $138 thousand for the nine
months ended September 30, 1998. This decrease was primarily
attributed to leasehold improvements made in the first quarter of
1997 to occupy the second floor of the facility currently leased
by the Company and purchases of manufacturing and test equipment
throughout the first nine months of 1997 to support the Company's
development and manufacturing efforts. The Company's planned
capital expenditures for the remainder of 1998 are approximately
$415,000 and will be primarily to support the manufacturing
capabilities of the Company.
On July 21, 1998, the Company entered into a loan agreement with
IBM to borrow $2.5 million at a fixed interest rate of 10% per
year. Interest payments are due quarterly beginning October 1,
1998. The loan is due in full on December 31, 2000 and is
secured by the assets and intellectual property of the Company.
As part of the loan agreement, the Company issued a warrant to
IBM that provides the right to purchase 500,000 shares of common
stock at an exercise price of $2.50 per share, until the warrant
expires on July 21, 2003. The warrant was valued at $325,000,
which was allocated to common stock with an equivalent discount
on the loan. The discount is being amortized over the life of
the loan resulting in a non-cash charge to interest expense.
Amortization expense was $27,542 for the quarter ended September
30, 1998.
As of September 30, 1998, the Company was not in compliance with
the net tangible asset requirement for continued listing on the
Nasdaq National Market. The Company is reviewing various
strategies to increase its net tangible assets and restore
compliance with this requirement. If its common stock cannot
remain listed on the Nasdaq National Market, the Company would
seek to have it listed on the Nasdaq Small Capitalization Market,
although the Company can give no assurance that this will occur.
Based on the current operating plan of the Company, the primary
requirements for cash through the remainder of 1998 will be to
fund operating losses, marketing and sales efforts, commercial
production of the enhanced Truecolor System and the further
development and enhancement of the Company's products. The
Company's currently planned research and development activities
are focused on value engineering to improve system profit margin
and developing higher resolution ink jet printing.
Under the current operating plan, the Company believes that its
existing cash resources and the funds obtained through the loan
agreement with IBM will be sufficient for the financing of its
operations and capital expenditures through the fourth quarter of
1998. In the event the Company is unsuccessful in achieving its
operating plan, the Company would expect to reduce costs and
capital acquisitions in order to fund cash requirements through
the end of 1998. The Company is continuing to review various
financing strategies, both debt and equity, that would enable it
to fund operations in 1999. The Company is a development stage
company and it is expected that quarterly net losses will
continue through at least the third quarter of 1999.
Year 2000
The Year 2000 date issue arises from the fact that many computer
programs use only two digits rather than four to define the
applicable year. The Company is currently assessing its major
internal management systems for Year 2000 readiness. This
assessment includes identification of all critical information
management systems, testing Year 2000 readiness of such systems
and making corrective fixes or replacing non-compliant systems.
The Company's plan also includes obtaining compliance
verification from third party vendors supplying critical
software, and communication with significant suppliers to
determine their plans to address their own Year 2000 issues. The
Company has not completed its assessment, but intends to make any
corrective action necessary as a result of such review. All
costs associated with internal Year 2000 readiness has not been,
and is not expected to be, material to the Company's business,
financial condition or results of operations. The Company
expects to complete its Year 2000 assessment by June 1999.
The Company presently believes that with modifications of current
software and conversions to new software, the Year 2000 issues
can be mitigated. However, the Company may not timely identify
and remediate all significant Year 2000 problems and remedial
efforts may involve significant time and expense. There can be
no assurance that the Year 2000 compliance problems of the
Company or its customers or suppliers will not have a material
effect on the Company's business, financial condition or results
of operation.
Forward-Looking Statements
The foregoing statements and analysis contain forward-looking
statements and information including information with respect to
the Company's plans and strategy for its business. Such forward-
looking statements are made pursuant to the "safe harbor"
provisions of Section 21E of the Securities Exchange Act of 1934,
as amended, which were enacted as part of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
contained in the foregoing analysis include marketing, revenue
and expenditure expectations, and other strategies and
anticipated events. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause actual
events or the Company's actual results to differ materially from
those indicated by such forward-looking statements. These
factors include, without limitation, (i) the level of customer
acceptance of the Company's products; (ii) the ability of the
Company to raise capital sufficient to support its business plan;
(iii) the ability of the Company to remain listed on the Nasdaq
National Market; (iv) the dependence of the Company on third
party suppliers for certain key technology elements; (v) the
dependence of the Company on third party marketing, distribution
and support, including the control by the Company's OEM customers
over the timing of the introduction of its products and the need
for the Company to complete and satisfy extensive testing
requirements of its products on a timely basis; (vi) the
potential fluctuations in the Company's quarterly results of
operations; and (vii) the ability of the Company to identify and
remediate significant internal Year 2000 problems and ensure that
corrective action, if necessary, is being taken by the Company's
customers and suppliers. Further information on factors that
could cause actual results to differ from those anticipated is
detailed in the Company's Annual Report on Form 10-K for 1997 as
filed with the Securities and Exchange Commission. Any forward-
looking information contained herein should be considered in
light of these factors.
Part II. Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Loan Agreement between the Company and
International Business Machines Corporation.
Exhibit 10.2 - Promissory Note between the Company and
International Business Machines Corporation.
Exhibit 10.3 - Security Agreement between the Company and
International Business Machines Corporation.
Exhibit 27 - Financial data schedule
(b) Reports filed on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACCENT COLOR SCIENCES, INC.
Dated November 16, 1998 By /s/ Charles E. Buchheit
Charles E. Buchheit
President and Chief
Executive Officer
By /s/ Patrick J. Pedonti
Patrick J. Pedonti
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,096,540
<SECURITIES> 0
<RECEIVABLES> 1,004,521
<ALLOWANCES> 0
<INVENTORY> 6,617,194
<CURRENT-ASSETS> 9,839,844
<PP&E> 4,642,265
<DEPRECIATION> 2,417,796
<TOTAL-ASSETS> 12,134,533
<CURRENT-LIABILITIES> 5,831,758
<BONDS> 2,242,852
0
3,311,093
<COMMON> 46,094,203
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,134,533
<SALES> 664,689
<TOTAL-REVENUES> 664,689
<CGS> 861,495
<TOTAL-COSTS> 861,495
<OTHER-EXPENSES> 895,614
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,740
<INCOME-PRETAX> (2,028,001)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,028,001)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,028,001)
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</TABLE>
EXECUTION COPY
ASC Loan Agreement
LOAN AGREEMENT
This LOAN AGREEMENT (as the same may be amended, supplemented or
modified from time to time, this "Agreement") is made as of July
21, 1998, between ACCENT COLOR SCIENCES, INC., a Connecticut
corporation, having its principal place of business at 800
Connecticut Boulevard, East Hartford, Connecticut 06108 (the
"Company"), and INTERNATIONAL BUSINESS MACHINES CORPORATION, a
New York corporation, with its principal place of business at New
Orchard Road, Armonk, New York 10504 ("Lender").
