UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
Commission File Number 0-29048
ACCENT COLOR SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1380314
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Connecticut Boulevard, East Hartford, Connecticut 06108
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (860) 610-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes/X/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 5, 1999 was $7,038,099.
The number of shares outstanding of the registrant's common stock as of
March 5, 1999 was 13,942,721.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ACCENT COLOR SCIENCES, INC.
FORM 10-K
For The Year Ended December 31, 1998
INDEX
Part I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 32
Part III
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial
Owners and Management 37
Item 13. Certain Relationships and Related Transactions 38
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 39
Signatures 41
PART I
Item 1. Business
General
Accent Color Sciences, Inc. ("Accent Color" or the "Company") designs,
manufactures and sells innovative, high-speed, spot color printing
systems ("Truecolor Systems") for integration with digital, high-speed,
black-on-white printers and sells related consumables. Spot color
printing involves the use of color to enhance traditional black-on-white
documents by accenting critical information, such as a balance due on a
billing statement, or by printing graphics, such as a company logo. The
Company believes its Truecolor Systems are the first, and only, printers
capable of cost-effectively printing or highlighting variable data (text
or graphics which may vary from page to page) in multiple standard and
custom colors with the speed and functionality of existing high-speed
(more than 80 pages per minute), black-on-white printers. Truecolor
Systems are designed to address what the Company believes is a
substantial, unfulfilled demand for spot color printing in the production
printing and production publishing segments of the digital printing
market. Accent Color's strategy is to penetrate these global markets
through strategic relationships with major original equipment
manufacturers ("OEMs"). The primary OEMs that serve these markets include
International Business Machines Corporation ("IBM"), Oce Printing Systems
GmbH. ("Oce") and Xerox Corporation ("Xerox").
Truecolor Systems are designed to print spot color in high-speed, high-
volume applications at a low incremental cost per page without
diminishing the speed or performance of the high-speed, black-on-white
host printer or affecting the end user's existing operational methods.
Truecolor Systems are capable of printing up to 501 pages per minute,
utilizing up to eight different colors, including custom colors, to print
or highlight fixed or variable data. Truecolor Systems combine the
Company's proprietary paper handling technology with patented ink jet
technology from Spectra, Inc. ("Spectra"). The Company holds an exclusive
right to supply products which include Spectra ink jet printheads to
print color on the black-on-white output from specified high-speed
printers from Xerox, IBM, Oce and certain other parties through the year
2002, however, the Company is currently not in compliance with certain
volume purchase requirements necessary to maintain such exclusivity. The
Company is in discussion with Spectra to establish a revised requirement
for exclusivity, but can give no assurance that an agreement preserving
exclusivity can be reached. The Company's primary channel to market for
its Truecolor Systems are OEMs of high-speed, black-on-white printers and
the Company is presently focused on targeting the production printing
segment of the overall market opportunity. According to CAP Ventures,
Inc. ("CAP Ventures"), a printing industry market research firm, the 1996
year-end installed base of digital, high-speed, black-on-white printers
used in the production printing segment of the digital printing market in
the U.S. was approximately 15,200 and the installed base of these
printers is projected to grow at a five-year compounded annual growth
rate ("CAGR") of approximately 6% to 20,500 systems by the year 2001. In
addition, approximately 3,200 digital, high-speed, black-on-white
printers were sold into this market segment in the U.S. in 1996. Revenue
from new system sales, supplies and service exceeded $2.1 billion in 1996
and is expected to grow at a five-year CAGR of approximately 7% to $2.9
billion by the year 2000. This growth is further driven by the number of
pages printed per year, which is projected to grow at a five-year CAGR of
approximately 7% by the year 2001.
To facilitate access to its target markets, the Company has entered into
agreements with IBM and Groupe SET International ("Groupe SET"), a
European provider of high-speed digital printing solutions headquartered
in Paris, France. IBM and Groupe SET are marketing, selling and servicing
Truecolor Systems under their respective corporate logos and product
identifications. The Company also sells consumables comprised of standard
and custom color wax-based inks, as well as spare parts used with
Truecolor Systems. The Company expects that consumables will generate
recurring revenue, which the Company believes will increase as the
installed base and usage of Truecolor Systems increase. According to
Dataquest, continuous forms and cut sheet high-speed, black-on-white
printers servicing typical applications in the production printing market
produce approximately 2.2 million and 0.7 million pages per month,
respectively.
The Company was incorporated in Connecticut in May 1993. The Company's
principal executive offices are located at 800 Connecticut Boulevard,
East Hartford, Connecticut 06108, and its telephone number is (860) 610-
4000. The Company's World Wide Web site is located at
www.accentcolor.com. The information contained in the Company's World
Wide Web site should not be considered a part of this Form 10-K.
Products
ACS Truecolor System
The Company currently offers a continuous form version of Truecolor
Systems which is marketed under the corporate logos and product
identifications of the Company's OEM customers. The selling price of the
Company's Truecolor Systems to its OEM customers ranges from $114,000 to
$130,000, depending on model, options, and terms and conditions of
purchase.
The version of the Truecolor System sold by IBM as the "IBMr InfoPrintT
Hi-Lite Color post processor" attaches directly to the IBM 3900 and IBM
InfoPrint 4000 continuous form production printing systems. It is
configured to print at the same speed as the IBM production printing
system (up to 501 pages per minute) at 240 dots per inch resolution. The
continuous form version of the Truecolor System is designed to print up
to 5,600,000 pages per month.
TRUECOLOR SYSTEM FEATURES
Host Printer IBM 3900; IBM InfoPrint 4000; SET M3056SF
Paper Handling Continuous form
Speed Up to 501 pages per minute (2 up images)
Resolution 240 dots per inch
Ink Reservoirs 4 standard, 8 optional
Paper Width 6.5 to 18.0 inches
Paper Length 6.0 to 17.0 inches
Paper Weights 16 to 28 pound bond
Paper Type Pre-printed or blank, fanfold or roll-fed
forms, some labels
Maximum Usage 5.6 million pages per month
Consumables and Spare Parts
The Company's product offering includes consumables, such as standard and
custom color wax-based ink, and spare parts. Spot color printing with
Truecolor Systems requires the consumption of significant quantities of
wax-based ink and the replacement of certain parts that are subject to
normal wear and tear. The Company expects that sales of consumables will
generate recurring revenue, which the Company believes will increase as
the installed base and usage of Truecolor Systems increases.
Consumables. The wax-based ink used in the Truecolor Systems is sold in
six-kilogram packages containing 60 individual wax-based ink blocks to
the Company's OEM customers. The Company purchases its wax-based ink from
Spectra. As long as the Company purchases its wax-based inks exclusively
from Spectra, Spectra is prohibited, through its agreement with the
Company, from knowingly supplying the wax-based ink directly to the
Company's OEM customers. Similarly, IBM and Groupe SET are currently
prohibited from purchasing wax-based ink from sources other than the
Company, subject to certain conditions.
Spare Parts. The Company expects that periodic preventive maintenance
and repair will need to be performed on Truecolor Systems and will
include the replacement of damaged or worn parts which are expected to be
supplied exclusively by Accent Color to the OEM customer. These
replacement parts are produced by subcontractors and suppliers according
to the Company's design specifications.
Product Development
The Company considers the enhancement of its present products to be its
research and development priority. Consequently, the Company currently
devotes a significant portion of its resources to product development.
The Company plans to commit resources to enhance its technology in the
areas of (i) higher resolution ink jet printing, (ii) advanced paper
handling functionality, particularly duplex printing (the ability to
print on both sides of a page), (iii) wider ink jet printheads for
greater color coverage per page and (iv) process color printing. The
Company also plans to devote substantial resources in the near-term to
assure the quality, performance and cost reduction of its Truecolor
Systems.
Accent Color considers its on-going efforts in engineering, research and
development to be a key component of its strategy. The Company believes
that its future success will depend in part on its ability to continue to
enhance and cost reduce its existing products and to develop new
products. The Company's research and development activities consist of
both long-term efforts to develop and enhance products and services and
short-term projects to make modifications to respond to the immediate
needs of its OEM customers.
The Company's products are developed internally. The Company also
purchases technology, licenses intellectual property rights, and oversees
third party development for certain components of its products. Internal
development enables Accent Color to maintain closer technical control
over the products and gives the Company the freedom to designate which
modifications and enhancements are most important and when they should be
implemented. The Company has created development processes for creating
and enhancing its products. Product documentation is generally created
internally in coordination with its OEM customers.
The Company expended approximately $6.9 million, $8.8 million and $4.2
million on engineering and research and development in the years ended
December 31, 1996, 1997 and 1998, respectively. As the Company
transitions toward a commercial operation with increasing focus on
manufacturing and sales it anticipates it will be able to further reduce
its research and development spending. As of March 5, 1999, Accent Color
had 25 employees engaged in engineering and research and development.
Manufacturing and Assembly
The Company's manufacturing strategy has been to design a product based
upon a relatively small number of discrete modules that can be
subassembled and tested by other parties. Other than the patented ink jet
printheads supplied by Spectra, the Company believes these modules can be
readily procured on competitive terms. Initially, a substantial amount of
assembly will be done by the Company prior to the completion and
implementation of subcontract agreements with those suppliers of the
major modules that the Company has determined are suitably qualified. The
Company has identified subcontract manufacturing companies to be the
primary manufacturers of the five major modules of Truecolor Systems. The
Company believes that these companies have both the manufacturing and
quality assurance capabilities to satisfy the Company's supplier
qualification process, which initially qualifies and monitors ongoing
performance to the Company's cost, quality and schedule requirements. The
Company has implemented a formal quality control program to inspect parts
received from subcontractors to determine whether they comply with
Company specifications. The Company monitors adherence to these
procedures through site visits and direct supervision.
The Company has made product assurance and quality a priority in its
business strategy. In pursuit of this goal, the Company has adopted a
formal approach to documentation control, design, manufacturing and
business process definition and has implemented an integrated business
system software package to manage key processes. Accent Color also
subjects the component modules and each complete Truecolor System to
extensive testing during the assembly process. An important part of the
testing involves extensive print quality tests in which the Company uses
a variety of paper grades and test patterns designed to verify accuracy,
color and other performance characteristics prior to shipment.
Marketing, Product Support, Sales and Training
Accent Color has initially adopted a third-party distribution strategy
that employs OEM customers to address the global market. Currently, two
such OEM customers purchase Truecolor Systems for integration with their
high-speed, black-on-white printing systems and currently markets them
for both installed printers and new printers under their corporate logos
and product identifications. The goals of these relationships are to (i)
rapidly penetrate the market represented by both the existing installed
base and new sales of high-speed, black-on-white printers, (ii)
substantially reduce the cost and time required for the Company to
develop a direct sales and service organization of its own, (iii) quickly
gain credibility and market acceptance by meeting the technical
requirements typically set by such OEM customers and (iv) integrate the
Company's Truecolor Systems with certain hardware and supporting software
marketed by these OEM customers. The Company may enter into relationships
with other OEM customers covering additional segments of the digital,
high-speed printing market. The Company generally expects to receive
monthly or quarterly, non-binding, rolling forecasts of future orders for
its products from its OEM customers. The forecasts will usually cover the
subsequent 12 months. The Company will plan its future activities, in
part, on the basis of these forecasts. OEM customers are expected to
place actual orders by submitting purchase orders, generally on a monthly
basis, which cover product requirements from four months from the date of
the purchase order.
Accent Color provides marketing focus and sales support for its OEM
customers. This includes technical advice, as required, regarding the
optimal use of Truecolor Systems in demanding applications, the
preparation and production of custom print samples and participation in
the formulation of marketing initiatives to position and promote Accent
Color's products against any perceived or emerging competitors. The
Company expects to benefit from this interaction in three significant
ways, (i) by being directly involved in the sales process with end user
customers, (ii) by identifying market opportunities where there is a
strong need for document enhancement or other commercial benefit using
the spot color printing capabilities of Truecolor Systems and (iii) by
receiving timely feedback on end user needs and desires which will drive
product enhancement and new product development.
The OEM customers, IBM and Groupe SET, also distribute wax-based inks
provided by Accent Color through their existing supply channels. Accent
Color currently provides sales support to meet the end user requests to
create custom colors using the Company's wax-based inks. IBM and Groupe
SET will also distribute spare parts provided by Accent Color for
Truecolor Systems and will provide field service through their
established service organizations. This will provide end users with the
first three levels of customer support coverage, consisting of on site
field service for installation and maintenance, central technical support
at a national and international level and extensive stocking of spare
parts to ensure adequate responsiveness. In exceptional circumstances,
Accent Color's technical support group will assist IBM and Groupe SET to
resolve unusual maintenance situations, should the need arise, via 7-
day/24-hour telephone coverage. In addition, IBM and Groupe SET will also
provide training for their internal organizations and end users. To
support this activity, Accent Color has undertaken training course
development and has provided initial training classes to the education
and training organizations of IBM and Groupe SET.
Customers
The Company has entered into agreements with IBM and Groupe SET. Under
these arrangements, IBM and Groupe SET intend to market, distribute and
support Truecolor Systems under their respective brand names. These
agreements are significant in several respects. First, according to CAP
Ventures, IBM is one of the leading suppliers of high-speed, black-on-
white printers and IBM's AFP/IPDS architecture is continuing to emerge
as an industry standard particularly with large end user organizations.
Second, the Company's products are designed to be fully integrated with
certain hardware and supporting software products marketed by IBM. Third,
Accent Color expects that market acceptance of its Truecolor Systems will
be accelerated since sales and service will be provided by the well-
established sales and service organizations of IBM and Groupe SET.
Fourth, the Color Enabler Solution technology, which the Company expects
to be developed under the Groupe SET Agreements, will enable it to
integrate Truecolor Systems more easily with printing systems from other
manufacturers avoiding the need for costly and time consuming product
development to accomplish integration.
International Business Machines Corporation. IBM's products are used in
corporate data centers and other high-speed printing applications. In
April 1996, the Company and IBM entered into a Product Purchase Agreement
(the "IBM Agreement"). This agreement is for a term of three years with
IBM having the right to renew it for two additional one-year terms. On
March 29, 1999, IBM renewed the Agreement for an additional one-year term.
The Company has been informed that Truecolor Systems will be IBM's first
product targeted at spot color applications in high-speed printing. The
integration of color into IBM's AFP (Advanced Function Printing) protocol
and the use of the Truecolor System as an integrated post-processing
device attached to the IBM 3900 and IBM InfoPrint 4000 high-speed, black-
on-white printers are expected to be marketed worldwide by IBM's
international operations.
