UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NUMBER 1 TO THE 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. /X/
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.
The registrant is amending its Annual Report on Form 10-K to include
amendments to Items 6, 7 and 8.
ACCENT COLOR SCIENCES, INC.
FORM 10-K/A
For The Year Ended December 31, 1998
INDEX
Part II
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
Item 8. Financial Statements and Supplementary Data 11
Signatures 28
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the year ended December 31,
1994 1995 1996 1997 1998
<S>
Statement of
Operations Data:
<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)
------ ------ ------ ------ ------
Non-cash imputed
dividend on
mandatorily
redeemable
convertible
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>
<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997 1998
<S>
Balance Sheet Data:
Cash and cash <C> <C> <C> <C> <C>
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
Mandatorily
redeemable
convertible preferred
stock - - - - 3,097
Total shareholders'
equity (deficit) (57)(3,164) 19,345 7,270 (1,307)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Accent Color Sciences, Inc. ("Accent Color" or the "Company") 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 (48) (25) (6,654,000)
recognized in 1998
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 Mandatorily
Redeemable 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), after the reclassification described in Note 7, 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, except as to Note 7
which is as of September 14, 1999
ACCENT COLOR SCIENCES, INC.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
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, Mandatorily Redeemable
Convertible Preferred Stock and
Shareholders' Equity (Deficit)
Current liabilities:
Obligations under capital
leases (Note 9) $ 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 9) 23,116 91,937
Long-term debt, net of discount
(Note 5) 2,235,593 -
Other long-term liabilities (Notes
8 and 9) 601,759 501,644
Total non-current
liabilities 2,860,468 593,581
----------- -----------
Total liabilities 5,070,074 5,137,617
----------- -----------
Commitments and contingencies
(Notes 9 and 13)
Mandatorily redeemable convertible
preferred stock, no par value,
500,000 shares authorized,
3500 and 0 issued and outstanding
(Reclassified Note 7) 3,097,368 -
----------- -----------
Shareholders' equity (Notes 6 and 8):
Common stock, no par value,
35,000,000 and 25,000,000
shares authorized,
12,841,881 and 11,989,855
shares issued and outstanding 46,307,927 45,114,633
Accumulated deficit (47,614,964) (37,845,111)
----------- -----------
Total shareholders'
equity (deficit) (1,307,037) 7,269,522
----------- -----------
Total liabilities,
mandatorily redeemable
convertible preferred
stock and shareholders'
equity $ 6,860,405 $ 12,407,139
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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 12) 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 mandatorily
redeemable convertible preferred
stock (Note 7) (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.
ACCENT COLOR SCIENCES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
<S> 1998 1997 1996
Cash flows from operating ------ ------ ------
activities: <C> <C> <C>
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.
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
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
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
Exercise of
options 37,500 44,625 - - - 44,625
Proceed from sale
of warrants - 810,000 - - - 810,000
Imputed dividend on
mandatorily redeemable
convertible preferred
stock - (920,000) - - - (920,000)
Conversion of
mandatorily
redeemable
convertible
preferred stock 814,526 933,669 - - - 933,669
Warrants issued
with debt - 325,000 - - - 325,000
Net loss - - - - (9,769,853) (9,769,853)
---------- ---------- --------- ---------- ----------- ----------
December 31,
1998 12,841,881 $46,307,927 - $ - $(47,614,964) $(1,307,037)
========== ========== ========= ========== =========== ==========
</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.
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. Mandatorily Redeemable 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 with net proceeds of $3,921,037. 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. The deemed fair
market value of these warrants has been reflected as an increase to common
shareholders' equity and a reduction of mandatorily redeemable convertible
preferred stock. 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. In certain, but not all, redemption events, the Company has
the unilateral right to pre-empt the right of holders of the Series B Stock
from demanding cash redemption of their shares by paying to them within
five days of the specific event, as liquidated damages, 25% of the face
amount of the Series B Stock then outstanding. Such liquidated damages can
be paid in cash or shares at the Company's election. Management does not
consider any of the events that would trigger mandatory redemption to be
probable events, has determined a reasonable estimate of when the
circumstances that would result in the shares becoming mandatorily
redeemable cannot be made, and therefore at December 31, 1998 does not
accrue for accretion.
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 has been
recorded as a reduction to common shareholders' equity.