WHEREAS, the Company now desires to borrow from Lender a total of
$2,500,000 (two million five hundred thousand dollars) and Lender
is willing to loan such amount subject to the terms and
conditions set forth in this Agreement and the related documents
to be executed concurrently herewith or pursuant hereto;
WHEREAS, such loan shall be secured by the assets of the Company
as provided in the Security Agreement (as defined below); and
WHEREAS, to induce Lender to provide the loan, the Company has
agreed to issue to Lender a warrant to purchase 500,000 shares of
its common stock, no par value, and to provide registration
rights with respect thereto.
NOW THEREFORE, in consideration of the mutual promises, covenants
and other agreements hereinafter set forth, the parties hereto
agree as follows:
SECTION 1.THE LOAN.
1.1 The Loan. (a) Subject to the terms and conditions and
relying on the representations, warranties and covenants set
forth herein, Lender agrees to make a loan to the Company in the
aggregate principal amount of TWO MILLION FIVE HUNDRED THOUSAND
DOLLARS ($2,500,000) (the "Loan"), which Loan shall be evidenced
by a promissory note in the form attached as Exhibit A hereto
(the "Note").
(b)Subject to the other terms and conditions hereof and upon the
execution of this Agreement, the Note, the Security Agreement,
the Warrant (as defined below) and the Registration Rights
Agreement (as defined below), the amount of the Loan will be
funded to the Company by wire transfer to the Company's account
(number 9361548689) at Fleet National Bank, Hartford, Connecticut
(ABA number 011900571).
1.2Maturity Date. Unless sooner repaid in accordance with the
terms of this Agreement, the principal balance of the Loan shall
be due and payable, together with all interest accrued but not
yet paid, on December 31, 2000.
1.3Interest. (a) So long as no Event of Default has occurred
and is continuing, the Company shall pay interest to Lender at a
rate per annum which is equal to ten percent (10%) per annum on
the entire principal amount remaining unpaid and outstanding. So
long as an Event of Default has occurred and is continuing,
amounts payable under this Agreement shall bear interest
(compounded monthly and payable on demand in respect of overdue
amounts) at a rate per annum which is 2% per annum above the rate
otherwise applicable.
(b) Accrued interest shall be paid by the Company to Lender (i)
on the first day of each October, January, April and July to and
including October 1, 2000 and (ii) on December 31, 2000 when the
entire principal balance together with any unpaid accrued
interest and all other sums hereunder shall become due and
payable.
(c)All computations of interest payable hereunder shall be made
by Lender on the basis of actual days elapsed and on a 360-day
year.
(d)Notwithstanding anything herein or in the Note to the
contrary, if at any time the applicable interest rate, together
with all fees and charges and rights of any kind which are
treated as interest under applicable law (collectively the
"Charges"), as provided for herein or in any other document
executed in connection herewith, or otherwise contracted for,
charged, received, taken or reserved by Lender, shall exceed the
maximum lawful rate (the "Maximum Rate") which may be contracted
for, charged, received, taken or reserved by Lender in accordance
with applicable law, the rate of interest payable, together with
all Charges payable to Lender, shall be limited to the Maximum
Rate.
1.4Prepayment. (a) The Company shall have the right at any time
and from time to time, without premium or penalty, to prepay the
principal amount of the Loan, in whole or in part, together with
accrued interest on the prepaid amount, upon notice to Lender
(each such notice being referred to herein as a "Prepayment
Notice"); provided, however, that any prepayments of less than
the entire outstanding balance of the Loan shall be at least
$500,000.
(b)Each Prepayment Notice shall specify the prepayment date and
the principal amount (or portion thereof) to be prepaid as well
as the interest accrued on such amount to the date of payment.
(c)Any principal amount of this Note shall be accompanied by
accrued interest on the principal amount being prepaid to the
date of payment.
(d)If the Company sells any of the Collateral (as defined in the
Security Agreement) other than inventory sold in the ordinary
course of the Company's business, or if any of the Collateral is
taken by condemnation, the Company shall pay to Lender, unless
otherwise agreed by Lender, as a mandatory prepayment of the
Loan, a sum (not to exceed the amount of principal, interest and
other sums, if any, due to Lender under this Agreement, the Note,
the Security Agreement, the Warrant and the Registration Rights
Agreement) equal to the cash proceeds received by the Company
from such sale or condemnation and shall assign to Lender all of
its right, title and interest in and to all non-cash proceeds
from such sale or condemnation; provided however, that no
prepayment shall be required pursuant to this Section 1.4(d) as a
result of equipment sold in the ordinary course of the Company's
business if the total value of all such equipment sold in any one
calendar month does not exceed $25,000.
1.5Setoff. If during the term of this Loan an Event of Default
shall occur, any amount owed to Lender hereunder shall
immediately be setoff against any and all amounts Lender, its
subsidiaries and affiliates may owe to the Company, its
subsidiaries and affiliates at such time.
SECTION 2.SECURITY, WARRANT AND REGISTRATION RIGHTS. The Company
hereby acknowledges that it has executed and delivered to Lender
each of the following documents: (i) the Note;(ii) the security
agreement, dated as of the date hereof, between the Company and
Lender, in the form attached as Exhibit B hereto (as the same may
be amended, supplemented or modified from time to time, the
"Security Agreement"); (iii) the stock purchase warrant, dated as
of the date hereof, in the form attached as Exhibit C hereto (as
the same may be amended, supplemented or modified from time to
time, the "Warrant"); and (iv) the registration rights agreement,
dated as of the date hereof, between the Company and Lender, in
the form attached as Exhibit D hereto (as the same may be
amended, supplemented or modified from time to time, the
"Registration Rights Agreement").
SECTION 3.REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to Lender that:
3.1Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of
Connecticut, has the necessary authority and power to transact
the business in which it is engaged, is duly qualified to do
business in each jurisdiction in which the conduct of its
business or the ownership of its assets require such
qualification.
3.2Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its
obligations under this Agreement, the Note, the Security
Agreement, the Warrant and the Registration Rights Agreement
(including without limitation the power and authority to borrow
the money as contemplated hereby, issue the Warrant Shares (as
defined in the Warrant) upon exercise of the Warrant in
accordance with the terms thereof and grant the first priority
security interest in the Collateral pursuant to the Security
Agreement); (ii) the execution, delivery and performance of this
Agreement, the Note, the Security Agreement, the Warrant and the
Registration Rights Agreement by the Company and the consummation
by it of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Warrant and
the issuance and reservation for issuance of the Warrant Shares)
have been duly authorized by the Company's Board of Directors and
no further consent or authorization of the Company, its Board of
Directors, any committee of the Board of Directors, or its
stockholders is required; (iii) this Agreement, the Note, the
Security Agreement, the Warrant and the Registration Rights
Agreement have been duly executed and delivered by the Company;
and (iv) this Agreement, the Note, the Security Agreement, the
Warrant and the Registration Rights Agreement constitute valid
and binding obligations of the Company enforceable against the
Company in accordance with their terms.