Under the IBM Agreement, IBM has committed to purchase consumables from
the Company for one year from the date of general availability of the HC2
Model of Truecolor Systems, which was in March 1998, to IBM customers
and, if certain conditions concerning competitive pricing are met,
thereafter as well. The IBM Agreement also requires the Company to
warrant its products against manufacturing defects for 90 days after
initial installation. Furthermore, under the IBM Agreement, the Company
has agreed to provide spare parts for its products to IBM at prices which
will yield a monthly parts cost per Truecolor System not to exceed a
specified amount. If the Company is unable to perform its obligations
under the agreement, after a cure period, the IBM Agreement affords IBM
certain backup manufacturing rights, including the right to manufacture,
or have a third party manufacture, the Company's Truecolor Systems. This
right to manufacture is limited to the specific types of units not
properly delivered and may be terminated if the Company is thereafter
able to deliver the units in question in compliance with the terms of the
IBM Agreement.
Groupe SET International. In August 1997, the Company and Groupe SET
entered into two Product Development and Distribution Agreements (the
"SET Agreements"). The SET Agreements have an initial term extending to
December, 2001. Under the first agreement, Groupe SET is expected to
market, sell and service Accent Color's Truecolor Systems with the SET-
M3056SF and other high speed black-on-white printing systems to target
the high speed continuous forms printing segment of the production
printing market for applications such as billing statements, brochures
and direct mail. Under the second agreement, Groupe SET developed a
version of its "plug-and-play" Color Enabler Solution ("CES") data
interpreter and print controller technologies to allow Accent Color's
Truecolor Systems to interface to a wide variety of high speed continuous
form and cut sheet black-on-white printers which are not highlight color
enabled. In addition, the Color Lay Out ("CLO") software option is
expected to enhance customer applications by providing up to 8 colors of
highlight color capability without modifying the existing application
software.
Backlog
The Company measures backlog based on purchase orders for Truecolor
Systems, consumables and spare parts that have not yet been shipped. A
substantial amount of the Company's backlog can be modified or canceled
prior to 30 days before shipment without penalty, except for the recovery
of the Company's actual costs. Accordingly, the Company believes that
backlog cannot be considered a meaningful indicator of future financial
performance. As of December 31, 1998, the Company's total backlog was
approximately $4.8 million.
Competition
Although there are existing digital and offset color printing systems,
the Company believes there is no other product currently marketed that is
capable of cost-effectively printing variable data in multiple standard
or custom colors with the functionality of existing high-speed, black-on-
white printers.
Suppliers to the market compete on the basis of speed, print quality,
functionality, reliability, cost per page and color variety. The Company
competes, in significant part, on the basis of advanced proprietary
technology in the areas of paper handling, ink jet color printing and
interface software which allows the Company's products to print variable
data, in multiple standard or custom colors at high speeds. Products or
product improvements based on new technologies could be introduced by
other companies with little or no advance notice.
Competition in the markets for the Company's products is highly
fragmented. The Xerox 4890 (a similar product is also marketed by Xerox
as the DocuPrint 390HC) is a spot color printer, which prints in black
and one color per job (out of a limited palette). It is capable of
printing 92 pages per minute but does not offer custom colors. BESTE
Bunch Systems markets a color offset press used as a downstream add-on to
Oce or IBM high-speed, black-on-white printers. While it is capable of
providing color logos, it does not print variable data, requires a longer
time to set up and requires specialized skills. The use of this offset
press also requires additional processes of negative production and plate
making. Oce has introduced two products, the DC210 and the DC155. The
DC210 is a web based, while the DC155 is a cut-sheet system. Both are
based on electrophotographic imaging. However, both systems provide only
one highlight color and have dramatically reduced print speeds when
highlight colors are used, thus rendering them less than ideal for the
market. In addition, there are production full process color digital
printing systems available which operate at print speeds of up to 100
pages per minute, including the Xeikon DCP-50 and the Xerox DocuColor 40.
These systems have relatively high print costs per page and operate at
much lower speeds than typical applications in the production printing
market segment require, making them impractical for high-speed print
jobs.
Scitex Digital Printing offers a product based on liquid ink-jet
technology, which can print at high speed and in multiple colors. This
system, though, would require a potential user currently using
electrophotographic systems such as those from IBM, Xerox and Oce to
completely change equipment and re-train operators to use a different
process. The Company believes that the cost and disruption of such an
implementation would be prohibitive except in a few very large single
applications.
Atlantic Zeiser has demonstrated the use of a continuous type of liquid
ink jet technology, which may be attached to the output of a black only
laser devise. The system was demonstrated as a technology, and is not
currently available for sale.
In addition to direct competition from other firms utilizing high-speed
color technologies, there exists potential direct competition from firms
improving technologies used in low-speed to medium-speed color printers
and indirect competition from firms producing pre-printed forms.
Manufacturers of high-speed, black-on-white printers may also, in time,
develop comparable or more effective color capability within their own
products, which may render the Company's products obsolete.
Intellectual Property
The Company's ability to compete effectively will depend, in part, on the
ability of the Company to maintain the proprietary nature of its
technology. The Company relies, in part, on proprietary technology, know-
how and trade secrets related to certain aspects of its principal
products and operations. To protect its rights in these areas, the
Company generally requires its OEM customers, its suppliers and its
employees to enter into nondisclosure agreements. As of March 5, 1999,
the Company had been granted three patents by the U.S. Patent and
Trademark Office relative to the mechanical design of the Company's paper
handling and color printing system, which form the core of the Truecolor
Systems. In addition, the Company has filed applications for two
additional patents relative to certain enhancements of Truecolor Systems
technology. The Company has also filed foreign patent applications
seeking patent protection in several foreign countries.
The Company has an exclusive right to supply products which include
Spectra's ink jet printheads to print color on the black-on-white output
from specified high-speed printers marketed by Xerox, IBM, Oce and
certain other parties. To the extent that wax-based inks and ink jet
printheads purchased from Spectra are covered under patents or licenses,
the Company relies on Spectra's rights under such patents and licenses
and Spectra's willingness and ability to enforce its patents and maintain
its licenses.
Employees
As of March 5, 1999, the Company employed 66 individuals, of whom 25
employees were engaged in engineering and research and development, 23
employees in manufacturing and operations, 9 employees in marketing and
service efforts, and 9 employees were working in general administration.
The Company's employees are not represented by a collective bargaining
organization, and the Company has never experienced a work stoppage. The
Company believes that its relationship with its employees is good.
Item 2. Properties
The Company's facilities are located at 800 Connecticut Boulevard in East
Hartford, Connecticut and presently consist of approximately 69,000
square feet. The Company believes that these facilities will meet the
Company's needs for at least the next 12 months. The Company leases this
facility under a lease that expires on December 31, 2000.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock began trading publicly on the National tier of
the Nasdaq Stock Market under the ticker symbol "ACLR" on December 18,
1996. Prior to this date, there was no public market for the Common
Stock. The table below sets forth the per share quarterly high and low
sales prices of the Common Stock for the two most recent fiscal years, as
reported on the Nasdaq Stock Market.
COMMON STOCK INFORMATION
High Low
Year Ended 12/31/98
First Quarter $3 3/8 $1 1/2
Second Quarter $3 3/8 $1
Third Quarter $1 13/16 $13/16
Fourth Quarter $1 5/32 $1/2
Year Ended 12/31/97 High Low
First Quarter $15 1/2 $4 7/8
Second Quarter $8 1/2 $3 7/8
Third Quarter $6 1/16 $3 3/8
Fourth Quarter $5 5/8 $2 1/4
As of March 5, 1999, there were approximately 2,393 stockholders of
record, which includes those stockholders whose certificates were held by
nominees. The Company has never declared or paid cash dividends on its
Common Stock. The Company currently intends to retain any earnings for
use in its business and does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future.
Effective March 17, 1999, the Company was delisted from the Nasdaq Stock
Market as the Company was in violation of Nasdaq's minimum bid price and
net tangible asset level. The Company's Common Stock is now trading on
the OTC Bulletin Board under the same ticker symbol.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the year ended December 31,
1994 1995 1996 1997 1998
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $ - $ - $ - $ 1,578 $ 8,220
Costs and
expenses:
Costs of production - - 1,272 7,397 9,836
Research and development 805 3,051 6,932 8,786 4,249
Marketing, general and
administrative 336 1,003 4,394 4,439 3,822
Related party
administrative
expense - 80 25 - -
------- -------- --------- --------- --------
1,142 4,134 12,623 20,622 17,907
Other (income)expense:
Interest expense 12 83 656 246 200
Interest income - - (113) (599) (117)
------- -------- --------- --------- ---------
12 83 543 (353) 83
Net loss before
extraordinary item (1,154) (4,217) (13,166) (18,691) (9,770)
Extraordinary item:
Loss on early
extinguishment of
debt, net of
income taxes of nil - - (573) - -
------- -------- --------- --------- ---------
Net loss (1,154) (4,217) (13,739) (18,691) (9,770)
One-time non-cash
imputed dividend
on preferred stock - - - - (920)
------- -------- --------- --------- ---------
Net loss
applicable to
common stock $(1,154) $(4,217) $(13,739) $(18,691) $(10,690)
======== ======== ========= ========= ==========
Net loss (basic
and diluted) per
common share: $ (.66) $ (2.33) $ (3.57) $ (1.77) $ (.87)
Weighted average
common shares
outstanding 1,756,841 1,809,240 3,852,982 10,566,890 12,330,903
========== ========= ========= ========== ==========
</TABLE>
December 31,
1994 1995 1996 1997 1998
Balance Sheet Data:
Cash and cash
equivalents $ 165 $ 1 $ 20,289 $ 4,006 $ 1,048
Working capital
(deficit) (86) (1,862) 18,189 4,836 2,646
Total assets 246 728 26,951 12,407 6,860
Short-term debt - 50 1,000 - -
Long-term debt, less
current portion - 2,020 1,272 - 2,236
Total shareholders'
equity (deficit) (57) (3,164) 19,345 7,270 1,790
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Accent Color Sciences, Inc. ("Accent Color" or the "Company") designs,
manufactures and sells innovative, high-speed, spot color printing
systems ("Truecolor Systems"). The Company was formed in 1993 initially
to develop a high-speed, color printer to attach to cut sheet, black-on-
white production printers. Development and testing of a prototype began
in January 1994 and was first announced at the On-Demand Trade Show (a
major printing industry trade show) in May 1994. In November 1994, a
"proof-of-concept" Truecolor System was shown at the Xplor International
Global Electronic Document Systems Conference ("Xplor") (the primary
production printing industry trade show). After Xplor in November 1994,
International Business Machines Corporation ("IBM") approached the
Company and requested that the Company develop a version of its Truecolor
System to work in conjunction with the IBM 3900 continuous form
production printing system.
During 1995, the Company began negotiations with IBM and Siemens Nixdorf
Printing Systems USA, Inc. (which was acquired by an affiliate of Oce
Printing Systems GmbH ("Oce") in 1996) to enter into a formal development
relationship. During the same period, the Company accelerated its
engineering and development activities as its efforts were focused on
designing and building the next generation prototypes which were
demonstrated at Xplor in November 1995.
During 1996, the Company was focused on refining the Truecolor System
design and preparing for the commencement of commercial production in the
first half of 1997. The Company entered into a Product Purchase Agreement
with IBM in April 1996. In October 1996, the Company signed a memorandum
of understanding with Oce. At Xplor in October 1996, the Company
demonstrated its Truecolor Systems, as well as certain enhancements
planned for production in 1998.
On May 6, 1997, IBM announced the limited availability product
introduction phase of the Company's continuous form version of the
Truecolor System designed for integration with IBM's 3900 production
printing system, which IBM will market as the IBM InfoPrint Hi-Lite
Color, model HC1 post processor. The product was announced for general
worldwide availability on September 15, 1997.
In August 1997, the Company signed an agreement with Groupe SET
International ("Groupe SET"), a European provider of high speed digital
printing solutions headquartered in Paris, France. Pursuant to this
agreement, Groupe SET will market, sell and service the Company's
Truecolor Systems with the SET-M3056SF and other high speed black-on-
white printing systems. In addition, Groupe SET agreed to develop a
version of its "plug-and-play" Color Enabler Solution data interpreter
and print controller technologies to allow the Company's Truecolor
Systems to interface with a wide variety of high speed continuous form
and cut sheet black-on-white printers that are not highlight color
enabled.
On March 27, 1998, the Company and IBM announced the availability of the
IBM InfoPrint Hi-Lite Color post processor, Model HC2. The Model HC2,
which incorporates Accent Color Sciences' spot color printing technology,
increases color coverage capability by over 250% compared to the Model
HC1. The Model HC2 supports configurations of most models of IBM's
InfoPrint 4000 and 3900 continuous form high-speed printers.
Accent Color also sells related consumables and spare parts. Currently,
the only consumables sold by the Company are wax-based inks, which it
acquires from a vendor. The sale of consumables is expected to generate
recurring revenue, which the Company believes will continue to increase
as the installed base and usage of Truecolor Systems increases.
Results of Operations
Comparison of Year Ended December 31, 1998 to Year Ended December 31,
1997
Total Net Sales. The Company currently sells its Truecolor system with a
90-day warranty, which starts when the printer is installed at the end-
user customer site. Prior to the quarter ended December 31, 1998, the
Company deferred revenue on printer shipments until the end of the 90-day
warranty period. During the quarter ended December 31, 1998, the Company,
in accordance with its revenue recognition policy on printer sales,
determined that it had adequate warranty experience to begin recognizing
revenue upon shipment of printers to its primary OEM customer. The
Company will continue to defer revenue on shipments to its second OEM
customer until systems are in production and are past the warranty period
or until the Company has adequate warranty history with that customer.
As of December 31, 1998 and 1997, the Company had deferred revenue of
$595,000 and $2,496,000 related to Truecolor Systems shipped. Total net
sales were $8,220,000 for the year ended December 31, 1998 compared to
$1,578,000 for the year ended December 31, 1997. Of the sales recognized
in 1998, $2,496,000 resulted from deferred revenue recorded in 1997.
Printer sales represented 81% of total net sales for the year ended
December 31, 1998 while sales of consumables and spare parts represented
19%.