In the course of a review of a Securities Act filing, the staff of the
Securities and Exchange Commission ("the Commission") raised an issue
regarding the classification of the Company's mandatorily redeemable
convertible preferred stock. Due to certain of the mandatory redemption
features mentioned above, the carrying value of the preferred shares, which
were previously presented as a component of Shareholders' equity (deficit),
has been reclassified as temporary equity, outside of shareholders' equity
(deficit) at December 31, 1998. The reclassification of the 1998 financial
statements for the matter described above had no effect on the Company's
net loss, total assets or total liabilities. The Company's redeemable
equity and total shareholders' equity (deficit) at December 31, 1998, as
previously reported and reclassified, are as follows:
December 31, 1998
Redeemable equity - previously reported.......... $ -
Adjustment related to the presentation of the mandatorily
redeemable convertible preferred shares as redeemable... 3,097,368
---------
As restated...................... $ 3,097,368
=========
Shareholders'equity (deficit) - previously reported..... $ 1,790,331
Adjustment related to the presentation of the mandatorily
redeemable convertible preferred shares as redeemable... (3,097,368)
---------
As restated...................... $(1,307,037)
=========
8. 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.
9. 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.
14. Subsequent Events and Reclassification of Mandatorily Redeemable
Convertible Preferred Stock at Interim Reporting Dates (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.
On April 6, 1999, the Company elected to forgo its right to prevent demand
redemption on its outstanding shares of Series B Preferred Stock which
resulted in an additional $1,176,154 being accreted to Redeemable Preferred
Stock to reflect the increase in redemption value from April 6, 1999 to
June 30, 1999 in accordance with the redemption price specified in the
Company's Certificate of Incorporation. Such accretion was charged against
common stock and also increased the net loss applicable to common
shareholders. As of June 30, 1999, there were 7,402,874 shares of common
stock reserved for issuance pursuant to the conversion of the remaining
2,028 shares of Redeemable Preferred Stock issued and outstanding. The
features and rights of the Redeemable Preferred Stock remain the same with
the exception that the remaining holders may demand redemption of their
outstanding shares at any point in time.
In the course of a review of a Securities Act filing, the staff of the
Securities and Exchange Commission ("the Commission") raised an issue
regarding the classification of the Company's mandatorily redeemable
convertible preferred stock.
Due to certain mandatory redemption features, the carrying value of the
preferred shares, which were previously presented as a component of
shareholders' equity (deficit), has been reclassified as temporary equity,
outside of shareholders' equity (deficit) for 1998.
The reclassification of the preferred shares for the matter described above
had no effect on the Company's net loss, total assets or total liabilities.
The Company's redeemable equity and total shareholders' equity (deficit) at
the interim reporting dates, as previously reported and reclassified, are
as follows:
1998
--------------------------------
September 31 June 30 March 31
Redeemable equity-previously reported $ - $ - $ -
Adjustment related to the presentation
of the mandatorily redeemable
convertible preferred shares
as redeemable 3,377,466 3,657,565 4,031,038
---------- ---------- ----------
As restated $3,377,466 $3,657,495 $4,031,038
========== ========== ==========
Shareholders' equity (deficit)-
previously reported $3,502,208 $5,205,209 $8,159,813
Adjustment related to the
presentation of the mandatorily
redeemable convertible preferred
shares as redeemable (3,377,466) (3,657,565) (4,031,038)
---------- ---------- ----------
As restated $ 124,742 $1,547,644 $4,128,775
========== ========== ==========
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 September 17, 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 September 17, 1999.
Signature Title Date
/s/ Charles E. Buchheit
- ------------------------
Charles E. Buchheit President and Chief September 17, 1999
Executive Officer
(Principal Executive Officer)
/s/ Tracy L. Hubert
- ------------------------
Tracy L. Hubert Acting Chief Financial Officer September 17, 1999
(Principal Financial and Accounting Officer)
- ----------*-------------
Joseph T. Brophy Director September 17, 1999
- ----------*-------------
Richard J. Coburn Director September 17, 1999
- ----------*-------------
Richard Hodgson Director September 17, 1999
- ----------*-------------
Norman L. Millard Director September 17, 1999
- ----------*-------------
Willard F. Pinney, Jr. Director September 17, 1999
- ----------*-------------
Robert H. Steele Director September 17, 1999
*By: Charles E. Buchheit
Charles E. Buchheit
Attorney-in-fact
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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
3,097,368
0
<COMMON> 46,307,927
<OTHER-SE> (47,614,964)
<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-BASIC> (.87)
<EPS-DILUTED> (.87)
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