3.3Compliance with Other Instruments. The Company is not in
default (a) under its Certificate of Incorporation or Bylaws, any
material note, indenture mortgage, lease, agreement, contract,
purchase order or other instrument, document, or agreement to
which the Company is a party or by which it or any of its
property is bound or affected; (b) with respect to any order,
writ, injunction or decree of any court or any federal, state,
municipal or other governmental department, commission or board.
To the best of the Company's knowledge after due inquiry, no
third party is in default under any material agreement, contract
or other instrument to which the Company is a party or by which
it or any of its property is affected.
3.4No Conflicts. Except as set forth in Schedule 3.4, the
execution, delivery and performance of this Agreement, the
Security Agreement, the Warrants and the Registration Rights
Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including,
without limitation, the issuance and reservation for issuance, as
applicable, of the Warrant and Warrant Shares) will not (i)
result in a violation of the Company's Certificate of
Incorporation or By-laws or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of
termination, amendment (including, without limitation, the
triggering of any anti-dilution provisions), acceleration or
cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or result in a
violation of any law, rule, regulation, order, judgment or decree
(including U.S. federal and state securities laws and
regulations and rules or regulations of any self-regulatory
organizations to which either the Company or its securities are
subject) applicable to the Company or any of its subsidiaries or
by which any property or asset of the Company or any of its
subsidiaries is bound or affected.
3.5No Consents. Except as specifically contemplated by this
Agreement and the Registration Rights Agreement, the Company is
not required to obtain any consent, approval, authorization or
order of, or make any filing or registration with, any court or
governmental agency or any regulatory or self regulatory agency
in order for it to execute, deliver or perform any of its
obligations under this Agreement, the Security Agreement, the
Warrant or the Registration Rights Agreement, in each case in
accordance with the terms hereof or thereof.
3.6Information Disclosed to Lender. All information provided by
the Company to Lender in connection with this Agreement, the
Note, the Security Agreement, the Warrant and the Registration
Rights Agreement and the transactions contemplated hereby and
thereby:
(a)is true and correct in all material respects and the Company
has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the
circumstances in which they were made, not misleading; and
(b)either (A) has been publicly disclosed in one or more filings
with the Securities and Exchange Commission (the "SEC") pursuant
the Securities Act of 1933, as amended, and/or the Securities
Exchange Act of 1934, as amended, or (B) is not required to be so
disclosed.
3.7Financial Statements. The Company has furnished to Lender its
consolidated statement of financial position and related
consolidated statements of earnings, cash flows and stockholders'
equity as of and for the year ended December 31, 1997, audited by
and accompanied by the opinion of Price Waterhouse LLP. Such
financial statements present fairly the financial position,
results of operations, cash flows and changes in stockholders'
equity of the Company and its subsidiaries in accordance with
U.S. generally accepted accounting principles.
3.8Absence of Certain Changes. Since December 31, 1997, there
has been no material adverse change and no material adverse
development in the business, properties, operations, prospects,
financial condition or results of operations of the Company and
its subsidiaries, taken as a whole, except as publicly disclosed
in filings by the Company with the SEC prior to the date hereof.
3.9Absence of Litigation. There are no lawsuits or proceedings
to which the Company is a party, or which are threatened, with
respect to which a result adverse to the Company would prejudice
the Company's ability to perform its obligations under, or affect
the validity of, this Agreement, the Note, the Security
Agreement, the Warrant or the Registration Rights Agreement.
3.10No Liens. Except with respect to Lender and as set forth on
Schedule 3.10, the Company has not granted security interests in,
and there are no outstanding liens, encumbrances, mortgages,
pledges, hypothecations, charges, restrictions or other security
interest of any kind securing any obligation of any entity or
person (collectively, "Liens") with respect to, its tangible or
intangible assets.
3.11Tax Returns. The Company and each of its subsidiaries has
filed or caused to be filed all foreign, federal, state and
local income and all other tax returns required to be filed by it
and has paid or caused to be paid all taxes shown to be due and
payable on such returns or on any assessments received by it
except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such
returns, reports or declarations apply.
3.12Capitalization. The capitalization of the Company as of the
date hereof, including the authorized capital stock, the number
of shares issued and outstanding, the number of shares issuable
and reserved for issuance pursuant to the Company's stock option
plans, the number of shares issuable and reserved for issuance
pursuant to securities (other than the Warrant) exercisable or
exchangeable for, or convertible into, any shares of capital
stock and the number of shares reserved for issuance upon the
exercise of the Warrant is set forth on Schedule 3.12. All of
such outstanding shares of capital stock have been, or upon
issuance in accordance with the terms of any such warrants,
options or preferred stock, will be, validly issued, fully paid
and non-assessable. No shares of capital stock of the Company
(including the Warrant Shares) are subject to preemptive rights
or any other similar rights of the stockholders of the Company or
any liens or encumbrances. Except for the securities and as set
forth on Schedule 3.12, as of the date of this Agreement, there
are no outstanding options, warrants, rights to subscribe to
securities or rights convertible into or exercisable for, any
shares of capital stock of the Company or any of its
subsidiaries, or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares
of capital stock of the Company or any of its subsidiaries.
Except as set forth on Schedule 3.12, there are no securities or
instruments containing antidilution or similar provisions that
will be triggered by the issuance of the Warrant or the Warrant
Shares in accordance with the terms of this Agreement and the
Warrant. The Company has furnished to the Purchasers true and
correct copies of the Company's Certificate of Incorporation as
in effect on the date hereof, the Company's By-laws as in effect
on the date hereof, and all other instruments and agreements
governing securities convertible into or exercisable or
exchangeable for capital stock of the Company.
SECTION 4.COVENANTS OF THE COMPANY. The Company covenants and
agrees that from and after the date hereof and until such time as
all amounts of principal and interest payable under the Note have
been indefeasibly paid in full, the Company shall:
4.1Notice. Promptly give written notice to Lender of the
occurrence of any Event of Default, of the commencement or threat
of any material litigation or proceedings affecting the Company,
or of any dispute between the Company and any regulatory body.
4.2Legal Compliance. Observe all requirements of any
governmental authorities relating to the conduct of its business;
maintain its existence as a legal entity in good standing; and
obtain and keep in full force and effect all rights, franchises,
licenses and permits which are necessary to the proper conduct of
its business.
4.3Inspection. Permit Lender or its authorized representative at
any reasonable time and upon reasonable notice to inspect the
books and records of the Company.
4.4Proper Records. Keep proper books of record and account in
which full, true and correct entries in accordance with generally
accepted accounting principles will be made of all dealings or
transactions in relation to its business and activities.