Printers. Printer sales were $6,654,000 for the year ended December 31,
1998 compared to $658,000 for the year ended December 31, 1997. Of the
sales recognized in 1998, $2,496,000 resulted from deferred revenue
recorded in 1997. Sales for 1998 consisted of 48 new systems and 25
system upgrades. A total of 27 systems and 23 system upgrades were
shipped during 1998, of which 5 systems shipped in 1998 were recorded as
deferred revenue. Below is a summary of system shipments and system
revenue for the year ended December 31, 1998:
Units Dollars
New System New Systems &
Systems Upgrades Upgrades
Deferred revenue as of
December 31, 1997 26 2 $ 2,496,000
Plus: Shipments in 1998 27 23 4,753,000
Less: Revenue recognized in 1998 (48) (25) (6,654,000)
------- ------ -------------
Deferred revenue as of
December 31, 1998 5 - $ 595,000
======= ====== =============
As of December 31, 1998, the Company's backlog consisted of 35 systems, 3
system upgrades and consumables totaling $4,838,000.
Consumables and Spare Parts Sales. Consumables and spare parts sales
were $1,566,000 for the year ended December 31, 1998 compared to $920,000
for the year ended December 31, 1997.
Costs of Production. Costs of production increased from $7,397,000 for
the year ended December 31, 1997 to $9,836,000 for the year ended
December 31, 1998. This increase was attributed to the cost of goods
sold related to the increased sales of printers, consumables and spare
parts totaling $5,877,000 and was off-set by reduced overhead spending
mainly in payroll related costs and reductions in charges for inventory
reserves totaling $1,142,000 and $1,814,000, respectively.
Research and Development Expenses. Research and development expenses
primarily consist of the cost of personnel and equipment needed to
conduct the Company's research and development efforts, including
manufacturing prototype systems. Research and development expenses
decreased 52% from $8,786,000 for the year ended December 31, 1997 to
$4,249,000 for the year ended December 31, 1998 as the Company directed
its efforts toward production and market development with less
significant emphasis on research and development. The decrease in
research and development was primarily attributed to four major factors:
(i) a reduction in payroll and related costs due to the reduction in
personnel in 1998, (ii) a reduction in design and development costs paid
to Spectra associated with the development of ink jet printheads for the
enhanced wide-head version of the Truecolor Model HC2 system, (iii) the
Company's completion of the payments, in 1997, to Spectra to maintain
exclusivity rights, and (iv) a decrease in general design and development
costs.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses decreased from $4,439,000 for the year ended
December 31, 1997 to $3,822,000 for the year ended December 31, 1998.
This decrease was primarily due to a reduction in payroll related costs
as a result of the reduction in administrative personnel in 1998 and a
reduction in professional service costs. These items were offset by an
increase in marketing and service expenses of approximately $443,000,
which included increased marketing costs for travel and consultants to
support the increased sales and marketing efforts and a reclassification
of service related costs. Service costs, consisting primarily of customer
technical support, were classified as costs of production during 1997.
Beginning in 1998, such costs are now classified as marketing, general
and administrative.
Interest Expense and Other (Income) Expense. Interest expense decreased
18.7% from $246,000 for the year ended December 31, 1997 to $200,000 for
the year ended December 31, 1998. This decrease was due to the Company
having an outstanding loan from Xerox for the full year 1997 compared to
a similar sized loan from IBM for only 7 months in 1998. Interest income
decreased 80.5% from $599,000 for the year ended December 31, 1997 to
$117,000 for the year ended December 31, 1998. This decrease in interest
income was attributed to a greater amount of cash available for
investment in 1997 as compared to 1998.
Comparison of Year Ended December 31, 1997 to Year Ended December 31,
1996
Total Net Sales. Total net sales were $1,578,000 for the year ended
December 31, 1997 compared to none for the year ended December 31, 1996.
Printer sales constituted 41.7% of total net sales for the year ended
December 31, 1997 while sales of consumables and spare parts constituted
58.3%.
Printers. Printer sales were $658,000 for the year ended December 31,
1997 compared to none for the year ended December 31, 1996. Sales for
1997 consisted of three pre-production systems and two production
systems. A total of 27 production systems were shipped during 1997,
which were recorded as deferred revenue in accordance with the revenue
recognition policy of the Company. As of December 31, 1997, the
Company's backlog consisted of 18 systems totaling $2,138,000.
Consumables and Spare Parts Sales. Consumables and spare parts sales
were $920,000 for the year ended December 31, 1997 compared to none for
the year ended December 31, 1996. These sales were primarily attributed
to the shipment of consumables in the second and third quarters of 1997
to fill the channels of an OEM customer.
Costs of Production. Costs of production increased from $1,272,000 for
the year ended December 31, 1996 to $7,397,000 for the year ended
December 31, 1997. This increase was attributed to three major factors:
(i) ramp-up manufacturing expenses related to the Company's launch of the
commercial production of its Truecolor Systems, (ii) cost of goods sold
related to the sale of printers, consumables and spare parts and (iii) a
charge for obsolete inventory due to the enhancement of the Company's
product from narrow to wide printhead systems and a cancellation charge
related to purchase commitments of inventory totaling $1,250,000 and
$300,000, respectively.
Research and Development Expenses. Research and development expenses
increased 26.7% from $6,932,000 for the year ended December 31, 1996 to
$8,786,000 for the year ended December 31, 1997. This increase was
primarily attributed to engineering and product ramp-up costs associated
with the development of the wide ink jet printhead in addition to an
increase in payroll costs for personnel retained to support such efforts.
This increase was partially offset by a decrease in materials procured
for research and development as in 1997, the Company's efforts were
primarily focused on production with a less significant emphasis on
research and development. During 1996, however, systems were built for
research and development purposes and the related components were
utilized for design improvements and testing.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses increased from $4,393,000 for the year ended
December 31, 1996 to $4,439,000 for the year ended December 31, 1997.
This increase was primarily attributed to the hiring of additional
marketing and administrative personnel, expenses associated with
promotional activities and costs incurred for professional services to
support the Company's anticipated revenue growth and manufacturing
activities. This increase was partially offset by expenses incurred in
1996 related to the recruiting of personnel, system documentation,
regulatory testing, deferred financing costs and the Company's relocation
to a new facility, which were not incurred during the comparable time in
1997.
Interest Expense and Other (Income) Expense. Interest expense decreased
62.5% from $656,000 for the year ended December 31, 1996 to $246,000 for
the year ended December 31, 1997. This decrease was primarily attributed
to the elimination of interest expense related to extinguished debentures
originally issued in October 1995, February 1996 and October 1996.
Interest income increased by $486,000 from $113,000 for the year ended
December 31, 1996 to $599,000 for the year ended December 31, 1997. This
increase in interest income was attributed to a greater amount of cash
available for investment in 1997 as compared to 1996, primarily due to
the Company's initial public offering in December 1996.
Liquidity and Capital Resources
The Company's need for funding has increased from period to period as it
has increased its marketing, sales and service 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 the sale of equity securities.
On January 13, 1998, the Company completed a private equity financing
providing net proceeds to the Company of $3.9 million. Pursuant to the
financing, the Company issued 4,500 shares of Series B Convertible
Preferred Stock at a price of $1,000 per share and warrants to purchase
the Company's common stock. The warrants issued are exercisable into
300,000 shares of common stock with an exercise price of $2.75 and an
expiration date of January 9, 2008. Additionally, warrants exercisable
into 115,385 shares of common stock with an exercise price of $2.50 and
an expiration date of January 9, 2003 were issued to the placement agent
for services provided.
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 $60,593 for the year ended December 31, 1998.
Operating activities consumed $9.2 million in cash in 1998 compared to
$18.9 million in 1997. This decrease was primarily attributed to a
decrease in the net loss of the Company and a decrease in inventories.
This was partially offset by an increase in accounts receivable, a
decrease in accrued expenses and a decrease in deferred revenues.
Capital expenditures decreased 87% from $1.3 million for the year ended
December 31, 1997 to $169,000 for the year ended December 31, 1998.
Capital expenditures during 1998 primarily reflected acquisitions of
equipment to support the Company's manufacturing activities. This
decrease was primarily attributed to lower capital expenditures
requirements in 1998, since in 1997, the Company had completed the
majority of equipment acquisitions to support its near-term manufacturing
needs. The Company had no significant capital expenditure commitments at
December 31, 1998.
During 1998, the Company continued to adjust its staffing levels from a
high of 140 full-time, part-time and contract employees as of December
31, 1997 to 67 employees as of December 31, 1998. On March 11, 1999, the
Company completed a reduction of personnel to align its expenses with
current sales demand. In connection with this reduction, the Company
eliminated 19 positions and recorded a charge of approximately $61,000
for employee severance. Of the total reduction, approximately 37% was in
the area of operations, 53% in research and development and 10% in
marketing, general and administrative.
As of December 31, 1998, the Company's primary source of liquidity was
cash and cash equivalents totaling $1.0 million. Based on the current
operating plan of the Company, the primary requirements for cash through
the remainder of 1999 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 and other enhancements to
the Truecolor Systems.
Based on its current operating plan, the Company anticipates that
additional financing will be required to finance its operations and
capital expenditures during the second half of 1999. The Company's
currently anticipated levels of revenue and cash flow are subject to many
uncertainties and cannot be assured. The amount of funds required by the
Company will depend on many factors, including the extent and timing of
sales of Truecolor Systems, product costs, engineering and customer and
technical support requirements. The inability to obtain additional
financing and to generate sufficient cash from operations could require
the Company to reduce or eliminate expenditures for research and
development, production or marketing of its products, or otherwise to
curtail or discontinue its operations. The Company expects that quarterly
net losses will continue through at least the fourth quarter of 1999.
Year 2000
Year 2000 Compliance. The information presented below related to year
2000 compliance contains forward-looking statements that are subject to
risks and uncertainties. The Company's actual results may differ
significantly from the results discussed below and elsewhere in this Form
10-K regarding Year 2000 compliance.
Year 2000 Issue Defined. The Year 2000 ("Y2K") issue is the result of
certain computer hardware, operating system software and software
application programs having been developed using two digits rather than
four digits to define a year. For example the clock circuit in the
hardware may be incapable of holding a date beyond the year 1999; some
operating systems recognize a date using "00" as the year 1900 rather
than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems
or miscalculations, which could have material impact on companies through
business interruption or shutdown, financial loss, damage to reputation,
and legal liability to third parties.
State of Readiness. The Company's Information Technology ("IT")
department began addressing the Y2K issue in 1996 as we evaluated the
purchase of new software applications and hardware systems. During the
fourth quarter of 1996, IT researched methodologies to manage the Y2K
program and established a process that matched the resources available
within the Company. The initial step in the process was to organize a
team of both IT and non-IT employees and explain their roles in the
process. The second step of the process was to establish an inventory of
all potential areas where the Y2K problem could exist. The inventory
included; server hardware (BIOS), server operating systems, server
application software, network device hardware and software, PC hardware
(BIOS), PC operating systems, PC application software, phone system,
security system, the Company's products (hardware BIOS and software), and
our vendors. Each area listed in the inventory was assigned to a team
member to evaluate the current Y2K compliance and where required,
recommend a solution correct a Y2K problem. A database was created for
all items to track the status to completion. All IT systems, except the
phone system, have been updated to be Y2K complaint. The phone system
will be updated in second quarter, 1999. During second quarter 1999, we
will test the compliance of primary software applications in our test
environment to confirm that vendor statements are consistent with our
test results.
Accent Color Sciences Products. The Company designs and manufactures high-
speed color printing systems for integration with digital high-speed
black on white printers. The Company has tested and confirmed that the
printer's BIOS are compliant where required. Software that operates on
the printer has been tested and is confirmed to be Y2K compliant. Future
software releases will include as part of the software regression test a
reconfirmation that the software remains Y2K compliant.
Third Party Relationships. The Company's business operations are heavily
dependent on third party materials suppliers. The Company is working with
all key external partners to identify and to mitigate the potential risks
of Y2K. The failure of external parties to resolve their own Y2K issues,
in a timely manner, could result in a material financial risk to the
Company. As part of the overall Y2K program, the Company is actively
communicating with third parties through correspondence. Because the
Company's Y2K compliance is dependant on the timely Y2K compliance of
third parties, there can be no assurance that the Company's efforts alone
will resolve all Y2K issues.
Contingency Plans. The Company has not conducted its assessment of the
reasonably likely worst case scenario of systems or product failures and
their related consequences. It is expected that the planned testing of IT
systems and the completed testing of the Company's product testing will
greatly reduce the need for substantial contingency planning. Contingency
planning, if required, would begin in third quarter, 1999.
Costs to Address Year 2000 Issues. The Y2K costs incurred to date have
not been material. Most software applications, BIOS and operating system
upgrades to Y2K compliance were incorporated into the Company's standard
licensing agreements. As part of the contingency planning effort we will
examine additional potential Y2K costs, where applicable.
Factors Affecting Future Results
The foregoing Management's Discussion and Analysis and discussion of the
Company's business contains various statements which are forward looking
in nature. Such forward-looking statements are made pursuant to the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of
1934, as amended, which were enacted as part of the Private Securities
Litigation Reform Act of 1995.
The Company cautions readers that the following important factors, among
others, in some cases have affected and, in the future, could materially
adversely affect the Company's actual results and cause the Company's
actual results to differ materially from the results expressed in any
forward-looking statements made by, or on behalf of, the Company.
Need For Additional Funding For Operating And Capital Requirements. The
Company's currently anticipated levels of revenue and cash flow are
subject to many uncertainties and cannot be assured. Further, the
Company's business plan may change, or unforeseen events may occur,
requiring the Company to raise additional funds. The amount of funds
required by the Company will depend on many factors, including the extent
and timing of the sale of Truecolor Systems, the cost associated sales
and marketing and customer technical support and the Company's operating
results. There can be no assurance that, when needed, additional
financing will be available, or available on acceptable terms, and
the Company's ability to raise additional funds has been adversely
impacted by the March 17, 1999 delisting from the NASDAQ Stock Market. The
inability to obtain additional financing or generate sufficient cash from
operations could require the Company to reduce or eliminate expenditures
for research and development, production or marketing of its products, or
otherwise to curtail or discontinue its operations, which could have a
material adverse effect on the Company's business, financial condition
and results of operations.
Limited Operating History; History Of Losses; Uncertainty Of Future
Financial Results. The Company was formed in May 1993 and has limited
operating history. The Company incurred losses in each year of existence
and incurred a net loss of $10,690,000 for the year ended December 31,
1998. As a result of these losses, as of December 31, 1998, the Company
had an accumulated deficit of $47,615,000. It is expected that quarterly
net losses will continue through at least the fourth quarter of 1999 and
that the Company will incur a net loss for 1999.