4.5Financial Information. Deliver to Lender: (i) within ten (10)
days after the filing with the SEC, a copy of its Annual Report
on Form 10-K, its Quarterly Reports on Form 10-Q, its proxy
statements and any Current Reports on Form 8-K; and (ii) within
one (1) day after release, copies of all press releases issued by
the Company or any of its subsidiaries. Delivery of these items
shall be made to:
IBM Printing Systems Company
6300 Diagonal Highway
Boulder, CO 80301
Attn:Chad L. Copenhaver, III
Vice President and IBM Associate General Counsel
4.6Use of Proceeds. Use the proceeds from this Loan for working
capital and operating expenses.
4.7Liens. Not grant or permit to exist a Lien upon any of its
assets of any kind, now owned or hereafter acquired, except Liens
in favor of Lender or as set forth on Schedule 3.10, without the
prior written consent of Lender.
4.8Accounts Receivable. Not sell, discount or otherwise transfer
its accounts receivable against current or deferred payment of
the purchase price thereof.
4.9Distributions. Not pay any dividend or distribution of cash
or assets with respect to any shares of its capital stock, nor
repurchase any capital stock, other than any distributions of
cash on shares of the Company's Series B Convertible Preferred
Stock required under the terms thereof or any deemed repurchases
of the Company's capital stock by reason of a cashless exercise
of any options and warrants to purchase the Common Stock of the
Company.
SECTION 5.EVENTS OF DEFAULT
If any of the following events (herein called an "Event of
Default") shall occur:
(a)The Company shall default in the payment of any part of the
principal of the Loan when and as the same shall become due and
payable, whether at maturity or by acceleration or otherwise; or
(b)The Company shall default in the payment of interest on the
Loan when and as the same shall become due and payable, and such
default in the payment of interest shall continue for a period of
five days after said default; or
(c)The Company fail to perform, keep or observe any other term or
provision of this Agreement, the Note, the Security Agreement,
the Warrant, the Registration Rights Agreement or any of other
document executed in connection with the transactions
contemplated hereby and such default shall continue for a period
of thirty (30); or
(d)an event of default, as defined in any indenture, agreement,
or instrument evidencing or under which there is at the time
outstanding any indebtedness of the Company for borrowed money,
shall occur and such indebtedness shall have become or been
declared due and payable at or prior to the date on which it
would otherwise have become due and payable and such event of
default shall not have been cured or waived; or
(e)any representation or warranty by the Company in this
Agreement, the Note, the Security Agreement, the Warrant or the
Registration Rights Agreement or in any document provided in
connection herewith or therewith shall prove to have been
incorrect in any material respect when made; or
(f)A Change of Control (as hereinafter defined) shall occur. A
"Change of Control" shall mean the occurrence of any one of the
following events: (i) any "person" (as such term is used in
Sections 3(a)(9) and 13(d) of the 1934 Act) becomes a "beneficial
owner" (as such term is used in Rule 13d-3 promulgated under the
1934 Act) of 30% or more of the Company's capital stock having
general voting power to elect the directors of the Company; (ii)
the majority of the Company's board of directors consists of
individuals other than the members of the board as of the date
hereof (the "Incumbent Directors"); provided that any person
becoming a director subsequent to the date hereof whose
nomination for election was supported by two-thirds of the
directors who then comprised the Incumbent Directors shall be
considered to be an Incumbent Director; (iii) the merger or
consolidation of the Company with or into another corporation
and, after such merger or consolidation is consummated, either
(A) the Company is not the surviving corporation, or (B) if the
Company is the surviving corporation, then the Company is a
wholly-owned subsidiary of another corporation and the
stockholders of the Company, immediately before such merger or
consolidation is consummated, do not own at least 80% of the
voting capital stock of the Company's parent corporation
immediately after such merger or consolidation is consummated;
(iii) the sale, lease, transfer or disposition of 20% or more of
the Company's assets or (iv) the Company adopts a plan of
liquidation providing for the distribution of all or
substantially all of its assets; or
(g)the Company shall (i) voluntarily commence any proceeding or
file any petition seeking relief under Title 11 of the United
States Code or any other Federal or state bankruptcy, insolvency,
or similar law, (ii) consent to the institution of, or fail to
controvert in a timely and appropriate manner, any such
proceeding or the filing of any such petition, (iii) apply for or
consent to the appointment of a receiver, trustee, custodian,
sequestrator, or similar official for the Company or for a
substantial part of its property or assets, (iv) file an answer
admitting the material allegations of a petition for involuntary
bankruptcy filed against it in any such proceeding, (v) make a
general assignment for the benefit of creditors, (vi) admit in
writing its general inability to pay its debts as they become due
or (vii) take corporate action for the purpose of effecting any
of the foregoing; or
(h)an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction
seeking (i) relief in respect of the Company or of a substantial
part of any of its property or assets, under Title 11 of the
United States Code or any other Federal or state bankruptcy,
insolvency, or similar law, (ii) the appointment of a receiver,
trustee, custodian, sequestrator, or similar official for the
Company or for a substantial part of its property or (iii) the
winding-up or liquidation of the Company, and, if and so long as
contested by the Company, either such proceeding or petition
described in this clause (B) shall continue undismissed for
ninety (90) days or an order or decree approving or ordering any
of the foregoing shall continue unstayed and in effect for ninety
(90) days.
then, (i) in the event of (a), (b), (c), (d) or (e) above, Lender
may at any time (unless all defaults shall theretofore have been
remedied or waived in writing by Lender) at its option, by
written notice to the Company, declare the Loan to be due and
payable, whereupon the same shall forthwith mature and become due
and payable, together with interest accrued thereon, without
diligence, presentment, demand, protest, or notice of any kind
whatsoever, all of which are hereby waived by the Company; or
(ii) in the event of (f), (g) or (h) above, the Loan shall be
immediately due and payable, whereupon the same shall forthwith
mature and become due and payable, together with interest accrued
thereon, without diligence, presentment, demand, protest, or
notice of any kind whatsoever, all of which are hereby waived by
the Company.
In case of one or more Events of Default shall occur and be
continuing, Lender may proceed to protect and enforce its rights
by an action at law, suit in equity or other appropriate
proceeding, whether for the specific performance of any agreement
described or contained herein or in any other agreement between
the parties, or for an injunction against violation of any of the
terms hereof or thereof, or in aid of the exercise of any power
granted hereby or thereby or by law. In case of a default in the
payment of any principal or interest on the Loan, the Company
will pay to Lender such further amount as shall be sufficient to
cover the cost and expenses of collection, including, without
limitation, reasonable attorneys' fees, expenses, and
disbursements. No course of dealing and no delay on the part of
Lender in exercising any right shall operate as a waiver thereof
or otherwise prejudice Lender's rights, nor shall the nonexercise
by Lender of any of its rights hereunder in any particular
instance constitute a waiver thereof in that or any subsequent
instance.
SECTION 6.MISCELLANEOUS
6.1No Extrinsic Assurances. By execution of this Agreement, the
Company agrees and acknowledges that (i) in entering into this
Agreement, the Company is not relying and will not rely on the
prospect of any orders for its products from Lender, or on any
present or future loans, extensions of credit, or other business
dealings or relationship with Lender, other than as expressly
provided herein; (ii) Lender has no obligation to make any
additional loans or extend any credit to the Company or to
further amend the terms of this Agreement, or the agreements
referenced herein in order to extend the maturity of, or waive
any of its rights with respect to any existing agreements between
Lender and the Company, and (iii) the Company will repay Lender
all amounts due and owing under this Agreement and the Note,
under the terms set forth therein and herein.
6.2Freedom of Action. Nothing in this Loan Agreement shall be
construed as prohibiting or restricting Lender from independently
developing, acquiring, and/or marketing any hardware, software,
firmware or other products or services which are or may be
considered competitive in any form with the products, services
and other materials of the Company, and Lender shall have full
freedom and flexibility in its marketing efforts for the
licensing, sublicensing or sale of any of the foregoing,
including, without limitation, the freedom to market, not market,
to discontinue marketing, and to decide its own method of
marketing terms, conditions and pricing.
6.3Future Bank Line of Credit. Notwithstanding Section 4.7 hereof
or the provisions of the Security Agreement, in the event the
Company elects to secure a working capital line of credit with a
commercial bank and the bank requires, as a condition to
extending the working capital line of credit, that the Company
provide the bank with a first priority security interest in the
receivables of the Company, Lender agrees to consider the
possibility of permitting a lien on the Company's accounts
receivables and subordinating its interest in such receivables to
such bank. Lender, however, reserves the right, in its sole
discretion, not to subordinate its interests in such receivables.
6.4Waiver; Remedies. No waiver of any of the provisions of this
Agreement, or of any attachment hereto or other document, or
attachment thereto, shall be effective unless it is set forth in
a writing which refers to the provision(s) so waived and is
executed by an authorized representative of the party waiving its
rights. No failure or delay by either party in exercising any
right, power or remedy will operate as a waiver of any such
right, power or remedy. No right or remedy in this Agreement is
intended to be exclusive but each shall be cumulative and in
addition to any other remedy referred to herein or otherwise
available to Lender at law or in equity; and the exercise by
Lender of any one or more remedies shall not preclude the
simultaneous or late exercise by Lender of any or all such other
remedies.
6.5Survival of Representations and Warranties. The
representations and warranties contained in this Agreement shall
survive the execution and delivery of this Agreement and shall
remain in full force and effect until the Loan and any unpaid
interest and expenses have been repaid in full. All other terms
and conditions of all other Agreements which are not expressly
modified hereby shall remain in effect in accordance with their
terms and shall continue to bind the parties hereto.
6.6Assignment. This Agreement and the Note shall not be
assignable or transferable by the Company (including by sale of
stock, operation of law in connection with a merger, or sale of
substantially all the assets, of the Company) without the prior
written consent of Lender. Lender or its assignee may assign, in
its sole discretion, any or all of its rights, interests, and
obligations under this Agreement and the Note to any third party.
6.7Binding. This Agreement shall be binding upon and inure to
the benefit of the Company and Lender and their respective
successors and assigns (to the extent permitted by the terms
hereof).
6.8Expenses. The Company shall pay all expenses (other than
legal fees) incurred by Lender in connection with the
preparation, execution and delivery of this Agreement and the
other agreements to be executed in connection herewith. The
Company shall indemnify and reimburse Lender for all costs and
expenses (including legal fees) incurred by Lender in connection
with the enforcement of its rights hereunder.
6.9Severability. If any provision of this Agreement, or the
application of any such provision to any person or circumstance
shall be held invalid, illegal or otherwise unenforceable in any
respect by a court of competent jurisdiction, such invalidity,
illegality or unenforceability shall not affect any other
provision hereof.
6.10Compliance with Laws. Both parties agree to comply and to do
all things necessary to enable the other party to comply with all
federal, state and local laws, regulations and ordinances.
6.11Amendment. This Agreement may be amended or modified only by
a written agreement of the parties hereto specifically referring
to this Agreement.
6.12Choice of Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the internal laws of
the State of New York, applicable to agreements performed
entirely within such State without regard to the conflicts of law
principles of such State. Each of the parties hereto irrevocably
waives any and all right to a trial by jury in any legal
proceeding arising out of or related to this Agreement. The
parties agree to submit to the exclusive jurisdiction and venue
of the federal or state courts of New York, County of
Westchester, to resolve any and all issues that may arise out of
or relate to this Agreement.
6.13Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more of such
counterparts have been signed by each of the parties and
delivered to the other party, together with any other required
documentation.
6.14Headings. Headings of sections are for convenience only, are
not part of this Agreement and shall not be deemed to affect the
meaning or construction of any of the provisions hereof.
6.15Entire Agreement: This Agreement, the Note, the Security
Agreement, the Warrant and the Registration Rights Agreement
constitute the entire agreement and understanding with respect to
the subject matter hereof.
ACCEPTED AND AGREED:
ACCENT COLOR SCIENCES, INC. INTERNATIONAL BUSINESS
MACHINES CORPORATION
By:_________________________By:____________________________
Name:______________________ Name:_________________________
Title:________________________Title:__________________________
Date: Date:
Witness:_____________________________
STATE OF ____________________________
COUNTY OF___________________________
I, ______________________________________, a Notary Public in and
for the said County, in the State aforesaid, DO HEREBY CERTIFY
THAT ___________________________, the ___________________________
of Accent Color Sciences, Inc., who is personally known to me to
be the same person whose name is subscribed to the foregoing
instrument as such, appeared before me this day in person and
acknowledged that he signed and delivered said instrument as his
own free and voluntary act, and as the free and voluntary act of
Accent Color Sciences, Inc., for the uses and purposes therein
set forth.
Given under my hand and notarial seal this ___day of _________,
1998.
___________________________
Notary Public
My Commission Expires:
ACS Promissory Note
PROMISSORY NOTE
$2,500,000.00 East Hartford, Connecticut
July 21, 1998
FOR VALUE RECEIVED, the undersigned, ACCENT COLOR SCIENCES,
INC., (hereinafter called the "Company"), hereby
unconditionally promises to pay to the order of
INTERNATIONAL BUSINESS MACHINES CORPORATION ("IBM") or
registered assigns the principal sum of TWO MILLION FIVE
HUNDRED THOUSAND DOLLARS (U.S.) ($2,500,000.00) on December
31, 2000, and to pay interest (computed on the basis of a
360-day year) on the unpaid principal balance hereof from
the date hereof at a rate per annum equal to ten percent
(10%), such interest to be due and payable (i) on the first
day of each October, January, April and July, to and
including October 1, 2000 and (ii) on December 31, 2000,
when the principal amount hereof shall become due and
payable, and to pay on demand interest on any overdue
principal and (to the extent permitted by law) on any
overdue payment of interest, at the rate of 12% per annum.