Uncertainty Of Market Development And Acceptance Of Accent Color's
Products. The digital, high-speed printing market has traditionally
relied mainly on black-on-white print. There can be no assurance that a
market for high-speed, variable data color printing will develop or
achieve significant growth. The failure of such market to develop or
achieve significant growth would have a material adverse effect on the
Company's future results. The Company's products are installed in
extremely demanding environments and there can be no assurance the
Company's systems will operate successfully in combination with mature
black-on-white host systems.
Dependence On A Limited Number Of Customers; Revenue Concentration. The
Company anticipates that sales of its Truecolor Systems and consumables
to a limited number of OEM customers will account for substantially all
of the Company's revenue. As of December 31, 1998, the Company had
contracts with only two customers, IBM and Groupe SET. There can be no
assurance that these customers will purchase a significant volume of the
Company's products.
Product Warranty; Limit On Prices For Spare Parts. The Company warrants
its Truecolor Systems to be free of defects in workmanship and materials
for 90 days from installation at the location of the end user.
Furthermore, under the IBM Agreement, the Company has agreed to provide
spare parts for its products at prices which will yield a monthly parts
cost per Truecolor System not to exceed a specified amount. There can be
no assurance that the Company will not experience warranty claims or
parts failure rates in excess of those, which it has assumed in pricing
its products and spare parts. Any such excess warranty claims or spare
parts failure rates could have a material adverse effect on the Company's
business, financial condition or results of operations.
Dependence On Third Party Marketing, Distribution And Support. A
significant element of the Company's marketing strategy is to form
alliances with third parties for the marketing and distribution of its
products. To this end, the Company has entered into the IBM Agreement and
the SET Agreements for the marketing, distribution and support of the
Company's products. There can be no assurance that (i) the Company will
be successful in maintaining such alliances or forming and maintaining
other alliances, (ii) the Company will be able to satisfy its contractual
obligations with its OEM customers or (iii) the Company's OEM customers
will devote adequate resources to market and distribute the Company's
products successfully.
Dependence On Spectra. The Company is dependent on Spectra, a wholly
owned subsidiary of Markem Corporation ("Markem"), as its sole source
supplier of ink jet printheads and the hot melt, wax-based inks included
in and used by Truecolor Systems. Spectra has agreed to supply the
Company with ink jet printheads and wax-based inks under a supply
agreement, subject to a number of conditions. The Company's reliance on
Spectra involves several risks, including a potential inability to obtain
an adequate supply of required printheads or inks, and reduced control
over the quality, pricing and timing of delivery of these items. To date,
Spectra has only produced a limited number of ink jet printheads.
Accordingly, there can be no assurance that Spectra will be able to
provide a stable source of supply of these components. Spectra has
granted the Company the exclusive right to supply products including
Spectra printheads in the worldwide market for printing color on the
output from specified high-speed, black-on-white printers from Xerox,
IBM, Oce and certain other parties through December 31, 2002. To maintain
such exclusive rights, the Company is required to purchase a minimum
number of ink jet printheads each year, to continue to purchase its wax-
based ink requirements from Spectra and to make certain payments. There
can be no assurance that the Company will be able to meet the minimum
purchase requirements or make these payments.
Limited History Of Product Manufacturing. To date, the Company has
manufactured only limited quantities of Truecolor Systems. To be
profitable, the Company's products must be manufactured in sufficient
quantities and at acceptable costs. Future production in sufficient
quantities may pose technical and financial challenges for the Company,
and no assurance can be given that the Company will be able to reduce its
current product costs to an acceptable level and to make a successful
transition to high-volume production.
Dependence On Major Subcontractors And Suppliers. The Company relies on
subcontractors and suppliers to manufacture, subassemble and perform
certain testing of some modules and parts of Truecolor Systems. The
Company currently performs the final assembly and testing of various
Truecolor System components and of each complete Truecolor System, and
the Company plans to eventually outsource the full assembly and testing
of the major modules of the Truecolor Systems. There can be no assurance
that subcontractors or suppliers will meet the Company's price, quality,
quantity and delivery requirements or otherwise perform to the Company's
expectations.
Significant Fluctuations In Quarterly Results. The Company's quarterly
operating results are likely to vary significantly in the future based
upon a number of factors. Historically, there has existed seasonality in
the purchase of major equipment such as the Company's Truecolor Systems,
with many companies experiencing higher sales in the fourth calendar
quarter. Furthermore, a significant portion of the Company's operating
expenses are relatively fixed in the short term, and planned expenditures
are based on sales forecasts. Sales forecasts by the Company's OEM
customers are generally not binding. If revenue levels are below
expectations, operating results may be disproportionately affected
because only a small portion of the Company's expenses vary with revenue
in the short term, which could have a material adverse effect on the
Company's future results.
Dependence On A Single Product Line. The Company anticipates that it
will derive substantially all of its revenue in the foreseeable future
from sales of Truecolor Systems, related consumables and spare parts. If
the Company is unable to generate sufficient sales of Truecolor Systems
due to market conditions, manufacturing difficulties or other reasons or
if purchasers of Truecolor Systems were to purchase wax-based ink or
spare parts from suppliers other than the Company, there could be a
material adverse effect of the Company's future results.
Rapid Technological Change Requires Ongoing Product Development Efforts.
The high-speed printer industry is characterized by evolving technology
and changing market requirements. The Company's future success will
depend on a number of factors, including its ability to continue to
develop and manufacture new products and to enhance existing products.
Consequently, the Company considers the enhancement of its products to be
a development priority. Additionally, in a new and evolving market,
customer preferences can change rapidly and new technology could render
existing technology obsolete. Failure by the Company to respond
adequately to changes in its target market, to develop or acquire new
technology or to successfully conform to market preferences could have a
material adverse effect on future results of the Company.
Limited Protection Of Proprietary Technology And Risks Of Third-Party
Claims. The Company's ability to compete effectively will depend, in
part, on the ability of the Company to maintain the proprietary nature of
its technology. The Company relies, in part, on proprietary technology,
know-how and trade secrets related to certain aspects of its principal
products and operations. To protect its rights in these areas, the
Company generally requires its OEM customers, suppliers, employees and
independent contractors to enter into nondisclosure agreements. In
addition, the Company has received a patent, and has filed additional
U.S. and foreign patent applications to protect technology, which the
Company believes is proprietary about its technology. There can be no
assurance, however, that these agreements, arrangements or patents will
provide meaningful protection for the Company's trade secrets, know-how
or other proprietary information. A failure of such protection could have
a material adverse effect on future results of the Company.
Competition. The Company expects to encounter varying degrees of
competition in the markets in which it intends to compete. Products or
product improvements based on new technologies could be introduced by
other companies with little or no advance notice. Manufacturers of high-
speed, black-on-white printers may also, in time, develop comparable or
more effective color capability within their own products, which may
render the Company's products obsolete. There can be no assurance that
the Company will be able to compete against future competitors
successfully or that competitive pressures faced by the Company will not
have a material adverse effect upon its future results.
Risks Associated With International Operations. The Company intends to
have its products marketed worldwide and therefore may enter into
contracts with foreign companies. International sales are subject to
certain inherent risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, fluctuations in exchange
rates, government controls, political instability and potential adverse
tax consequences. There can be no assurance that these factors will not
have a material adverse effect on the Company's future results.
Inflation
Although certain of the Company's expenses increase with general
inflation in the economy, inflation has not had a material impact on the
Company's financial results to date.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Accent Color Sciences, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of cash flows and of changes in shareholders'
equity (deficit) present fairly, in all material respects, the financial
position of Accent Color Sciences, Inc. at December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered recurring losses and
negative cash flows from operations that raise substantial doubt about the
Company's ability to continue as a going concern. The Company's plans in
regard to this matter are described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 9, 1999
ACCENT COLOR SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,048,425 $ 4,005,563
Accounts receivable 1,321,782 439,934
Inventories (Notes 2 and 4) 2,269,016 4,611,216
Prepaid expenses and other
current assets 216,564 323,306
Total current assets 4,855,787 9,380,019
Fixed assets, net (Notes 2 and 3) 1,933,043 2,974,422
Other assets, net (Note 2) 71,575 52,698
Total assets $6,860,405 $12,407,139
Liabilities and Shareholders'
Equity
Current liabilities:
Obligations under capital
leases (Note 8) $ 64,014 $ 61,360
Accounts payable 961,626 859,693
Accrued expenses (Note 2) 588,966 1,041,383
Customer advances
and deposits(Note 2) - 85,600
Deferred revenue (Note 2) 595,000 2,496,000
Total current liabilities 2,209,606 4,544,036
Obligations under capital
leases (Note 8) 23,116 91,937
Long-term debt, net of discount
(Note 5) 2,235,593 -
Other long-term liabilities
(Notes 7 and 8) 601,759 501,644
Total non-current
liabilities 2,860,468 593,581
Commitments and contingencies
(Notes 8 and 12)
Shareholders' equity (Note 6,
7 and 13):
Preferred stock, no par value,
500,000 shares authorized,
3,500 and 0 shares issued
and outstanding 3,049,691 -
Common stock, no par value,
35,000,000 and 25,000,000
shares authorized,
12,841,881 and 11,989,855
shares issued and 46,355,604 45,114,633
outstanding
Accumulated deficit (47,614,964) (37,845,111)
Total shareholders'
equity 1,790,331 7,269,522
Total liabilities and
shareholders' equity $ 6,860,405 $ 12,407,139
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF OPERATIONS
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Revenue (Note 2) $ 8,219,586 $ 1,577,508 $ -
Costs and expenses:
Costs of production 9,836,379 7,396,828 1,272,357
Research and development 4,248,779 8,786,217 6,932,017
Marketing, general and
administrative (Note 11) 3,822,113 4,438,518 4,418,380
17,907,271 20,621,563 12,622,754
Other (income) expense:
Interest expense 199,572 245,550 655,730
Interest income (117,404) (599,041) (113,126)
82,168 (353,491) 542,604
Net loss before extraordinary
item (9,769,853) (18,690,564) (13,165,358)
Extraordinary item:
Loss on early
extinguishment of debt net
of income taxes of nil - - (573,303)
Net loss (9,769,853) (18,690,564) (13,738,661)
Imputed dividend on preferred
stock (Note 6) (920,000) - -
Net loss applicable to common
stock $(10,689,853) $(18,690,564) $(13,738,661)
Net loss (basic and diluted) per
common share (Note 2): $ (.87) $ (1.77) $ (3.57)
Weighted average common shares
Outstanding (Note 2) 12,330,903 10,566,890 3,852,982
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF CASH FLOWS
For the year ended December 31,
<S> 1998 1997 1996
Cash flows from operating <C> <C> <C>
activities:
Net loss $ (9,769,853) $ (18,690,564) $ (13,738,661)
Adjustments to reconcile
net loss to net cash used in
Operating activities:
Depreciation and
amortization 1,208,368 1,128,533 974,184
Expense related to
stock and options granted 13,054 345,230 -
Loss on disposal of
fixed assets 4,552 11,460 82,691
Conversion of accrued
interest to common stock - - 231,147
Extraordinary loss on
extinguishment of debt - - 573,303
Changes in assets and
liabilities:
Accounts receivable (881,848) (410,463) (29,471)
Inventories 2,342,200 (1,248,964) (3,362,252)
Prepaid expenses and
other assets 106,742 188,327 (523,487)
Accounts payable and
accrued expenses (350,484) (717,230) 1,366,969
Customer advances and
deposits (85,600) (1,301,800) 837,400
Deferred revenue (1,901,000) 1,546,000 950,000
Other long-term
liabilities 87,061 293,642 133,091
Net cash used in
operating activities (9,226,808) (18,855,829) (12,505,086)
Cash flows from investing
activities:
Proceeds from sale of
fixed assets 58,475 - 5,524
Purchases of fixed assets (168,776) (1,256,244) (2,611,891)
Cost of patents (19,524) (21,666) (28,534)
Net cash used in
investing activities (129,825) (1,277,910) (2,634,901)
Cash flows from financing
activities:
Payment of capital lease
obligations (66,167) (69,146) (71,953)
Net proceeds from issuance
of debentures - - 3,049,768
Proceeds from issuance of
warrants 325,000 - 261,482
Net proceeds from issuance
of common stock - 4,486,326 33,869,508
Proceeds from exercise of
options and warrants 44,625 1,783,587 -
Net proceeds from issuance
of preferred stock 3,921,037 - -
Payment of notes payable - - (50,000)
Proceeds from long-term
debt 2,175,000 - 2,223,750
Repayment of debentures - (2,350,000) (3,855,000)
Net cash provided by
financing activities 6,399,495 3,850,767 35,427,555
Net increase
(decrease) in cash
and cash equivalents (2,957,138) (16,282,972) 20,287,568
Cash and cash
equivalents at
beginning of period 4,005,563 20,288,535 967
Cash and cash
equivalents at
end of period $ 1,048,425 $ 4,005,563 $ 20,288,535
Supplemental disclosure
Cash paid for:
Interest $ 75,089 $ 167,188 $ 246,509
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Preferred Stock Accumulated
Shares Amount Shares Amount Deficit Total
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 2,094,840 $821,291 324,360 $1,430,634 $ (5,415,886) $ (3,163,961)
Warrants issued
with debt - 261,482 - - - 261,482
Proceeds from
sale 2,625,000 9,460,044 - - - 9,460,044
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
agreement
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 3,921,037 - 3,921,037
Exercise of
options 37,500 44,625 - - - 44,625
Conversion of
Series B
Preferred
Stock 814,526 871,346 (1,000) (871,346) - -
Warrants issued
with debt - 325,000 - - - 325,000
Net loss - - - - (9,769,853) (9,769,853)
December 31, 1998 12,841,881 $46,355,604 3,500 $3,049,691 $(47,614,964) $1,790,331
</TABLE>
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Formation and Operations of the Company
Accent Color Sciences, Inc. (the "Company") was incorporated in Connecticut
in May 1993. The Company designs, manufactures and sells innovative high-
speed, color printers ("Truecolor Systems") to attach to high-speed, black-
on-white printers. The Company also sells related consumables and spare
parts.