All payments of principal and interest shall be made in
lawful money of the United States of America, by wire
transfer, at the office of IBM located at New Orchard Road,
Armonk, New York 10504, or at such other place as the holder
hereof shall have designated to the Company in writing.
This Note is issued pursuant to, and in accordance with, the
Loan Agreement dated the date hereof (the "Loan Agreement")
between the Company and IBM, and the holder of this Note is
entitled to the benefits thereof and the security and
benefits of the Security Agreement dated the date hereof
between the Company and IBM.
This Note is subject to setoff upon the occurrence of an
Event of Default (as defined in the Loan Agreement) and is
subject to mandatory prepayment by the Company upon the
occurrence of the events, and in the amounts, specified in
the Loan Agreement. The Company may at its election prepay
this Note and the maturity thereof may be accelerated
following an Event of Default, all as provided in the Loan
Agreement, to which reference is made for the terms and
conditions of such provisions as to prepayment and
acceleration.
Upon surrender of this Note for registration of transfer or
exchange, duly endorsed or accompanied by a written
instrument of transfer duly executed by the registered
holder hereof or such holder's attorney duly authorized in
writing, a new Note for a like principal amount will be
issued to, and, at the option of the holder, registered in
the name of, the transferee. The Company and any agent of
the Company may deem and treat the person in whose name this
Note is registered as the owner hereof for the purpose of
receiving payments of the principal of, and interest on,
this Note and for all other purposes whatsoever (including
payment of fees) whether or not this Note is overdue, and
the Company shall not be affected by any notice to the
contrary. The holder of this Note is required to notify the
Company of any transfer of this Note and the identity of the
transferee within a reasonable time after transfer of this
Note.
This Note shall be governed by and construed in accordance
with the laws of the State of New York.
Accent Color Sciences, Inc.
By: _________________________________
Title: ________________________________
Witness:______________________________________
STATE OF____________________________________
COUNTY OF__________________________________
I, ____________________________, a Notary Public in and for
the said County, in the State aforesaid, DO HEREBY CERTIFY
THAT _________________________,
the___________________________ of Accent Color Sciences,
Inc., who is personally known to me to be the same person
whose name is subscribed to the foregoing instrument as
such, appeared before me this day in person and acknowledged
that he signed and delivered said instrument as his own free
and voluntary act, and as the free and voluntary act of
Accent Color Sciences, Inc., for the uses and purposes
therein set forth.
Given under my hand and notarial seal this ___day of
__________, 1998.
______________________
Notary Public
My Commission Expires:
EXECUTION COPY
ACS Security Agreement
SECURITY AGREEMENT
This SECURITY AGREEMENT (as the same may be amended, supplemented
or otherwise modified from time to time, this "Security
Agreement"), dated as of July 21, 1998, made by ACCENT COLOR
SCIENCES, a Connecticut corporation having its principal place of
business at 800 Connecticut Boulevard, East Hartford, Connecticut
06108 (the "Company") to INTERNATIONAL BUSINESS MACHINES
CORPORATION, a New York corporation with its principal place of
business at New Orchard Road, Armonk, New York 10504, as the
secured party hereunder (hereinafter referred to as "Lender").
WHEREAS, the Company and Lender are parties to a certain Loan
Agreement, dated as of the date hereof (the "Loan Agreement"),
pursuant to which Lender has agreed to make a Loan (as defined in
the Loan Agreement) to the Company up to a maximum principal
amount of $2,500,000 (two million five hundred thousand dollars),
evidenced by a promissory note of the Company (the "Note");
WHEREAS, the execution and delivery of this Security Agreement by
the Company is required pursuant to the terms of the Loan
Agreement; and
WHEREAS, the Company has duly authorized and directed its
appropriate officers to execute this Security Agreement and the
same is being executed as an inducement to Lender to make the
Loan provided for as set forth in the Loan Agreement.
Capitalized terms used but not defined herein have the meanings
attributed to them in the Loan Agreement.
NOW, THEREFORE, in consideration of these premises, and for other
good and valuable consideration, receipt of which is hereby
acknowledged, and in order to induce Lender to enter into the
Loan Agreement, it is hereby agreed as follows:
SECTION 1. Security.
As security for the payment and fulfilment of its obligations to
Lender hereunder and under the Loan Agreement, the Note, the
Warrant and the Registration Rights Agreement, the Company hereby
grants to Lender, and hereby mortgages, pledges, hypothecates,
assigns and delivers to Lender a first priority security interest
in, general lien upon and/or right of setoff against the
following (hereinafter the "Security" or "Collateral"), together
with all right, title and interest of the Company therein and all
rights and remedies which the Company might exercise with respect
thereto but for the execution of this Agreement: all personal
and real property of the Company whether now or hereafter
existing or now owned or hereafter acquired or created and
wherever located, of every kind and description, tangible or
intangible, including, without limitation, the balance of every
account of the Company now or hereafter existing with Lender and
every other claim of the Company against Lender, now or hereafter
existing, and all money, goods, equipment, intellectual property,
inventory, instruments, securities, documents, chattel paper,
accounts, promissory notes, credits, claims, demands, general
intangibles, and any other property, rights or interests of the
Company of any nature whatsoever, and shall include the products,
proceeds and accessions of and to any thereof; provided, however,
that the security interest granted to Lender hereunder in the
items of Collateral set forth on Schedule 1 hereto shall be
subordinate to any security interest, right to purchase or other
interest held by the respective party identified on such
Schedule.
SECTION 2. Representations and Warranties of the Company.
2.1Title and Authority. The Company has good and valid rights in
and title to the Collateral with respect to which it has
purported to grant a security interest hereunder and has full
authority and power to grant to Lender the security interest in
the Collateral pursuant hereto and to execute, deliver and
perform its obligations in accordance with the terms of this
Agreement, without the consent or approval of any other person
other than any consent or approval that has been obtained.
2.2Filings. Fully executed Uniform Commercial Code financing
statements have been filed in each governmental, municipal or
other office specified in Schedule 2.2 hereto, which are all the
filings, recordings and registrations that are necessary to
publish notice of, protect the validity of and establish a legal
valid and perfected security in favor of Lender in respect of all
Collateral in which the security interest granted hereby may be
perfected by filing, recording or registration in the United
States and no further or subsequent filing, recording or
registration is necessary in any such jurisdiction, except as
provided under applicable law with respect to the filing of
continuation statements.
2.3Validity of Security Interest. The security interest granted
hereby constitutes: (a) a legal and valid security interest in
all the Collateral securing the obligations of the Company under
the Note, the Loan Agreement, the Warrant and the Registration
Rights Agreement and (b) a perfected security interest in all
Collateral in which a security interest may be perfected by
filing, recording or registering a financing statement or similar
document.
2.4No Liens. The Collateral is owned by the Company free and
clear of any Lien, except for Liens expressly permitted by
Section 3.10 of the Loan Agreement.
SECTION 3.Covenants of the Company
3.1Change of Name, etc. The Company agrees promptly to notify
Lender of any change (i) in its corporate name or any trade name
used to identify it in the conduct of its business or in the
ownership of its properties, (ii) in the location of its chief
executive offices, its principal place of business, any office in
which it maintains books or records relating to Collateral owned
by it or any office or facility at which such Collateral owned by
it is located (including the establishment of any such new office
or facility), or (iii) in its identity or corporate structure.
The Company agrees not to effect or permit any such change unless
all filings have been made under the Uniform Commercial Code that
are required in order for Lender to continue at all times
following such change to have a valid, legal and perfected
security interest in all the Collateral. The Company agrees
promptly to notify Lender if any material portion of the
Collateral is damaged or destroyed.
3.2Records; Inspection. (a) The Company agrees to maintain, at
its own cost and expense, complete and accurate records with
respect to the Collateral owned by it and, at such time or times
as Lender may request, promptly to prepare and deliver to Lender
a duly certified schedule showing the identity, amount and
location of any and all Collateral.
(b)Lender shall have the right at any reasonable time or times to
inspect the Collateral, all records relating thereto and the
premises on which the Collateral is located, to discuss the
Company's affairs with the officers of the Company and its
independent accountants and to verify under reasonable procedures
the validity, amount, quality, quantity, value condition and
status of, or any other matter relating to, the Collateral.
3.3Protection of Security. The Company shall, at its own
expense, take any and all actions necessary to defend title to
the Collateral against all persons and to defend the security
interest in the Collateral granted hereby and the priority
thereof against any Lien not expressly permitted under the Loan
Agreement.
3.4Limitation on Modification of Accounts. The Company will not,
without Lender's prior written consent, grant any extension of
the time of payment of any account receivable, compromise,
compound or settle the same for less than the full amount
thereof, release, wholly or partly, any person liable for the
payment thereof or allow any credit or discount whatsoever
thereon, other than extensions, credits, discounts, compromises
or settlements granted in the ordinary course of business. After
an Event of Default shall have occurred and during the
continuance thereof, the Company shall not to grant or make any
such extension, credit, discount, compromise or settlement under
any circumstances without Lender's prior written consent.
3.5Location of Inventory. The Company agrees that it shall not
permit any inventory to be in the possession of any warehouseman,
bailee or agent at any time unless such warehouseman, bailee or
agent shall have been notified of the security interest created
hereby and shall have agreed in writing to hold the inventory
subject to the security interest and to waive and release any
Lien held by it with respect to such inventory.
3.6Further Assurances. The Company agrees to execute and deliver
to Lender such additional agreements and instruments, in form
satisfactory to Lender's counsel, and do such further acts or
things of any nature, whether similar to the acts enumerated
above or not, as Lender or its counsel may require or deem
advisable to carry into effect the purposes of this Security
Agreement and the Loan Agreement, or to better assure and confirm
unto Lender its rights, powers and remedies hereunder and under
the Loan Agreement.
SECTION 4.Power of Attorney.
(a)The Company hereby constitutes and appoints Lender its true
and lawful attorney-in-fact, in the place and stead of the
Company with full power of substitution, either in Lender's own
name or in the name of the Company, to ask for, demand, sue for,
collect, receive, and give acquittance for any and all money due
or to become due under and by virtue of the Collateral, to
endorse checks, drafts, orders and other instruments for the
payment of money payable to the Company on account thereof, to
settle, compromise, prosecute or defend any action, claim or
proceeding with respect thereto, and to sell, assign, pledge,
transfer and make any agreement respecting, or otherwise deal
with, the same or take any action or execute any instrument which
Lender may deem necessary or desirable to accomplish the purpose
hereof; provided, however, that nothing herein contained shall be
construed as requiring or obligating Lender to make any demand,
or to make any inquiry as to the nature or sufficiency of any
payment received by it, or to present or file any claim for the
moneys due or to become due thereunder, and no action taken by
Lender or omitted to be taken with respect to the said Collateral
shall give rise to any defense, counterclaim or offset in favor
of the Company or to any claim or action against Lender. The
appointment hereunder by the Company of Lender as attorney-in-
fact is irrevocable and coupled with an interest.
(b)The Company hereby irrevocably authorizes Lender, at the
Company's own expense, to file such notices, financing
statements, mortgages, deeds of trust and other documents as
Lender or its counsel may deem necessary for the perfection of
the security interest and liens of Lender hereunder, without the
Company's signature, and appoints Lender as the Company's
attorney-in-fact to execute any such statements in the Company's
name and to perform all other acts which Lender deems appropriate
to perfect and continue the security interest conferred hereby.
SECTION 5.Remedies.
5.1General. During the effective period of this Security
Agreement, Lender shall have all of the rights and remedies of a
secured party under the Uniform Commercial Code (as said law may
at any time be amended), and in addition thereto, the rights and
remedies provided herein, in the Loan Agreement, the Warrant, the
Registration Rights Agreement and in any other instrument,
document or agreement executed by the Company in favor of Lender.
5.2Remedies Upon an Event of Default. Upon the occurrence and
during the continuation of an Event of Default, the Company
agrees to deliver each item of Collateral to Lender on demand and
it is agreed that Lender shall have the right (subject to
applicable law) to take any of or all the following actions at
the same or different times: (a) with respect to any Collateral
consisting of intellectual property, on demand to cause the
security interest granted hereby to become an assignment,
transfer and conveyance of all such Collateral by the Company to
Lender, or to license or, to the extent permitted by applicable
law, to sublicense, any such Collateral throughout the world on
such terms and in such manner as Lender shall determine (other
than in violation of any then-existing license arrangements to
the extent that waivers cannot be obtained); and (b) with or
without legal process and with or without previous notice or
demand for performance, to take possession of the Collateral and
without liability for trespass to enter any premises where the
Collateral may be located for the purpose of taking possession of
or removing the Collateral and generally to exercise any and all
rights afforded to a secured party under the Uniform Commercial
Code. Without limiting the generality of the foregoing, Lender
may, without being required to give any notice, except of
intention to sell or of time and place of sale (except such
notice as is required by applicable statute and cannot be
waived), sell the Collateral, or any part thereof, at a public or
private sale, for cash, upon credit or for future delivery, and
at such price or prices as Lender may deem satisfactory, and
Lender may be the purchaser of any and all of the Collateral so
sold, and thereafter hold the same, absolutely, free from any
right or claim of whatsoever kind, including any equity of
redemption of the Company. Upon any such sale, the purchaser
shall hold the property sold absolutely, free from any claim or
right of whatsoever kind, including any equity or right of
redemption of the Company, which hereby specifically waives all
rights of redemption, and any rights of stay or appraisal which
the Company has or may have under any rule of law or statute now
existing or hereafter adopted. Any such public or private sale
shall be held at such time or times within ordinary business
hours and at such place or places in the State where the
Collateral is located or otherwise assembled, or elsewhere, or as
may be required by applicable law, as Lender may fix in the
notice of such sale. At any such private or public sale, the
Collateral may be sold as an entirety or in separate parcels, as
Lender may determine. Lender shall not be obligated to make any
sale pursuant to any such notice. Lender may, without notice or
publication, adjourn any public or private sale or cause the same
to be adjourned from time to time by announcement at the time and
place fixed for such sale, and such sale may, without further
notice, be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so
sold may be retained by Lender until the selling price is paid by
the purchase thereof, but Lender shall not incur any liability in
case of the failure of such purchaser to take up and pay for the
Collateral so sold and, in case of any such failure, such
Collateral may again be sold upon like notice. Lender, however,
instead of exercising the power of sale herein conferred upon it,
may proceed by a suit or suits at law or in equity to foreclose
the security interest granted pursuant to this Security Agreement
and sell the Collateral, or any portion thereof, under a judgment
or decree of a court or courts of competent jurisdiction, the
Company having been given notice of all such action.