Development and testing of a prototype began in January 1994, with a "proof-
of-concept" system developed in November 1994. During 1995, the Company
began negotiations with major original equipment manufacturers ("OEMs") to
enter into formal development relationships. At the same time, the Company
accelerated its engineering and development activities as its efforts were
focused on designing and building the next generation prototypes that were
completed in 1995. As of December 31, 1996, the Company received $1.5
million for the delivery of seven prototype machines to various OEMs, which
by the end of 1997, had been fully offset against research and development
expense. During 1996, the Company was focused on refining the Truecolor
System design and preparing for the commencement of commercial production
in the first half of 1997. During 1997, an OEM announced general worldwide
availability of the Company's continuous form version of the Truecolor
System designed for integration with their production printing system and
the Company launched into commercial production. In 1997, all sales were
attributable to a single customer. During the first quarter of 1998, the
Company introduced to the market a new enhanced version of its product, the
wide-head Truecolor System, which it shipped throughout the year. For the
year ended December 31, 1998, $8,121,938 or 99% of total sales were
attributed to the Company's primary OEM customer.
Through 1997, the Company was considered to be a development stage company
as defined in Statement of Financial Accounting Standards No. 7. The
Company is no longer considered to be a development stage enterprise as its
planned principal operations, which generated significant revenues,
commenced in 1998.
Based on its current operating plan, the Company anticipates that
additional financing will be required to finance its operations and capital
expenditures during the second half of 1999. The Company's currently
anticipated levels of revenue and cash flow are subject to many
uncertainties and cannot be assured. The amount of funds required by the
Company will depend on many factors, including the extent and timing of
sales of Truecolor Systems, product costs, engineering and customer and
technical support requirements. The inability to obtain additional
financing and to generate sufficient cash from operations could require the
Company to reduce or eliminate expenditures for research and development,
production or marketing of its products, or otherwise to curtail or
discontinue its operations. The Company expects that quarterly net losses
will continue through at least the fourth quarter of 1999.
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. The Company has
established warranty policies that, under specific conditions, enable
customers to return products. The Company provides reserves for potential
returns and allowances and warranty costs at the time of revenue
recognition. Until the Company had adequate information and experience to
estimate potential returns, allowances and warranty costs, revenue
resulting from Truecolor Systems was deferred until the end of the warranty
period. During the fourth quarter of 1998, the Company determined that it
had adequate warranty information and experience to begin recognizing
revenue upon the shipment of systems to its primary OEM customer. The
Company will continue to defer revenue on shipments to its second OEM
customer until systems are in production and are past the warranty period
or until the Company has adequate warranty history with that product. As
of December 31, 1998 and 1997, the Company had deferred revenue of $595,000
and $2,496,000 related to Truecolor Systems shipped. In addition,
estimated warranty costs of $344,206 and $83,000 were accrued by the
Company as of December 31, 1998 and 1997, respectively. Warranty expense
was $180,251, $164,000 and $0 for the years ended December 31, 1998, 1997
and 1996, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks, as well as
short-term investments with original maturities of 90 days or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Fixed Assets
Fixed assets are stated at cost and are depreciated over their estimated
useful lives using the straight-line method. The estimated useful lives
are between three and five years. Leasehold improvements are amortized
over the shorter of the term of the lease or the useful life of the asset.
Patent
Patent costs of $73,399 and $53,875 at December 31, 1998 and 1997,
respectively, are capitalized as incurred and are amortized, once issued,
using the straight-line method over the shorter of the legal term or
estimated useful life. Accumulated amortization was $1,823, $1,177 and
$746 at December 31, 1998, 1997 and 1996, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of
assets and liabilities.
Research and Development Expenditures
Research and development expenditures are charged to expense as incurred.
Customer Advances and Deposits
Customer Advances Under Research and Development Agreements
Amounts advanced pursuant to customer sponsored research and development
agreements are recognized as a liability until certain obligations (as
defined in the agreements, including delivery and acceptance of certain
test units) under the agreements have been met. When the obligations are
met, the amounts are offset against research and development expense.
There were no deferred advances as of December 31, 1998 and 1997. Amounts
offset against research and development expense were $0, $600,000 and
$300,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Customer Deposits
Based on sales contracts with certain customers, the Company was entitled,
for a limited time, to a percentage of the sales price upon receipt of
certain firm purchase orders. Customer deposits of $0 and $85,600 were
deferred at December 31, 1998 and 1997, respectively.
Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its Stock Incentive Plan. Under APB 25, when the exercise
price of employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Additional disclosures required under Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation," are included in Note 7, Stock
Incentive Plan.
Net Loss Per Common Share
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," for all periods
presented. Basic earnings per share computations are determined based on
the weighted average number of shares outstanding during the period. The
effect of the exercise and conversion of all securities, including stock
options and warrants would be antidilutive and thus is not included in the
diluted earnings per share calculation.
3. Fixed Assets
December 31,
1998 1997
Equipment $ 1,643,851 $ 1,564,611
Computers 838,367 902,662
Furniture and fixtures 487,627 487,627
Leasehold improvements 950,755 953,699
Purchased software 369,252 369,606
Capital leases - equipment 294,397 294,397
Construction in process 29,317 -
------------ -----------
4,613,566 4,572,602
Less: accumulated
depreciation and
amortization 2,680,523 1,598,180
------------ -----------
$ 1,933,043 $ 2,974,422
============ ===========
Amortization expense for capital leases amounted to $78,887, $77,250 and
$42,454 for the years ended December 31, 1998, 1997 and 1996, respectively.
Depreciation expense was $1,068,241, $971,601 and $485,191 for the years
ended December 31, 1998, 1997 and 1996, respectively.
4. Inventories
Inventories consist of the following:
December 31,
1998 1997
Raw materials and components $ 1,185,529 $ 1,590,386
Work-in-process 299,271 403,585
Finished goods 784,216 2,617,245
----------- -----------
$ 2,269,016 $ 4,611,216
=========== ===========
5. Debt
The following table summarizes the Company's current outstanding debt:
Stated December 31,
Intere Maturity 1998 1997
st
Rate
Long-term debt, net
of unamortized
discount of $264,407 10.00% December 31, 2000 $ 2,235,593 $ -
Less: current portion - -
----------- -----------
$ 2,235,593 $ -
=========== ===========
IBM Loan Agreement
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 fair value of the warrant using an option pricing model was
determined to be $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 $60,593 for the year ended December 31, 1998.
Private Financing
On October 11, 1996, the Company completed a private financing (the
"Interim Financing") of discounted notes in an aggregate principal amount
of $3,450,000 bearing interest at a rate of 8.70% per annum (excluding debt
discount). This financing resulted in net proceeds to the Company of
$2,780,000. The Interim Financing was repaid upon the closing of the
initial public offering on December 23, 1996.
At the time of issuance, holders of notes of the Interim Financing received
warrants to purchase an aggregate of 45,000 shares of common stock at an
exercise price of $8.00 per share with an expiration date of October 11,
2001. The Interim Financing Warrants were valued at $123,450, and
accordingly this amount was allocated to common stock with an equivalent
discount recorded on the notes. The discount was amortized over the term of
the debentures until its extinguishment on December 23, 1996. Amortization
of the original issue discount and the warrant valuation was $0, $0 and
$159,107 for the years ended December 31, 1998, 1997 and 1996,
respectively. The unamortized discount remaining at extinguishment is
included in the extraordinary loss due to early extinguishment of the debt.
Related deferred debt issuance costs of $220,000 were capitalized and were
amortized using the effective interest method over the term of the debt
until its extinguishment on December 23, 1996. Amortization expense was
$0, $0 and $61,040 for the years ended December 31, 1998, 1997 and 1996,
respectively. The unamortized cost remaining at extinguishment is included
in the extraordinary loss due to early extinguishment of the debt.
Xerox Loan
In 1996, the Company and a customer finalized terms of a loan that provided
for a maximum commitment of $3,000,000, at an annual interest rate of
8.00%, through April 1, 1998. As part of the inducement to extend such
commitment, the Company agreed to issue detachable warrants. During 1996,
the Company received $2,350,000 in loan proceeds and issued detachable
warrants exercisable into 375,000 shares of common stock at $3.67 per
share. A warrant to purchase 125,000 shares was issued with an expiration
date of February 28, 1999 and a warrant to purchase 250,000 shares was
issued with an expiration date of April 19, 1999. Accordingly, $126,250 was
allocated to common stock with an equivalent discount recorded on the note.
Amortization expense was $0, $78,362 and $47,888 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company paid its first principal installment of $500,000 on July 1,
1997. During September 1997, the Company concluded an agreement with the
customer that superceded the prior production and loan agreements. Under
the new agreement, the customer exercised the warrants to purchase 375,000
shares of common stock. The exercise proceeds of $1,375,000 were applied
to reduce the outstanding debt and accrued interest. The principal balance
remaining after this reduction was paid in full in three equal installments
prior to the end of 1997.
In exchange for mutual releases from liability under the prior production
agreement, the Company issued 50,000 shares of common stock to the
customer. The Company's product deposits from the customer were offset
against the charge resulting from the issuance of 50,000 shares of common
stock and inventories specific to the project, resulting in no material
impact to the Statement of Operations.
Series IV Debentures
During February 1996, the Company completed a private placement of 8%
subordinated debentures (the "Series IV Debentures") for net proceeds of
$405,000, of which $240,000 were issued to a director of the Company. The
Series IV Debentures were non-convertible. The Series IV Debentures were
due on August 31, 1996, and were repaid by the Company on August 29, 1996.
In addition, each holder received detachable warrants (the "Series IV
Warrants") to purchase common stock equal to the Series IV Debentures'
principal amount divided by $3.67. The Series IV Warrants were valued at
$0.11 per warrant. Accordingly, $11,782 was allocated to common stock,
with an equivalent discount recorded on the Series IV Debentures. The
entire discount was amortized in the year ended December 31, 1996. The
Series IV Warrants issued are exercisable into 110,454 shares of common
stock at an exercise price of $3.67 per share with an expiration date of
February 28, 2001.
Series III Debentures
On October 31, 1995, the Company completed an offering of 8.00% convertible
subordinated debentures (the "Series III Debentures") for net proceeds of
$1,668,443. During 1995, the Company converted $50,000 of accounts payable
to Series III Debentures. The Series III Debentures were convertible into
common stock at a rate of $3.67 per share. The carrying value of the
debentures, plus accrued interest of $231,147, converted into 607,626
common stock shares upon the closing of the initial public offering on
December 23, 1996.
At the time of issuance, each holder of a Series III Debenture received a
detachable warrant (the "Series III Warrants") to purchase common stock for
an amount of shares equal to the Series III Debentures' principal amount
divided by the conversion rate. Series III Warrants issued were exercisable
into 544,554 common shares at an exercise price of $3.67 per share with an
expiration date of August 15, 1997. The Series III Warrants were valued at
$56,631, and accordingly this amount was allocated to common stock with an
equivalent discount recorded on the Series III Debentures. The discount was
amortized over the term of the debentures until its conversion to common
stock on December 23, 1996. Amortization expense was $0, $0, and $30,226
for the years ended December 31, 1998, 1997 and 1996, respectively. The
unamortized discount remaining at conversion was included as a reduction in
the carrying value of the related common stock.
Related deferred debt issuance costs of $278,157 were amortized using the
effective interest method over the term of the related debt until its
conversion to common stock on December 23, 1996. Amortization expense was
$0, $0, and $136,088 for the years ended December 31, 1998, 1997 and 1996,
respectively. The unamortized cost remaining at conversion was included as
a reduction in the carrying value of the related common stock.
6. Shareholders' Equity
Capital Stock Transactions
On September 15, 1994, the following changes in the Company's capital
structure occurred: (i) the Company's Board of Directors declared a 450-for-
1 split of the common stock, effective upon the amendment of the Company's
Certificate of Incorporation, (ii) the authorized number of common shares
was increased to 1,000,000 and (iii) the par value of the common stock was
changed from $.01 to no par value.
In January 1995, the Company's Board of Directors amended the articles of
incorporation to increase the authorized shares of common stock from
1,000,000 to 2,000,000. In April 1996, under the consent of the Board of
Directors, the number of authorized shares of common stock was increased
from 2,000,000 shares to 25,000,000 shares.
On October 8, 1996, as authorized by the Board of Directors, the Company
split its common stock 3-for-1.
All shares and per share conversion amounts (unless otherwise indicated) in
the accompanying financial statements have been restated to reflect the
capital stock transactions described.
Common Stock
In June 1996, pursuant to a private placement offering, the Company issued
2,625,000 shares of common stock for $4.00 per share. This offering
resulted in net proceeds of $9,460,044 to the Company. Stock purchase
warrants exercisable into 300,000 common shares with an exercise price of
$4.00 and an expiration date of June 28, 2001 were issued to the placement
agent in connection with this offering.
On December 23, 1996, the Company completed an initial public offering
pursuant to which 3,450,000 common stock shares were issued at $8.00 each
resulting in net proceeds of $24,409,464 to the Company.
On October 16, 1997, the Company completed a private placement offering
("Unit Offering") of 437,913 units of its common stock at a price of $10.95
per unit, or $3.65 per share. Each unit consisted of three shares of
common stock and a warrant exercisable into one share of common stock.
The Unit Offering resulted in net proceeds of approximately $4,486,000 to
the Company. The warrants were issued with an exercise price of $4.74 per
share and an expiration date of October 16, 2002. Additionally, warrants
exercisable into 102,500 shares of common stock were issued to the
placement agents for services provided. These warrants were granted with
an exercise price of $4.74 per share and an expiration date of October 16,
2002.
Series A Preferred Stock
From a class of preferred stock with 500,000 authorized shares, the
Company's Board of Directors designated a series consisting of 300,000 of
such shares as Series A Preferred Stock. The Series A Preferred Stock is
nonredeemable, convertible and voting, with no par value. The holders shall
be entitled to receive noncumulative cash dividends when and as declared by
the Board of Directors. In the event of any voluntary or involuntary
liquidation of the Company, the preferred shareholders shall be entitled to
all unpaid dividends at the time of liquidation and $5.00 per share as a
liquidating distribution prior to any liquidating distribution to the
common shareholders.
In 1994, pursuant to a private placement offering (the "Preferred Stock
Offering"), the Company issued 160,000 shares of Series A Preferred Stock,
with net proceeds of $643,770. In February 1995, the Board of Directors
increased the authorized shares of Series A Preferred Stock from 300,000
shares to 350,000 shares. In 1995 the Company issued an additional 75,000
shares of Series A Preferred Stock, with net proceeds of $340,060. Series A
Preferred Stock purchase warrants exercisable into 23,500 preferred shares
with an exercise price of $5.50 and an expiration date of September 2000
for 8,000 shares and February 22, 2001 for 15,500 shares were issued to
the placement agent in connection with these Preferred Stock offerings. In
September 1994, the Company issued to a third party vendor 15,000 shares of
Series A Preferred Stock as partial payment for services rendered pursuant
to a development agreement between the third party vendor and the Company.
The fair market value of the stock was recorded as $75,000.
Upon effectiveness of the registration statement filed pursuant to the
initial public offering of the Company on December 18, 1996, the 324,360
outstanding shares of Series A Preferred Stock converted at a rate of 4.2
common shares for one share of Series A Preferred Stock for a total of
1,362,309 common stock shares. Additionally, outstanding Series A
Preferred Stock purchase warrants for 23,500 shares converted at a rate of
4.2 common stock warrants for one Series A Preferred Stock warrant for a
total conversion to 98,700 common stock purchase warrants.
Series B Convertible Preferred Stock
In December 1997, the Company's Board of Directors designated a series of
4,500 shares of the Company's previously authorized preferred stock, no par
value per share, to be designated as the Series B Convertible Preferred
Stock ("Series B Stock"). 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 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 Stock and the execution of the warrants.
The 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 senior 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 represented 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) plus 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, including maintaining
its common stock listing on the NASDAQ Stock Market. 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.
As of December 31, 1998, there were 8,053,126 shares of common stock
reserved for issuance pursuant to the conversion of the remaining 3,500
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 December 31, 1998,
1,000 shares of Series B Stock had been converted into 814,526 shares of
common stock at an average conversion price of $1.15 per share (See Note
13).
The terms of conversion of the Series B Stock 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 $.07 per share for
the twelve months ended December 31, 1998. The imputed dividend will be
given no other accounting treatment in the 1998 financial statements of the
Company and beyond.
Warrants
As of December 31, 1998, the Company had outstanding common stock purchase
warrants exercisable into an aggregate of 2,227,607 shares. Such shares
have been authorized and reserved.
The following summarizes the activity of outstanding warrants:
Exercise
Shares price
under (per Warrants
warrant share) Exercisable
Outstanding at December 31, 1995 359,214 $ 3.67 359,214
Granted to Series IV
Debenture holders 110,454 3.67
Granted to noteholder 375,000 3.67
Granted to service
providers 13,635 3.67
Granted to service
providers 15,000 3.67
Granted to placement
agent 300,000 4.00
Conversion of 98,700 1.31
preferred stock warrants
Granted to former
advisor in settlement 32,433 4.40
Granted to former
advisor in settlement 554 8.80
Granted to Interim
Financing holders 45,000 7.40
Warrants surrendered (112,500) 3.67
------------
Outstanding at December 31, 1996 1,237,490 $1.31 - $8.80 1,237,490
Anti-dilution
adjustments pursuant to
warrant agreements 673 $3.66 - $8.08
Exercised (394,091) 3.67
Expired (241,258) 3.67
Granted in unit
offering 540,413 4.74
------------
Outstanding at December 31, 1997 1,143,227 $1.31 - $8.08 1,143,227
Anti-dilution
adjustments pursuant to
warrant agreements 68,995 $3.41 - $7.04
Granted in preferred
stock offering 300,000 2.75
Granted to advisors
in preferred stock offering 115,385 2.50
Granted pursuant to
IBM loan agreement 500,000 2.50
Granted to an employee 100,000 1.00
------------
Outstanding at December 31, 1998 2,227,607 $1.00 - $7.04 2,227,607
============
Pursuant to provisions in certain warrant agreements, anti-dilution
adjustments are to be made to the exercise price and/or the number of
shares purchasable under the warrant in certain circumstances. During
1998, adjustments were made for certain warrants in connection with the
preferred stock offering, the IBM loan agreement and warrants granted to an
employee. During 1997, adjustments were made in connection with the unit
offering. All shares and per share conversion amounts are adjusted in the
table above.
7. Stock Incentive Plan
In January 1995, the Company's Board of Directors adopted and approved the
1995 Stock Incentive Plan (the "Plan") for directors, officers, key
employees and other persons. The Plan permits the granting of incentive
stock options, non-statutory stock options, stock appreciation rights and
restricted stock awards to purchase up to 300,000 shares of common stock.
In April 1996, the number of shares increased to 1,500,000. In May 1997,
the number of shares increased to 2,000,000. Such shares have been
authorized and reserved.
Initially, options vested 20% each year, so that the options, or any
unexercised portion thereof, would be fully exercisable after a period of
five years following the date of their grant. In April 1996, the original
vesting period of five years was modified to three years with options
vesting 33% each year following the date of their grant. All options
previously granted are subject to this modification. In certain
circumstances, at the discretion of the Board of Directors, options are
granted with a vesting schedule of other than three years. Stock options
under the Plan have terms ranging from five to ten years.
The 1995 Stock Incentive Plan activity is summarized as follows:
For the year ended For the year ended
December 31, 1998 December 31, 1997
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
Outstanding at 1,318,850 $ 3.85 1,280,850 $ 3.53
beginning of period
Granted 2,870,450 2.03 302,675 6.44
Exercised (37,500) 1.19 (92,250) 3.67
Canceled (2,470,325) 3.56 (172,425) 6.12
------------- ----------
Outstanding at
period end 1,681,475 1.23 1,318,850 3.85
============= ==========
Options exercisable
at period end 314,000 2.26 629,960 3.44
============= ==========
Weighted average fair
value of options
granted during the
period $ 1.61 $ 5.20
============= ==========
By action of the Board of Directors on April 14, 1998, the Company re-
priced all options outstanding under its 1995 Stock Incentive Plan which
had a current exercise price exceeding $3.125 to an exercise price of
$3.125 per share, the fair market value as of that date. A total of
1,137,200 options were re-priced, which resulted in a reduction of the
weighted average exercise price of all options outstanding from $3.85 per
share at December 31, 1997 to $2.93 per share after the re-pricing.
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 the Company.
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 (the election date). If the employees elected to have their
options re-priced, the vesting period for such options was extended for one
year. A total of 1,066,625 options were modified, which further reduced
the weighted average exercise price of all options outstanding 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.
The following summarizes additional information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
Number Number
Outstanding Weighted Weighted Exercisable Weighted
at Average Average at Average
Exercise December Remaining Exercise December Exercise
Prices 31, 1998 Contractual Price 31, 1998 Price
Life
$ .91 260,150 9.34 $ .91 20,000 $ .91
1.00 1,114,825 7.15 1.00 - -
1.19-2.31 127,750 5.23 1.28 117,000 1.19
3.13 178,750 4.78 3.13 177,000 3.13
---------- --------
1,681,475 7.09 $ 1.23 314,000 $ 2.26
========== ========
Had compensation expense been recognized based on the fair value of the
options at their grant dates, as prescribed in Financial Accounting
Standard No. 123, the Company's net loss and net loss (basic and diluted)
per share would have been as follows:
Year ended Year ended
December 31, December 31,
1998 1997
Net loss:
As reported $ (10,689,853) $ (18,690,564)
Pro forma under FAS 123 $ (12,470,414) $ (20,052,460)
Pro forma net loss (basic and
diluted) per share (unaudited):
As reported $ (.87) $ (1.77)
Pro forma under FAS 123 $ (1.01) $ (1.90)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants during the applicable period: dividend yield of 0% for both
periods; risk-free interest rates ranging from 4.24% to 5.74% for options
granted during the year ended December 31, 1998 and 5.97% to 6.73% for
options granted during the year ended December 31, 1997; expected
volatility factors of 90% for the year ended December 31, 1998 and 87% for
the year ended December 31, 1997; and an expected option term ranging from
2 to 10 years for the year ended December 31, 1998 and 5 to 10 years for
the year ended December 31, 1997.
Compensation expense of approximately $550,725 has been attributed to
common stock options granted in August 1996. This compensation expense will
be recognized over the three year vesting period, of which $118,671 and
$174,420 was recognized as of December 31, 1998 and 1997, respectively.
Additionally, compensation expense of approximately $126,000 is included in
1997 for options whose vesting was accelerated in 1997.
8. Leases
Operating Leases
At December 31, 1998, the Company was committed under operating leases for
equipment and facilities with initial terms of more than one year. The
facility lease agreement provides for escalation of the lease payments over
the term of the lease, however, rent expense is recognized using the
straight-line method. Accrued rent related to this facility lease was
$232,870 and $264,480 as of December 31, 1998 and 1997, respectively. Rent
expense related to operating leases was $729,573 in 1998, $740,772 in 1997
and $468,862 in 1996.
Minimum lease payments under the noncancelable leases are as follows:
1999 $ 844,023
2000 832,642
2001 780
2002 195
2003 -
-----------
Total minimum obligations $ 1,677,640
===========
Capital Lease Obligations
The Company is obligated under capital leases for certain office equipment
that expire on various dates through the year 2000. Future minimum lease
payments under these leases are as follows:
1999 $ 84,914
2000 25,388
2001 -
2002 -
2003 -
----------
Total minimum obligations $ 110,302
Less: amount representing
interest 23,172
----------
Present value of minimum
lease payments 87,130
Less: current portion 64,014
----------
$ 23,116
==========
9. Income Taxes
Deferred tax assets and liabilities are as follows:
December 31,
1998 1997
Gross deferred tax
assets:
Carryforwards:
Research tax credits $ 1,484,206 $ 447,000
Net operating losses 17,666,564 13,841,000
Other assets 1,114,064 1,316,000
------------ -----------
Gross deferred tax
assets 20,264,834 15,604,000
------------ -----------
Gross deferred tax
liabilities (28,868) (21,000)
Valuation allowance (20,235,966) (15,583,000)
------------ -----------
$ - $ -
============ ============
The Company has provided a valuation allowance for the full amount of
deferred tax assets in excess of deferred tax liabilities since the
realization of these future benefits cannot be reasonably assured as of the
end of each related period. If the Company achieves profitability, the
deferred tax assets may be available to offset future income taxes.
At December 31, 1998, the Company had approximately $43 million of federal
net operating loss carryforwards that expire in years 2008 through 2013,
approximately $43 million of state net operating loss carryforwards that
expire in years 1999 through 2003 and research and development tax credit
carryforwards of approximately $1.5 million that expire in years 2009
through 2013.
As defined in the Internal Revenue Code, certain ownership changes limit
the annual utilization of federal net operating loss and tax credit
carryforwards. During 1996, the Company experienced such an ownership
change that limits the amount of federal net operating loss carryforwards
and research tax credits that can be utilized in any one taxable year. At
December 31, 1998 the approximate Section 382 annual limitation is $4.6
million for net operating loss carryforwards and research tax credits
incurred prior to the ownership change. Depending on the number of shares
of Series B Stock converted into common shares and the timing of such
conversions (Note 6), the transactions may result in further Section 382
annual limitations of net operating loss carryforwards.
10. Disclosure about Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, prepaid expenses,
accounts payable, accrued expenses, customer advances and deposits and
deferred revenue approximates fair value because of the short-term nature
of those instruments.
The fair value of long-term debt is estimated based upon management
estimates and current interest rates offered to the Company on similar
debt. The estimated fair value of the Company's debt (see Note 5)
approximates its carrying value as of December 31, 1998.
11. Related Party Transactions
The Company entered into an agreement with Knickerbocker Securities Inc.
("Knickerbocker") on September 20, 1994, in which Knickerbocker would
advise the Company with regard to financial matters and methods of
financing for a three-year period commencing on January 1, 1996 for a fee
of $1,000 per month. In March 1996, the Company terminated this agreement
as well as all previous agreements with Knickerbocker. The total amount
expensed relating to the advisory agreement and the termination of all
existing agreements was $105,260 of which $25,000 was incurred in 1996.
Additionally, 32,987 common stock purchase warrants were granted in 1996 as
settlement for a compensation claim. Of the total warrants, 32,433 expire
on June 27, 2001 and 554 October 10, 2001.
A member of the Company's Board of Directors is a partner with the
Company's primary legal firm.
In connection with the Interim Financing (see Note 5), a director and a
director's spouse purchased $250,000 and $100,000 of the notes, and
received 3,750 and 1,500 of the related warrants, respectively.
12. Commitments and Contingencies
On January 8, 1996, the Company signed a seven-year agreement with a vendor
for the supply of inks and printheads. The agreement provides the Company
with worldwide rights, as defined. The Company must pay the vendor
royalties and license fees upon achieving certain volume purchase levels.
The agreement also includes certain exclusivity features that benefit the
Company. To maintain the exclusivity rights, quarterly payments of
$250,000 were required beginning January 1, 1996 and ending on October 1,
1997, and the Company must purchase all ink and printhead requirements from
the vendor and purchase specified minimum amounts each year. The Company
is currently not in compliance with such specified minimum volume amounts
necessary to maintain exclusivity and is in discussion with Spectra to
establish a revised requirement for exclusivity, however, Management
believes there is no material adverse financial impact for the Company.
The Company has the option to terminate the exclusive rights leaving all
other aspects of the agreement unchanged. It is the Company's intent to
maintain such rights.
As of December 31, 1998, there were two employment agreements outstanding
for certain executive officers of the Company, each reflecting a three-year
term. These agreements are subject to termination by either party, and
provide for salary continuation and benefits for a specified period under
certain circumstances including a change in control (as defined) of the
Company. As of December 31, 1998, if such employees under contract were to
be terminated by the Company without cause (as defined), the Company's
liability would be approximately $873,000.
13. Subsequent Events (Unaudited)
On March 11, 1999, the Company completed a reduction of personnel to align
its expenses with current sales demand. In connection with this reduction,
the Company eliminated 19 positions and recorded a charge of approximately
$61,000 for employee severance. Of the total reduction, approximately 37%
was in the area of operations, 53% in research and development and 10% in
marketing, general and administrative.
The Company's common stock was delisted from the NASDAQ Stock Market
effective March 17, 1999 as the Company was in violation of NASDAQ's
minimum bid price and net tangible asset level. Consequently, each holder
of the Company's Series B Convertible Preferred Stock has the right,
beginning March 31, 1999, to require the Company to redeem such holder's
shares of Series B Preferred Stock at a redemption price, in cash or stock,
specified in the Company's Certificate of Incorporation. The Company is
not aware that any such holder intends to require such redemption, but
cannot predict what each holder may elect to require. In the event a
holder of Series B Preferred Stock were to demand redemption at a time when
the Company's resources are insufficient to redeem such holder's shares,
the rights of such holder would include the right to receive interest at
the annual rate of 24% on the defaulted payment amount. The Company has
the right to preempt the right of holders of Series B Preferred Stock from
demanding redemption of their shares by paying to them, as liquidated
damages, on or before April 6, 1999, 25% of the face amount of all
outstanding shares of Series B Preferred Stock in cash or in shares of
common stock valued at 50% of the average closing price of such stock
during the five trading days ended March 30, 1999. As of March 17, 1999,
such liquidated damages would amount to $713,750 in cash or 3,772,463
shares of common stock.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Officers
Following is information concerning each Director and
Executive Officer of Accent Color Sciences as of March 5,
1999 including name, age, position with the Company and
business experience during the last five years:
Joseph T. Brophy, age 65, became a director of the
Company in March 1998 upon his election by the Board of
Directors of the Company to fill a vacancy created by the
retirement of Raymond N. Smith, a co-founder and former
Chairman of the Board of Directors of the Company. Mr.
Brophy retired as President of Travelers Insurance Company,
a subsidiary of The Travelers Corporation, in 1993. Since
then, he has served as a consultant with Actuarial Sciences
Associates working with major companies such as AT&T,
Equifax and others in developing their business strategies
for health care. With The Travelers, Mr. Brophy led a
restructuring resulting in record sales of $1.7 billion and
$100 million in profits in 1992. His prior experience with
The Travelers included service as its Chief Information
Officer in charge of data processing operations. Mr. Brophy
is a fellow of the Society of Actuaries, holds memberships
in the American Academy of Actuaries, New York Academy of
Sciences, Acoustical Society of America and American
Arbitration Association and has received awards including
the Distinguished Information Sciences Award from the Data
Processing Management Association in 1986 and the Award of
Achievement in Managing Information Technology from Carnegie
Mellon and American Management Systems in 1987. Mr. Brophy
currently serves as a trustee of St. Joseph College and as a
director of the Connecticut Opera. He has also served as a
director of LIMRA International, Inc., trustee of RPI-
Hartford Graduate Center, and director of the Connecticut
Academy for Education in Mathematics, Sciences and
Technology and the Greater Hartford Chamber of Commerce. He
is currently an owner, director and co-founder of Solution
Point, an information company that provides decision support
tools, analysis and data for employers and health systems.
Mr. Brophy is a cum laude graduate of Fordham University,
from which he received a Bachelors of Science degree. He
has also attended NYU Graduate School and completed the
Advance Management Program at the Sloane School, MIT.
Charles E. Buchheit, age 58, has been President and
Chief Executive Officer of the Company since May 1998 and
became a director of the Company in March 1998 upon his
election by the Board of Directors of the Company to fill a
vacancy created by the resignation of Peter Teufel. Mr.
Buchheit served as a Corporate Officer and Division
President at Moore Corporation from 1995 to 1997, where he
also served as a member of the Moore Executive Committee.
At Moore, Mr. Buchheit developed Integrated Customer
Solutions, a division which had the capability of managing
all forms of print. Prior to that time, Mr. Buchheit was a
Corporate Officer and Vice President at Xerox Corporation
from 1989 to 1995. At Xerox, he was responsible for
launching the multi-billion dollar Docutech program
worldwide. From 1975 to 1989, he held several executive
positions at IBM Corporation, including Group Marketing
Executive, Director of Operations and Director of Product
Programs and Practices. At IBM, Mr. Buchheit was
responsible for the worldwide marketing of mainframes,
system software, storage and printing devices. He has
served on the Board of Directors for Infomart and NEPS, a
wholly owned subsidiary of Moore Corporation, and is
currently a member of the Board of Directors for Intercon
Associates, Incorporated.
Richard J. Coburn, age 67, has been Chairman of the
Board since May 1996 and cofounded the Company in May 1993.
Mr. Coburn served as President of the Company from May 1993
until May 1996 and served as Chief Executive Officer of the
Company from May 1993 until August 1996. From 1991 until
1993, Mr. Coburn worked as an independent consultant to
development stage companies. Mr. Coburn was a co-founder of
KCR Technology, Inc., a manufacturer of high-speed, black-on-
white printers, and served in various roles, both consulting
and managerial, including President from 1977 to 1991.
Mr. Coburn was also the founder of Coburn Technology, Inc.,
a developer of a xerographic printer product for word
processing, the rights to which were sold to Wang
Laboratories, Inc., and served as its President from 1974 to
1977. From 1968 to 1974, Mr. Coburn was president of Scan-
Optics, Inc., a manufacturer of data capture equipment, of
which he was a co-founder and currently serves as a
director. Prior to 1968, Mr. Coburn had served in various
engineering management positions in aerospace over a 14-year
period. Mr. Coburn received his degree in engineering from
Yale University.
Richard Hodgson, age 82, became a director of the
Company in 1996 and is Chairman of the Audit Committee.
Since 1980, Mr. Hodgson has been a director of McCowan
Associates, Inc., an investment management firm, where he is
currently in charge of technology investment strategies.
Mr. Hodgson had previously been Corporate Senior Vice
President of ITT Company, a hotels, gaming, entertainment
and information publishing company, where he was worldwide
Product Group Manager for the Engineered Products Group.
Prior to joining ITT in 1968, Mr. Hodgson was President and
CEO of Fairchild Camera, where he initiated Fairchild's
entry into the semiconductor industry. Mr. Hodgson is a co-
founder and a Director Emeritus of Intel Corporation, a
manufacturer of microprocessor, communications and
semiconductor products, and is also a director of IBIS
Technology Corp., I-Stat Corp., the Aegis Fund and
Continental Capital Corp. Mr. Hodgson received his degree
in engineering from Stanford University and his MBA from
Harvard University.
Norman L. Milliard, age 56, has been Vice Chairman and
Chief Technology Officer of the Company since May 1998. Mr.
Millard served as President of the Company from May 1996
through May 1998 and served as Chief Executive Officer of
the Company from August 1996 through May 1998. Mr. Millard
was elected a director of the Company in 1995. Mr. Milliard
served as Vice President of the Company from January 1994
until May 1996. From 1988 through 1993, Mr. Milliard served
as head of the Special Product Group at AEG Schneider
Automation, Inc. (formerly Modicon, Inc.), an industrial
automation company, and as the Director of Engineering and
Operations for KCR Technology, a manufacturer of high-speed,
black-on-white printers, from 1982 to 1988. Mr. Milliard
founded two companies in the electronic music field and
holds a number of patents in both the printing and
electronic music fields. Mr. Milliard received his degree
in physics, with honors, from The Citadel, the Military
College of South Carolina.
Patrick J. Pedonti, age 47, has been Vice President,
Chief Financial Officer and Treasurer of the Company since
March 1997. From 1994 through February 1997, Mr. Pedonti
served as Vice President and Chief Financial Officer of
Chemprene, Inc., a manufacturer of industrial products,
which was a privately held management led leveraged buy-out.
From 1991 to 1993, Mr. Pedonti was Vice President of Finance
at NovaSensor, a subsidiary of Lucas Industries, Inc. He
also held a variety of senior level financial and
operational positions from 1985 to 1990 at Lucas Duralith
Corporation and its predecessor company, AMP Keyboard
Technologies, Inc. He received his degree in accounting
from Merrimack College in Massachusetts.
Willard F. Pinney, Jr., age 55, has been Secretary of
the Company since December 1993 and became a director of the
Company in 1996. Mr. Pinney has been a partner since 1973
in the Connecticut law firm of Murtha, Cullina, Richter and
Pinney LLP, which serves as counsel to the Company. He
received his degree in political science from Yale
University and his JD, with honors, from the University of
Michigan Law School.
Robert H. Steele, age 60, became a director of the
Company in 1996 and is Chairman of the Executive
Compensation Committee. Mr. Steele is currently Vice
Chairman of John Ryan Company, a banking services Company,
of which he previously served as Senior Vice President since
1992. Mr. Steele has also been director of Merlin Retail
Banking center since 1992. Mr. Steele was President of RHS
Consulting, Inc., a business consulting firm, in 1991. From
1985 to 1990, Mr. Steele was Chairman and Chief Executive
Officer of Dollar Dry Dock Bank of New York. Mr. Steele
also served as President and CEO of Norwich Savings Society.
Mr. Steele is a former U.S. Congressman from the State of
Connecticut and currently serves as a director of Moore
Medical Corp., a pharmaceutical distributor, Scan-Optics,
Inc., a manufacturer of data capture equipment, NLC
Insurance Companies and SmartServ Online, Inc., an online
information provider. Mr. Steele received his undergraduate
degree from Amherst College and his Master's Degree from
Columbia University and holds an honorary Doctor of Laws
from Sacred Heart University.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to a review of the Company's records, all
required filings under Section 16(a) of the Securities
Exchange Act were made in compliance with this section with
the exception of the following two delinquent filings.
George T. Dolan, whom as of December 31, 1998 was no longer
an employee of the Company, became Vice President of
Operations on January 19, 1998 and was required to file Form
3 by January 29, 1998, but instead filed this form on
February 13, 1998. Joseph T. Brophy was required to file
Form 4 by June 10, 1998 for the purchase of 10,000 shares of
the Company's Common Stock on May 31, 1998, but instead
filed this form on September 1, 1998.
Item 11. Executive Compensation
A.) General. The following tables provide certain
information relating to the compensation of the Company's
Chief Executive Officer and its other most highly
compensated executive officers for the year ended December
31, 1998.
B.) Summary Compensation Table
The following Summary Compensation Table sets forth
information concerning compensation for the Chief Executive
Officer and the Company's other most highly compensated
executive officers whose total salary and bonus for the year
ended December 31, 1998 exceeded $100,000 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation Securities
Name & Principal Other Annual Underlying
Position Year Salary($) Bonus($) Compensation($) Options/SARs(#)
- ---------------- ----- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Charles E. Buchheit 1998 166,667 500 19,547 (1) 610,000 (2)(5)
President and CEO
Richard J. Coburn 1998 120,000 500 - 120,000 (5)
Chairman 1997 121,923 24,663 - 10,000
1996 128,846 - - 30,000
Norman L. Milliard 1998 181,344 500 - 220,000 (5)
Vice Chairman and CTO 1997 161,077 46,480 - 15,000
1996 155,692 - 26,000 (3) 30,000
Patrick J. Pedonti 1998 130,000 500 59,277 (4) 205,000 (5)
Vice President and CFO 1997 99,038 - 36,256 (4) 150,000 (5)
</TABLE>
- -----------------------------
(1) Consists of various living expense reimbursements to
Mr. Buchheit pursuant to his employment agreement with the
Company.
(2) Includes a common stock warrant to purchase 100,000
shares of the Company's common stock, commencing on
September 29, 1999, at an exercise price of $1.00 per share
and expiring in 2003.
(3) Reflects reimbursement of expenses of Mr. Milliard
relating to his relocation to Connecticut consisting of rent
expense in 1996 under an arrangement, which expired in
February 1997.
(4) Reflects various living and relocation expense
reimbursements to Mr. Pedonti in connection with his
relocation to Connecticut.
(5) Includes the re-pricing of previously granted options.
C.) Option Grants in the Last Fiscal Year
The following table contains information concerning the
stock option grants made to each of the Named Executive
Officers in fiscal 1998. No stock appreciation rights were
granted during such year.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Potential
Realizable Value
Exercise at Assumed
Number of % of Total or Annual Rates of
Securities Options/SARs Base Stock Price
Underlying Granted to Price/ Appreciation for
Options/SAR Employees in Share Expiration Option Term (2)
Grants(#) Fiscal Yrs ($/Sh)(1) Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Charles E. Buchheit 5,000 19.6% 2.19 3/23/03 3,022 6,677
250,000 (3) 9.79% 3.13 4/14/08 491,324 1,245,112
250,000 (3) 9.79% 1.00 4/14/08 148,234 370,767
5,000 (3) 19.6% 1.00 3/23/03 1,221 2,663
Richard J. Coburn 20,000 .8% 2.31 1/20/08 29,086 73,711
10,000 (3) .4% 3.13 3/20/07 17,067 41,956
30,000 (3) 1.18% 3.13 4/09/06 44,669 106,949
30,000 (3) 1.18% 1.00 4/09/06 13,310 31,467
10,000 (3) .39% 1.00 3/20/07 5,118 12,421
20,000 (3) .78% 1.00 1/20/08 11,499 28,571
Norman L. Milliard 20,000 .78% 2.31 1/20/08 29,086 73,711
45,000 (3) 1.76% 3.13 10/09/00 18,147 37,627
13,947 (3) .55% 3.13 3/20/07 23,804 58,517
1,053 (3) .04% 3.13 3/20/07 1,797 4,418
30,000 (3) 1.18% 3.13 2/02/06 43,453 103,520
30,000 (3) 1.18% 1.00 2/02/06 12,930 30,417
1,053 (3) .04% 1.00 3/20/07 539 1,308
13,947 (3) .55% 1.00 3/20/07 7,138 17,323
20,000 (3) .78% 1.00 1/20/08 11,499 28,571
45,000 (3) 1.76% 1.00 10/09/00 4,679 9,592
Patrick J. Pedonti 5,000 .20% 2.31 1/20/08 7,272 18,428
75,000 (3) 2.94% 3.13 3/20/07 128,005 314,673
45,000 1.76% .91 9/21/08 25,647 64,995
5,000 (3) .20% 1.00 1/20/08 2,875 7,143
75,000 (3) 2.94% 1.00 3/20/07 38,386 93,154
</TABLE>
(1) All options were granted at the fair market value on
the date of grant as determined by the Board of
Directors.
(2) The 5% and 10% assumed annual rates of compound stock
price appreciation are mandated by rules of the
Securities and Exchange Commission and do not reflect
the Company's estimates or projections of future Common
Stock prices. There can be no assurance provided to
any executive officer or any other holder of the
Company's securities that the actual stock price
appreciation over the term will be at the assumed 5% or
10% levels or at any other defined level. Unless the
market price of the Common Stock appreciates over the
option term, no value will be realized from the option
grants made to the executive officers.
(3) Reflects options that were re-priced during the year
pursuant to a stock option re-pricing and a stock option
modification occurring on April 14, 1998 and September 29,
1998, respectively, as approved by the Board of Directors of
the Company.
D.) Aggregate Option Exercise in Last Fiscal Year and Option Values as of
December 31, 1998
None of the Named Executive Officers exercised stock options during the
year ended December 31, 1998. The following table provides information
regarding the number of shares underlying both exercisable and
unexercisable stock options as of December 31, 1998 and the values of
unexercised "in-the-money" options as of that date. An option is "in-the-
money" if the per share fair market value of the underlying share exceeds
the options exercise price share.
<TABLE>
<CAPTION> Value of
Number of Unexercised Securities
Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at December 31,
December 31, 1998 1998 (1)
Number
of
Shares
Acquired
on Value Exercisable Unexercisable Exercisable Unexercisable
Exercise Realized (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Charles E. Buchheit - - - 255,000 - -
Richard J. Coburn - - - 60,000 - -
Norman L. Milliard - - 75,000 110,000 - -
Patrick J. Pedonti - - - 125,000 - -
</TABLE>
- ---------------------
(1) Based on the closing price at December 31, 1998 of $22/32.
E.) Long-Term Incentive Plan Awards
No long-term incentive plan awards were made to any of the Named
Executive Officers in the last fiscal year.
F.) Defined Benefit or Actuarial Plan Disclosure
Not applicable.
G.) Compensation of Directors
Directors of the Company who are not employees of the Company receive a
monthly retainer of $750 and a per meeting fee of $750 for each meeting of
the Board of Directors and any committee meetings attended in person by
such director. The Company also reimburses directors for reasonable travel
expenses incurred in order to attend meetings.
Under its 1995 Stock Incentive Plan, the Company has established a stock
incentive program for non-employee directors, whereby each newly elected
director receives an initial option to purchase 5,000 shares of Common
Stock and will receive an option to purchase an additional 5,000 shares of
Common Stock on the date of the annual meeting of the Board each year
through 2000 as long as the director remains in office. These options are
exercisable at the fair market value of the shares on the date of grant.
The Company, as permitted by Connecticut law, has purchased directors
and officers liability insurance policies covering all of the Company's
directors and officers on an annual basis and on a one time three-year
basis with respect to the Company's initial public offering. The aggregate
premiums for these policies paid or accrued during 1998 was approximately
$72,833.
H.) Employment Contracts and Termination of Employment and Change-in-
Control Arrangements
Charles E. Buchheit and Norman L. Milliard have entered into employment
agreements with the Company. Both agreements have a three-year term and
expire on April 14, 2001 and June 30, 2001, respectively. If either
employment agreement was terminated without "cause," as defined in the
agreements, Mr. Buchheit would be entitled to receive (i) his base salary
for the longer of a two-year period commencing on the date of termination
or the balance of the three-year term, the employment term; (ii) any
accrued vacation; (iii) payment of health benefits for the balance of the
employment term; and (iv) immediate vesting in all outstanding options.
Mr. Milliard would be entitled to receive his base salary and payment of
health benefits for the balance of the three-year term. Mr. Buchheit's
current base salary is $250,000 and Mr. Milliard's current base salary is
$150,000.
The employment agreements restrict Mr. Buchheit and Mr. Milliard from
directly or indirectly competing with the Company through the participation
in the development or distribution of any product related to the Company's
product or processes during the term of the agreement and for a period of
one year after if they voluntarily resign from the Company or are
terminated for cause. The Employment Agreements do not otherwise restrict
Mr. Buchheit and Mr. Milliard from pursuing any other business interests
that do not directly compete with the Company.
I.) Report on Repricing of Options/SARs
Not applicable.
J.) Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
Neither of the Executive Compensation Committee members, Robert H.
Steele and Willard F. Pinney, Jr., nor any executive officer of the Company
served during 1998 as a member of the Compensation Committee of any other
company. All members of the Executive Compensation Committee are outside
directors, except that Willard F. Pinney, Jr., is Secretary of the Company
and a partner of Murtha, Cullina, Richter and Pinney LLP, counsel to the
Company.
K.) Board Compensation Committee Report on Executive Compensation
Not applicable.
L.) Performance Graph
Not applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of February 1,
1999 regarding the beneficial ownership of the Company's Common Stock by
(i) each person (or group of affiliated persons) known by the Company to
own more than 5% of the outstanding shares of Common Stock, (ii) each of
the directors and Named Executive Officers of the Company, and (iii) all
directors and executive officers of the Company as a group.
Number of
Shares Percentage
Name and Address (1) Beneficially of Common
Owned Stock
(2)
Richard J. Coburn ..................... 435,969 3.2%
Norman L. Milliard (3)................. 190,500 1.4%
Willard F. Pinney, Jr. (4)............. 49,799 *
Joseph T. Brophy ...................... 40,649 *
Robert H. Steele (5)................... 36,618 *
Richard Hodgson (6).................... 28,750 *
Charles E. Buchheit.................... 20,000 *
Patrick J. Pedonti..................... 2,500 *
All directors and officers of the
Company as a group (8 persons) (7) .... 804,785 5.9%
- ----------------------
* Less than 1%
(1) The address of all persons who are executive officers or directors of
the Company is in care of the Company, 800 Connecticut Boulevard, East
Hartford, Connecticut 06108.
(2) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to such shares, subject to
community property laws where applicable. Shares not outstanding but
deemed beneficially owned by virtue of the right of a person or group
to acquire them within 60 days of February 1, 1999 ("currently
exercisable options") are treated as outstanding only for purposes of
determining the amount and percent owned by such person or group.
(3) Includes 75,000 shares of Common Stock subject to currently
exercisable options granted pursuant to the 1995 Stock Incentive Plan.
(4) Includes 30,000 shares of Common Stock subject to currently
exercisable options granted to Murtha, Cullina, Richter and Pinney LLP,
counsel to the Company, of which Mr. Pinney is a partner.
(5) Includes 17,118 shares of Common Stock owned by Mr. Steele's spouse
and 1,500 shares of Common Stock subject to currently exercisable warrants
issued to Mr. Steele's spouse, all of which he disclaims beneficial
ownership.
(6) Includes 3,750 shares of Common Stock subject to currently exercisable
warrants.
(7) Includes 105,000 shares of Common Stock subject to currently
exercisable options granted pursuant to the 1995 Stock Incentive Plan and
5,250 shares of Common Stock subject to currently exercisable warrants.
Item 13. Certain Relationships and Related Transactions
Willard F. Pinney, Jr. is a partner of the law firm Murtha, Cullina,
Richter and Pinney LLP, which serves as legal counsel to the Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report on
Form 10-K are incorporated herein by reference.
Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1998.
(c) Exhibit Listing
Exhibit
Number Description
3.1, 4.1 Restated Certificate of Incorporation of the
Company, as amended.(2)
3.2, 4.2 Bylaws of the Company, as amended December 29,
1997.(2)
10.1 Product Development and Distribution Agreement dated
February 16, 1996 between the Company and Xerox
Corporation.(1)
10.2 Letter of Understanding dated July 2, 1996 between the
Company and Xerox Corporation supplementing the Product
Development and Distribution Agreement.(1)
10.3 Amendment to Product Development and Distribution
Agreement between the Company and Xerox Corporation dated
February 29, 1996.(1)
10.4 Loan Agreement Promissory Note dated February 29, 1996
between the Company and Xerox Corporation.(1)
10.5 Product Purchase Agreement dated April 16, 1996 between
the Company and International Business Machines
Corporation.(1)
10.6 Letter Agreement supplementing Product Purchase Agreement
between the Company and International Business Machines
Corporation dated February 23, 1996.(1)
10.7 OEM Supply Agreement dated January 8, 1996 between the
Company and Spectra, Inc.(1)
10.8 Amendment No. 1 to the OEM Supply Agreement dated July
12, 1996 between the Company and Spectra, Inc.(1)
10.9 Lease Agreement dated February 16, 1996 between the
Company John Hancock Mutual Life Insurance Company.(1)
10.10 Memorandum of Understanding dated October 10, 1996
between the Company and Oce van der Grinten, N.V.(1)
10.11 Accent Color Sciences, Inc. 1995 Stock Incentive
Plan.(1)
10.12 Employment Agreement dated December 14, 1993 between
the Company and Norman L. Milliard.(1)
10.13 Amendment No. 1 to Employment Agreement between the
Company and Norman L. Milliard dated as of January 1, 1995.(1)
10.14 Employment Agreement dated December 14, 1993 between
the Company and Richard J. Coburn.(1)
10.15 Consulting Agreement dated August 2, 1994 between
the Company and Peter Teufel.(1)
10.16 Consulting Agreement dated May 3, 1996 between the
Company and Raymond N. Smith.(1)
10.17 Consulting Agreement Dated August 2, 1994 between
the Company and Klaus Werding.(1)
10.18 Letter Agreement dated February 28, 1996 between the
Company and Pennsylvania Merchant Group Ltd.(1)
10.19 Letter Agreement dated May 6, 1996 between the
Company and Pennsylvania Merchant Group Ltd.(1)
10.20 Termination Agreement dated August 20, 1996 between
the Company and Pennsylvania Merchant Group Ltd.(1)
10.21 Termination Agreement dated March 29, 1996 between
the Company and Knickerbocker Securities, Inc.(1)
10.22 Form of nondisclosure agreement between the Company
and its employees.(1)
10.23 Form of Registration Rights Agreement Relating to
sale of Preferred Stock of the Company.(1)
10.24 Form of Registration Rights Agreement Relating to
sale of Series III Debentures of the Company.(1)
10.25 Form of registration Rights Agreement Relating to
warrants issued in connection with Series III Debentures of
the Company.(1)
10.26 Form of Registration Rights Agreement Relating to
Warrants issued in connection with Series IV Debentures of the
Company.(1)
10.27 Form of Registration Rights Agreement Relating to
sale of Common Stock of the Company.(1)
10.28 Registration Rights Agreement Relating to Warrants
issued by the Company to Xerox Corporation.(1)
10.29 Form of Registration Rights Agreement Relating to Warrants
issued pursuant to sale of Interim Notes.(1)
10.30 Form of Securities Purchase Agreement dated as of 1/09/98.(3)
10.31 Certificate of Designations, Preferences and Rights of Series
B Convertible Preferred Stock.(3)
10.32 Form of Warrant issued in connection with the 1998 Private
Placement.(3)
10.33 Form of Registration Rights Agreement dated as of 1/09/98.(3)
10.34 Employment Agreement dated April 15, 1998 between Charles E.
Buchheit and the Company.(4)
10.35 Loan Agreement between the Company and International Business
Machines Corporation.(5)
10.36 Promissory Note between the Company and International Business
Machines Corporation.(5)
10.37 Security Agreement between the Company and International Business
Machines Corporation.(5)
23 Consent of Price Waterhouse LLP
24 Power of Attorney pursuant to which this Registration
Statement has been signed on behalf of certain Directors.
27 Financial Data Schedule
________________
(1) Incorporated by reference to Registration Statement 333-14043 on Form
S-1.
(2) Incorporated by reference to Registration Statement 333-43467 on Form
S-3.
(3) Incorporated by reference to Registration Statement 333-45321 on Form
S-3.
(4) Incorporated by reference to the Registrant's Quarterly Form 10-Q for
the quarter ended June 30, 1998 (File No. 000-29048)
(5) Incorporated by reference to the Registrant's Quarterly Form 10-Q for
the quarter ended September 30, 1998 (File No. 000-29048)
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of East Hartford, State of Connecticut, on March 30, 1999.
ACCENT COLOR SCIENCES, INC.
By: /s/Charles E. Buchheit
---------------------------
Charles E. Buchheit
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated on March 30, 1999.
Signature Title Date
/s/ Charles E. Buchheit
- ------------------------
Charles E. Buchheit President and Chief March 30,1999
Executive Officer
(Principal Executive Officer)
/s/ Patrick J. Pedonti
- ------------------------
Patrick J. Pedonti Vice President, Treasurer and March 30,1999
Chief Financial Officer
(Principal Financial and Accounting Officer)
- ----------*-------------
Joseph T. Brophy Director March 30, 1999
- ----------*-------------
Richard J. Coburn Director March 30, 1999
- ----------*-------------
Richard Hodgson Director March 30, 1999
- ----------*-------------
Norman L. Millard Director March 30, 1999
- ----------*-------------
Willard F. Pinney, Jr. Director March 30, 1999
- ----------*-------------
Robert H. Steele Director March 30, 1999
*By: Charles E. Buchheit
Charles E. Buchheit
Attorney-in-fact
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectus constituting part of the Registration Statement
of Post-Effective Amendment No. 1 on Form S-8 (No. 333
29407), the Registration Statement on Form S-3 (No. 333
45321), and the Registration Statement on Form S-3 (No. 333
66779) of Accent Color Sciences, Inc. of our report dated
March 9, 1999 appearing on page 16 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 31, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the
undersigned does hereby appoint and constitute Richard J.
Coburn and Charles E. Buchheit and each of them as his agent
and attorney-in-fact to execute in his name, place and stead
(whether on behalf of the undersigned individually or as an
officer or director of Accent Color Sciences, Inc. or
otherwise) the Annual Report on Form 10-K of Accent Color
Sciences, Inc. for the fiscal year ended December 31, 1998
an any and all amendements thereto and to file such Form 10-
K and any such amendment thereto with the Securities and
Exchange Commission. Each of the said attorneys shall have
the power to act hereunder with or without the other.
IN WITNESS WHEREOF, the undersigned have executed this
instrument this 22nd day of March, 1999.
/s/ Joseph T. Brophy
Joseph T. Brophy
/s/ Charles E. Buchheit
Charles E. Buchheit
/s/ Richard J. Coburn
Richard J. Coburn
/s/ Richard Hodgson
Richard Hodgson
/s/ Norman L. Milliard
Norman L. Milliard
/s/ Willard F. Pinney, Jr.
Willard F. Pinney, Jr.
/s/ Robert H. Steele
Robert H. Steele
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,048,425
<SECURITIES> 0
<RECEIVABLES> 1,321,782
<ALLOWANCES> 0
<INVENTORY> 2,269,016
<CURRENT-ASSETS> 4,855,787
<PP&E> 4,613,566
<DEPRECIATION> 2,680,523
<TOTAL-ASSETS> 6,860,405
<CURRENT-LIABILITIES> 2,209,606
<BONDS> 2,258,709
0
3,049,691
<COMMON> 46,355,604
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,860,405
<SALES> 8,219,586
<TOTAL-REVENUES> 8,219,586
<CGS> 9,836,379
<TOTAL-COSTS> 9,836,379
<OTHER-EXPENSES> 4,248,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,572
<INCOME-PRETAX> (9,769,853)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,769,853)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,769,853)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> (.87)
</TABLE>