5.3Application of Proceeds. The proceeds of any sale or
enforcement of all or any part of the Collateral, and any other
case at the time held by Lender pursuant to the terms of this
Security Agreement, shall be applied by Lender:
(1) First, to the payment of all costs and expenses paid or
incurred by Lender in connection with this Security
Agreement, the Loan Agreement, the Note, the Warrant and the
Registration Rights Agreement or the exercise of any right
or remedy hereunder or thereunder, including, without
limitation, the costs and expenses of any sale or
enforcement hereunder and all reasonable compensation to
Lender and its agents and legal counsel;
(2)Second, to the payment of the principal of and the
accrued interest on the Note;
(3)Finally, to the payment to the Company, its successors or
assigns, or as a court of competent jurisdiction may direct,
of any surplus then remaining from such proceeds.
5.4Grant of License to Use Intellectual Property. For the
purpose of enabling Lender to exercise rights and remedies under
this Section 5 at such time as Lender shall be lawfully entitled
to exercise such rights and remedies, the Company hereby grants
to Lender an irrevocable, non-exclusive license (exercisable
without payment or royalty to the Company) to use, license or
sublicense any of the Collateral consisting of intellectual
property now owned or hereinafter acquired by the Company, and
wherever the same may be located, and including in such license
reasonable access to all media in which any of the licensed items
may be recorded or stored and to all computer software and
programs used for the compilation or printout thereof. The use
of such license by Lender shall be exercised, at the option of
Lender, upon the occurrence and during the continuation of an
Event of Default, provided that any license, sublicense or other
transaction entered into by Lender in accordance herewith shall
be binding upon the Company notwithstanding any subsequent cure
of an Event of Default.
SECTION 6.Limitation of Liability.
Neither Lender nor any of its respective directors, officers,
agents or employees shall be liable for any action taken or
omitted to be taken by it or them under this Security Agreement,
except for its or their own gross negligence or willful
misconduct. Lender shall be entitled to rely upon any paper,
instrument or document which it in good faith believes to be
genuine and correct and to have been signed or sent by the proper
person or persons.
SECTION 7. Miscellaneous.
7.1Successors and Assigns. This Security Agreement shall be
binding upon and shall inure to the benefit of Lender and its
successors and assigns.
7.2Assignment. Lender may assign this instrument or any of its
rights and powers hereunder to any subsidiary or affiliate of
Lender or to any person or entity who acquires all, or any
significant portion of, the assets of IBM Printing Systems
Company, and may assign and/or deliver to any such assignee any
of the Collateral herefor and, in the event of such assignment,
the assignee hereof or of such rights and powers and of such
Collateral, if any of such Collateral be so assigned and/or
delivered, shall have the rights and remedies as if originally
named herein in place of Lender, and Lender shall be thereafter
fully discharged from all responsibility with respect to any such
Collateral so assigned and/or delivered.
7.3No Waiver. No failure on the part of Lender to exercise, and
no delay in exercising, any right, power or remedy hereunder,
shall operate as a waiver thereof; nor shall any single or
partial exercise by Lender of any right, power or remedy
hereunder, operate as a waiver thereof; nor shall any single or
partial exercise by Lender of any right, power or remedy
hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. The remedies
herein provided are cumulative and are not exclusive of any
remedies provided by law.
7.4 Termination. When all of the indebtedness and obligations
referred to herein and in the Loan Agreement shall have been paid
and performed in full, this Security Agreement shall terminate,
and Lender shall forthwith assign, transfer and deliver to the
Company, against the Company's receipt and at the Company's
expense, the Security and all cash, if any, then held by Lender
hereunder.
7.5Governing Law; Jurisdiction. This Security Agreement, and all
rights, obligations and liabilities arising hereunder, shall be
governed by and construed in accordance with the law of the State
of New York, without reference to choice of law principles. Each
of the parties hereto irrevocably waives any and all right to a
trial by jury in any legal proceeding arising out of or related
to this Security Agreement. The parties agree to submit to the
exclusive jurisdiction and venue of the federal or state courts
of New York, County of Westchester, to resolve any and all issues
that may arise out of or relate to this Security Agreement.
7.6Other Agreements. Lender is entitled to all of the benefits
set forth in the Loan Agreement, the Warrant and the Registration
Rights Agreement, including all rights and remedies set forth
therein.
7.7Amendments. This Security Agreement may not be altered,
amended or modified except in writing, executed by the Company
and Lender.
IN WITNESS WHEREOF, this Security Agreement has been duly
executed as of the day and year first above written.
INTERNATIONAL BUSINESS MACHINES ACCENT COLOR SCIENCES, INC.
CORPORATION (Secured Party) (Debtor)
By: __________________________ By: _________________________
Name: ________________________ Name: _______________________
Title: _________________________ Title:
________________________
Witness: ______________________STATE OF ________________________
COUNTY OF ______________________
I, ____________________, a Notary Public in and for the said
County, in the State aforesaid, DO HEREBY CERTIFY THAT
_________________________, the ________________________ of Accent
Color Sciences, Inc., who is personally known to me to be the
same person whose name is subscribed to the foregoing instrument
as such, appeared before me this day in person and acknowledged
that he signed and delivered said instrument as his own free and
voluntary act, and as the free and voluntary act of Accent Color
Sciences, Inc., for the uses and purposes therein set forth.
Given under my hand and notarial seal this ___ day of __________,
1998.
________________________
Notary Public
My Commission Expires:
