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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
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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 3, 2000 was $19,693,393.
The number of shares outstanding of the registrant's common stock
as of March 3, 2000 was 22,112,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered in
connection with the Annual Meeting of Shareholders to be held
May 22, 2000 are incorporated by reference into Part III.
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<PAGE>
ACCENT COLOR SCIENCES, INC.
FORM 10-K
For The Year Ended December 31, 1999
INDEX
Part I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 6
Item 3. Legal Proceedings.............................................. 6
Item 4. Submission of Matters to a Vote of Security Holders............ 6
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters............................................ 7
Item 6. Selected Financial Data........................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
Item 8. Financial Statements and Supplementary Data.................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures...................................... 37
Part III
Item 10. Directors and Executive Officers of the Registrant............. 37
Item 11. Executive Compensation......................................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 37
Item 13. Certain Relationships and Related Transactions................. 37
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 37
Signatures ............................................................... 40
<PAGE>
PART I
Item 1. Business
General
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Accent Color Sciences, Inc. ("Accent Color" or the "Company") designs,
manufactures, and sells innovative, high-speed, highlight color printing systems
(Truecolor Systems(TM)). These systems are integrated with high-speed,
continuous-forms, monochrome printers and installed in businesses requiring high
volume transaction printing applications. Highlight color adds value to printed
documents such as billing statements, account balance statements, and customer
correspondence by drawing attention to remittance requirements, marketing
messages, or customer service information. The Company sells, in addition to the
highlight color printing systems, related consumables (wax-based inks) and spare
parts, both of which generate a recurring revenue stream based on the installed
base and usage of Accent Color's Truecolor Systems.
Correspondence and billing statements are transitioning to become a primary
source of communications to customers for many industries like banking,
securities, finance, telecommunications, and utilities. As these companies look
for ways to improve customer communications, cross-sell their various product
offerings, and expand their business via targeted prospects, printed matter is
viewed as a cost-effective and efficient method to increase customer
satisfaction, revenue, and profits. Adding color to a statement costs
$0.005-$0.01, making this a cost-effective way to deliver messages.
According to CAP Ventures, a printing industry market research firm, the 1997
year-end installed base of high-speed, monochrome printers in the United States
was approximately 15,000, and the installed base of these printers is projected
to grow at a four-year compounded annual growth rate (CAGR) of approximately
5.7% to 18,000 systems by the year 2001. Accent Color believes that the U.S.
market represents approximately 50% of the worldwide market for high-speed,
monochrome printers. Such market research shows that the potential opportunities
for marketing the product are substantial, particularly since the Company is
targeting both sales of new printers and retrofits to installed systems.
High volume transaction applications are typically found in large corporate data
centers or outsourcing service bureaus. The application requirements are
characterized by print volumes exceeding one million pages per month,
time-critical print windows, low cost, and customer-unique page information.
Through original equipment manufacturer ("OEM") agreements, such as with IBM and
Xerox (through its Groupe SET subsidiary), Accent Color's strategy requires low
sales and support investment, yet is global in scope. Accent Color's products
are sold, supported and serviced by companies who are known and trusted in the
marketplace. The transaction printing market segment produces mission-critical
documents that require system reliability and round-the-clock support. Using IBM
and Xerox for support provides access to customers who would otherwise be
hesitant to entrust their business to a startup concern. Initial installations
are already in place and producing customer statements in North America, Europe
and South America.
The Company was incorporated in Connecticut in May 1993. The Company's corporate
offices are located at 800 Connecticut Boulevard, East Hartford, Connecticut.
The Company's telephone number there is (860) 610-4000. The Company also
maintains a web site containing product and corporate information. The Company's
web site address is http://www.accentcolor.com. The information contained in the
Company's web site should not be considered a part of this Form 10-K.
<PAGE>
Products
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ACS Truecolor System
- --------------------------------------------------------------------------------
The Company currently offers a continuous forms version of Truecolor Systems
which is marketed under the corporate logos and product identifications of the
Company's OEM customers. The selling price of the Company's Truecolor Systems to
its OEM customers ranges from $117,000 to $156,000 depending on model, options,
and terms and conditions of purchase.
The version of the Truecolor System sold by IBM as the "IBM(R) InfoPrint(TM)
Hi-Lite Color post processor" attaches directly to the IBM 3900 and IBM
InfoPrint 4000 continuous form production printing systems. It is configured to
print at the same speed as the IBM production printing system (up to 501 pages
per minute) at 240 or 300 dots per inch resolution. The continuous form version
of the Truecolor System is designed to match the monthly production capacity of
the Infoprint 4000 system.
The version of the Truecolor System sold by Xerox as the "Xerox Docuprint CF
Color post processor" attaches directly to the Xerox Docuprint 500 CF continuous
forms production-printing system. It is configured to print at the same speed as
the Xerox production printing system (up to 501 pages per minute) at 240 or 300
dots per inch resolution. The continuous forms version of the Truecolor System
is designed to match the monthly production capacity of the Xerox Docuprint 500
system.
TRUECOLOR SYSTEM FEATURES
Host Printer IBM 3900; IBM InfoPrint 4000; Xerox Docuprint 500 CF
Paper Handling Continuous forms
Speed Up to 230 feet per minute, 70 meters per minute
(501 images per minute using 2-up letter-size
portrait images)
Resolution 240 or 300 dots per inch
Ink Reservoirs 4 standard or 8 optional for IBM system, 8 standard
for Xerox system
Paper Width 9.0 to 18.0 inches
Paper Length 3.0 to 17.0 inches
Paper Weights 16 to 28 pound, 60 to 105 grams per square meter
Paper Type Pre-printed or blank, fanfold or roll-fed forms,
tractor holes
Maximum Usage Same as monochrome IBM or Xerox host printer
Consumables and Spare Parts
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The Company's product offerings include consumables, such as standard and custom
color hot melt ink, and spare parts. Highlight color printing with Truecolor
Systems requires the consumption of significant quantities of ink and the
replacement of certain parts that are subject to normal wear and tear. The
Company expects that sales of consumables will generate recurring revenue, which
the Company believes will increase as the installed base and usage of Truecolor
Systems increases.
Consumables. The wax-based hot melt ink used in the Truecolor Systems is sold to
the Company's OEM customers in six-kilogram packages containing 60 individual
ink blocks. The Company purchases its wax-based ink from Spectra Inc., a
wholly-owned subsidiary of Markem, Inc. As long as the Company purchases its
wax-based inks exclusively from Spectra, Spectra is prohibited, through its
agreement with the Company, from knowingly supplying the wax-based ink directly
to the Company's OEM customers or the OEM's end users. Similarly, IBM and Xerox
are currently prohibited from purchasing wax-based ink from sources other than
the Company, subject to certain conditions.
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Spare Parts. The Company expects that periodic preventive maintenance and repair
will need to be performed on Truecolor Systems and will include the replacement
of damaged or worn parts which are expected to be supplied exclusively by Accent
Color to the OEM customers. Subcontractors produce these replacement parts and
suppliers according to the Company's design specifications.
Product Development
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The engineering goals at Accent Color are focused on the following areas:
Support current market development to assure flawless market entry and strong
customer satisfaction. The Company's engineering group is committed to timely
solutions to achieve and maintain easy and reliable installation and use of its
current product. This product is deployed in high-volume transaction printing
applications, which are considered mission-critical and time-sensitive. Many of
the printing centers operate 24 hours a day, 7 days a week to meet time and
volume demands. This product must be reliable and maintainable in this
challenging environment. Accent Color is currently engaged in a joint program
with its OEM customers to implement performance enhancing and lifecycle
cost-reducing design improvements for all the Company's current end user
customers.
Value engineering program to improve system profit margin. During 1999, the
Company engaged in a very significant cost reduction and value-engineering
program aimed at achieving significantly enhanced printer profit margins in 2000
and beyond. Through this program, the Company will provide a printer model that
will take half the time to manufacture, be faster to install, and be simpler to
maintain in the field, increasing the Company's OEM customer's and end user
customer's satisfaction.
Expanding the addressable market base of the Company's current product. Accent
Color is committed to the success of its current version products. The Company's
engineering group will continue to develop enhancements to its product based
upon defined customer needs, which expand the addressable market for the
Company's products. During the year 2000, the Company will invest funds to
increase the maximum print width of the Truecolor System product. This expanded
print coverage leverages previous Accent Color developments in print heads and
electronics.
Developing technologies for future generation products. In addition to enhancing
its current products, the Company believes that in the long-term, its future
success will depend upon its ability to develop new products as well.
Accordingly, the Company is working closely with Spectra its printing technology
supplier to define technology requirements necessary for future products. These
technologies include printing capabilities of higher speeds, greater resolution,
lower cost and less complexity.
In addition, Accent Color is pursuing opportunities for specific applications in
the high-speed industrial printing market. These programs would comprise the
repackaging or modifications of existing modules to meet a specific application.
This activity is being pursued through direct discussions with key companies and
is expected to include financial support of the necessary engineering
modifications.
The Company expended approximately $8.8 million, $4.2 million and $2.8 million
on engineering and research and development in the years ended December 31,
1997, 1998 and 1999, respectively. As the Company emphasizes its manufacturing,
it anticipates that further product cost reduction, product enhancement, and
product-sustaining engineering will keep its research and development spending
consistent with expenditures in 1999. As of March 3, 2000, Accent Color had 15
employees engaged in engineering and research and development.
Manufacturing and Assembly
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The Company's manufacturing strategy has been to design a product based upon a
relatively small number of discrete modules that can be subassembled and tested
by other parties. Other than the patented ink jet printheads supplied by
Spectra, the Company believes these modules can be readily procured on
competitive terms. Initially, a substantial amount of assembly will be done by
the Company prior to the completion and implementation of subcontract agreements
with those suppliers of the major modules that the Company has determined are
suitably qualified. The Company has identified subcontract-manufacturing
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<PAGE>
companies to be the primary manufacturers of the major modules of Truecolor
Systems. The Company believes that these companies have both the manufacturing
and quality assurance capabilities to satisfy the Company's supplier
qualification process, which initially qualifies and monitors ongoing
performance to the Company's cost, quality and schedule requirements. The
Company has implemented a formal quality control program to inspect parts
received from subcontractors to determine whether they comply with Company
specifications. The Company monitors adherence to these procedures through site
visits and direct supervision.
The Company has made product assurance and quality a priority in its business
strategy. In pursuit of this goal, the Company has adopted a formal approach to
documentation control, design, manufacturing and business process definition and
has implemented an integrated business system software package to manage key
processes. Accent Color also subjects the component modules and each complete
Truecolor System to extensive testing during the assembly process. An important
part of the testing involves extensive print quality tests in which the Company
uses a variety of paper grades and test patterns designed to verify accuracy,
color and other performance characteristics prior to shipment. As of March 3,
2000 the Company had 15 employees engaged in manufacturing and operations.
Marketing, Product Support, Sales and Training
- --------------------------------------------------------------------------------
Accent Color has adopted an OEM distribution strategy to address the global
market. Specifically, the Company's OEM customers purchase Truecolor Systems for
integration with their high-speed, continuous-forms printers and market them to
both existing installed base and new printer sales under their respective brand
names. The goals of these relationships are: (1) to rapidly penetrate the market
represented by both the existing installed base and new sales of high-speed,
continuous-forms printers; (2) to substantially reduce or eliminate the cost and
time required for Accent Color to develop its own sales and service
organization; (3) to quickly gain credibility and market acceptance by meeting
the end user customer support requirements; and (4) to integrate the Company's
Truecolor Systems with certain hardware and supporting software marketed by
these OEM customers.
To access its target markets, Accent Color has entered into agreements with IBM
and Xerox. Under these agreements, IBM and Xerox will market, sell and service
Truecolor Systems for continuous-forms applications under their respective
corporate identities. A key element of achieving the plan is close coordination
between Accent Color and its OEM customer's Sales, Marketing, Service and
Engineering functions. The Company's goal is to achieve enhanced market
engagement, which it expects to accomplish through a sales support and technical
support process, common to and linked with its OEM customers' processes.
Accent Color provides support for the sales, marketing, and service activities
of its OEM customers. This includes offering technical advice, as required,
regarding the optimal use of Truecolor Systems in demanding applications, and
participation in the formulation of marketing initiatives to position and
promote Accent Color's products against any perceived or emerging competitors.
The Company benefits from this interaction by receiving timely feedback on end
user needs and desires which, in turn, drives product enhancement and new
product development. Separately, Accent Color will continue to perform its own
market research to supplement the OEM customers' requirement requests to better
understand market trends and end user needs.
The Company's technical support group acts as an extension of the OEM customer's
support and engineering organizations providing on-site installation assistance,
training, and call center support. The common goal between Accent Color and its
OEM customers is to study the initial installations for ways to minimize overall
support costs once higher unit volumes are achieved. As of March 3, 2000 the
Company had 9 employees engaged in marketing and service efforts.
Customers
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The Company has entered into agreements with IBM and Xerox. Under these
arrangements, IBM and Xerox intend to market, distribute and support Truecolor
Systems under their respective brand names. These agreements are significant in
several respects. First, according to CAP Ventures, IBM is one of the leading
suppliers of high-speed, monochrome printers and IBM's AFP/IPDS architecture is
an industry standard in transaction printing applications. Second, the Company's
products are designed to be fully integrated with certain hardware and
supporting software products marketed by IBM. Third, Accent Color expects that
market acceptance of its Truecolor Systems will be accelerated since sales and
service will be provided by the well-established sales and service organizations
of IBM and Xerox.
International Business Machines Corporation. IBM's products are used in
corporate data centers and other high-speed printing applications. In April
1996, the Company and IBM entered into a Product Purchase Agreement (the "IBM
Agreement"). This agreement was for a term of three years with IBM having the
right to renew it for two additional one-year terms. On March 29, 1999, IBM
renewed the IBM Agreement for an additional one-year term. On July 14, 1999, IBM
4
<PAGE>
renewed the IBM Agreement for an additional 6 years. The use of the Truecolor
System as an integrated post-processing device attached to the IBM InfoPrint
4000 high speed, monochrome printers is being marketed world wide by IBM's sales
and marketing operations.
IBM has committed to purchase consumables from the Company if certain conditions
concerning competitive pricing are met. The IBM Agreement also requires the
Company to warrant its products against manufacturing defects for 90 days after
initial installation. Furthermore, under the IBM Agreement, the Company has
agreed to provide spare parts for its products to IBM at prices which will yield
a monthly parts cost per Truecolor System not to exceed a specified amount. If
the Company is unable to perform its obligations under the agreement, after a
cure period, the IBM Agreement affords IBM certain backup manufacturing rights,
including the right to manufacture, or have a third party manufacture, the
Company's Truecolor Systems. This right to manufacture is limited to the
specific types of units not properly delivered and may be terminated if the
Company is thereafter able to deliver the units in question in compliance with
the terms of the IBM Agreement.
Xerox Corporation. In May 1999, Xerox Corporation purchased Groupe SET
International thereby taking over the two Product Development and Distribution
Agreements (the "SET Agreements") that the Company and Groupe SET entered into
in August 1997. The SET Agreements had an initial term extending to December
2001. Under the first agreement, Groupe SET is expected to market, sell and
service Accent Color's Truecolor Systems with the SET-M3056SF and other high
speed black-on-white printing systems to target the high speed continuous forms
printing segment of the production printing market for applications such as
billing statements, brochures and direct mail. Under the second agreement,
Groupe SET developed a version of its "plug-and-play" Color Enabler Solution
("CES") data interpreter and print controller technologies to allow Accent
Color's Truecolor Systems to interface to a wide variety of high speed
continuous form and cut sheet black-on-white printers which are not highlight
color enabled. On July 21, 1999, Accent Color Sciences signed a Letter of
Variation to the original Groupe SET agreements outlining Accent Color's and
Xerox's intentions regarding launch and support of the Value-Engineered (VE)
model of the Truecolor System. Additionally, the Letter of Variation modified
the Second Product Development Distribution Agreement (SET agreement) providing
Xerox with a right of refusal to supply its CES to Accent Color if in Xerox's
opinion Accent Color intends to supply the Color Enabler Solution to a
competitor of Xerox.
Backlog
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The Company measures backlog based on purchase orders or commitments for
Truecolor Systems, consumables and spare parts that have not yet been shipped. A
substantial amount of the Company's backlog can be modified or canceled prior to
30 days before shipment without penalty, except for the recovery of the
Company's actual costs. Accordingly, the Company believes that backlog cannot be
considered a meaningful indicator of future financial performance. As of
December 31, 1999 the Company has orders and contractual commitments for the
year 2000 in excess of $10 million from its primary OEM customers.
Competition
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Although there are existing digital and offset color printing systems, the
Company believes there is no other product currently marketed that is capable of
cost-effectively printing variable data in multiple standard or custom colors
with the functionality of existing high-speed, monochrome printers.
Suppliers to the market compete on the basis of speed, print quality,
functionality, reliability, cost per page and color variety. The Company
competes, in significant part, on the basis of advanced proprietary technology
in the areas of paper handling, ink jet color printing and interface software
which allows the Company's products to print variable data, in multiple standard
or custom colors at high speeds. Other companies with little or no advance
notice could introduce products or product improvements based on new
technologies.
Competition in the markets for the Company's products is highly fragmented. The
Xerox 4890 (a similar product is also marketed by Xerox as the DocuPrint 390HC)
is a highlight color printer, which prints in black and one color per job (out
of a limited palette). It is capable of printing 92 pages per minute but does
not offer custom colors. Oce Printing Systems GmbH ("Oce") has introduced two
products, the DSC210 and the DC155. The DSC210 is a continuous forms-based,
while the DC155 is a cut-sheet system. Both are based on electrophotographic
imaging. However, both systems provide only one highlight color and have
dramatically reduced print speeds when highlight colors are used, thus rendering
them less than ideal for the high volume transaction printing market. In
addition, there are full color digital printing systems available which operate
at print speeds of up to 100 pages per minute, including the Xeikon DCP/50D, IBM
Infoprint Color 100, and the Xerox DocuColor 100. These systems have relatively
high per page print costs and operate at much lower speeds than typical
applications in the transaction printing segment require, making them
impractical for high-volume print jobs.
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<PAGE>
Scitex Digital Printing offers a product based on liquid ink-jet technology,
which can print at high speed and in multiple colors. This system, though, would
require a potential user currently using electrophotographic systems such as
those from IBM, Xerox and Oce to completely change equipment and re-train
operators to use a different process. The Company believes that the cost and
disruption of such an implementation would be prohibitive except in a few very
large single applications.
In addition to direct competition from other firms utilizing high-speed color
technologies, there exists potential direct competition from firms improving
technologies used in low-speed to medium-speed color printers and indirect
competition from firms producing pre-printed forms.
Intellectual Property
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The Company's ability to compete effectively depends, in part, on the ability of
the Company to maintain the proprietary nature of its technology. The Company
relies, in part, on proprietary technology, know-how and trade secrets related
to certain aspects of its principal products and operations. To protect its
rights in these areas, the Company generally requires its OEM customers, its
suppliers and its employees to enter into nondisclosure agreements. As of March
3, 2000, the Company has been granted three patents by the U.S. Patent and
Trademark Office relative to the mechanical design of the Company's paper
handling and color printing system, which form the core of the Truecolor
Systems. In addition, the Company has filed applications for two additional U.S.
patents relative to certain enhancements of Truecolor Systems technology. The
Company has also filed foreign patent applications seeking patent protection in
several foreign countries.
The Company has an exclusive right to supply products which include Spectra's
ink jet printheads to print color on the black-on-white output from specified
high-speed printers marketed by Xerox, IBM, Oce and certain other parties. To
the extent that wax-based inks and ink jet printheads purchased from Spectra are
covered under patents or licenses, the Company relies on Spectra's rights under
such patents and licenses and Spectra's willingness and ability to enforce its
patents and maintain its licenses.
Employees
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As of March 3, 2000, the Company employed 47 individuals, of whom 15 employees
were engaged in engineering and research and development, 15 employees in
manufacturing and operations, 9 employees in marketing and service efforts, and
8 employees in general administration. The Company's employees are not
represented by a collective bargaining organization, and the Company has never
experienced a work stoppage. The Company believes that its relationship with its
employees is good.
Item 2. Properties
The Company's facilities are located at 800 Connecticut Boulevard in East
Hartford, Connecticut and presently consist of approximately 35,231 square feet.
The Company believes that these facilities will meet the Company's needs for at
least the next 12 months. The Company leases this facility under a lease that
expires on December 31, 2000.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Increase in the number of shares of our authorized common stock
At our annual meeting of stockholders held on Nov. 29, 1999, the stockholders
approved an amendment to the restated certificate of incorporation increasing
the authorized number of shares of our common stock from 35,000,000 to
50,000,000 shares. This amendment was approved as follows:
Votes for: 14,696,174
Votes against: 66,523
Abstentions: 17,171
Broker non-votes: 0
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Increase in the number of shares issuable under our 1995 Stock Incentive Plan
At our annual meeting of stockholders held on Nov. 29, 1999, the stockholders
approved an amendment to our 1995 Stock Incentive Plan (the "Plan") increasing
the number of shares of common stock issuable under the Plan from 2,000,000 to
4,000,000 shares. This amendment was approved as follows:
Votes for: 6,608,631
Votes against: 324,720
Abstentions: 233,855
Broker non-votes: 7,612,662
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock began trading publicly on the National tier of the
NASDAQ Stock Market under the ticker symbol "ACLR" on December 18, 1996. Prior
to this date, there was no public market for the Common Stock. Effective March
17, 1999, the Company was delisted from the NASDAQ Stock Market as the Company
was not in compliance with NASDAQ's minimum bid price and net tangible asset
level. The Company's Common Stock is now trading on the OTC Bulletin Board under
the same ticker symbol. The table below sets forth the per share quarterly high
and low sales prices of the Common Stock for the two most recent fiscal years.
COMMON STOCK INFORMATION
Year Ended 12/31/99 High Low
First Quarter $.8125 $.125
Second Quarter $.8438 $.1562
Third Quarter $.7656 $.375
Fourth Quarter $.7188 $.4062
Year Ended 12/31/98 High Low
First Quarter $3.375 $1.50
Second Quarter $3.375 $1.00
Third Quarter $1.8125 $.8125
Fourth Quarter $1.1563 $.50
As of March 16, 2000 there were approximately 2,841 stockholders of record,
including those stockholders whose certificates were held by nominees. The
Company has never declared or paid cash dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $ - $ - $ 1,578 $ 8,220 $ 7,344
Costs and expenses:
Costs of production - 1,272 7,397 9,836 6,864
Research and development 3,051 6,932 8,786 4,249 2,850
Marketing, general and administrative 1,003 4,394 4,439 3,822 2,900
Related party administrative expense 80 25 - - -
----------- ---------- ----------- ------------ ----------
4,134 12,623 20,622 17,907 12,614
Other (income) expense:
Interest expense 83 656 246 200 450
Interest income - (113) (599) (117) (37)
----------- ---------- ----------- ------------ ----------
83 543 (353) 83 413
Net loss before extraordinary item (4,217) (13,166) (18,691) (9,770) (5,683)
----------- ---------- ----------- ------------ ----------
Extraordinary item:
Loss on early extinguishment of debt,
net of income taxes of nil - (573) - - -
----------- ---------- ----------- ------------ ----------
Net loss (4,217) (13,739) (18,691) (9,770) (5,683)
=========== ========== =========== ============ ==========
Non-cash imputed dividendon
preferred stock - - - (920) (1,627)
Net loss applicable to common stock $ (4,217) $ (13,739) $(18,691) $(10,690) $ (7,310)
=========== ========== =========== ============ ==========
Net loss (basic and diluted) per
common share: $ (2.33) $ (3.57) $ (1.77) $ (.87) $ (.44)
Weighted average common shares
outstanding 1,809,240 3,852,982 10,566,890 12,330,903 16,647,285
=========== ========== =========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1 $20,289 $ 4,006 $ 1,048 $ 2,574
Working capital (deficit) (1,862) 18,189 4,836 2,646 (681)
Total assets 728 26,951 12,407 6,860 5,848
Short-term debt 50 1,000 -- -- 2,368
Long-term debt, less current portion 2,020 1,272 -- 2,236 --
Total shareholders' equity (deficit) (3,164) 19,345 7,270 (1,307) (4,150)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
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Accent Color designs, manufactures and sells innovative, high-speed, highlight
color printing systems ("Truecolor Systems"). The Company was formed in 1993
initially to develop a high-speed, color printer to attach to cut sheet,
monochrome 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 and 1996, the Company accelerated its engineering and development
activities as its efforts were focused on designing and building the Truecolor
System 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. At Xplor in October 1996, the Company demonstrated its Truecolor
Systems, as well as certain enhancements planned for production in 1998.
In 1997, IBM announced the availability of the Company's continuous forms
version of the Truecolor System designed for integration with IBM's 3900
production printing system, which IBM marketed as the IBM InfoPrint Hi-Lite
Color post processor.
In August 1997, the Company signed a Product Development and Distribution
Agreement with SET Electronique France ("SET"), a European provider of
high-speed digital printing solutions headquartered in Paris, France. Pursuant
to this
8
<PAGE>
agreement, SET would market, sell and service the Company's Truecolor
Systems with the SET-M3056SF and other high-speed monochrome printing systems.
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's 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.
In January 1999, the Company and IBM announced the availability of the IBM
Infoprint Hi-Lite Color post processor, Model HC2, 300dpi resolution. This
expanded the market opportunity to include requirements for highlight color
applications utilizing 300dpi.
In May 1999, Xerox Corporation purchased SET and took ownership of the contract
between the Company and SET. During July 1999, Xerox and the Company agreed to
terms as to how the relationship would proceed between Xerox and the Company and
documented these in a letter entitled "Variations to Agreement between ACS and
SET dated 27th August 1997." This agreement included commitments to the Company
regarding minimum purchases of Truecolor Systems for shipment in calendar year
2000.
In July 1999, IBM and the Company signed a third amendment to the Product
Purchase Agreement extending the term of the agreement by six (6) additional
years and committing to minimum purchases of Truecolor Systems for shipment in
calendar year 2000.
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, 1999 to Year Ended December 31, 1998
Total Net Sales. Prior to the quarter ended December 31, 1998, the Company had
adopted a policy of deferring revenue on its Truecolor system until expiration
of the product's warranty period. This policy was adopted because the system was
sold with a 90-day warranty to IBM and the Company had not established adequate
warranty experience as of that date to estimate future warranty costs. During
the quarter ended December 31, 1998, the Company, in accordance with its revenue
recognition policy on printer sales, determined that it now 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 accepted. As of December
31, 1999 and 1998, the Company had deferred revenue of $874,000 and $595,000
related to Truecolor Systems shipped. Total net sales were $7,344,000 for the
year ended December 31, 1999 compared to $8,220,000 for the year ended December
31, 1998. Of the sales recognized in 1999, $595,000 resulted from deferred
revenues recorded in 1998, while recognized sales in 1998 included $2,496,000 of
deferred revenue recorded in 1997. Printer sales represented 74% of total net
sales for the year ended December 31, 1999 while sales of consumables and spare
parts represented 26%. As of December 31, 1998, printer sales were 81% of total
net sales and consumables and spare parts represented 19%.
Printers. Printer sales were $5,446,000 for the year ended December 31, 1999 and
$6,654,000 for the year ended December 31, 1998. Of the sales recognized in
1999, $595,000 resulted from deferred revenue recorded in 1998 compared to
$2,496,000 from 1997. Sales for 1999 consisted of 41 new systems and 3 system
upgrades. A total of 43 systems and 3 system upgrades were shipped during 1999,
of which 2 systems shipped in 1999 were recorded as deferred revenue.
Additionally, 5 systems shipped in 1998 remain in deferred revenue. Below is a
summary of system shipments and system revenue for the year ended December 31,
1999:
<TABLE>
<CAPTION>
Units Dollars
-------------------------------------- --------------------------
New Systems System Upgrades New Systems & Upgrades
----------- --------------- ----------------------
<S> <C> <C> <C>
Deferred revenue as of
December 31, 1998 5 0 $ 595,000
Plus: Shipments in 1999 43 3 5,725,000
Less: Revenue recognized
in 1999 (41) (3) (5,446,000
------------- ------------ ------------
Deferred revenue of
December 31, 1999 7 - $ 874,000
============= ============ ============
</TABLE>
9
<PAGE>
As of December 31, 1999 the Company has orders and contractual commitments for
the year 2000 in excess of $10 million from its primary OEM customers.
Consumables and Spare Parts Sales. Consumables and spare parts sales were
$1,890,000 for the year ended December 31, 1999 compared to $1,566,000 for the
year ended December 31, 1998.
Costs of Production. Costs of production were $6,864,000 for the year ended
December 31, 1999 and $9,836,000 for the year ended December 31, 1998. The
decrease was attributed to the cost of goods sold related to fewer sales of
printers, reduced overhead spending mainly in payroll and related costs and
partially offset by an increase in the use of ink due to a higher number of
printers now being utilized by customers.
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 were $2,850,000 for the year ended December
31, 1999 a decrease of 33% from $4,249,000 for the year ended December 31, 1998.
This decrease was attributed to the Company directing 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 three major factors: (i) a reduction in payroll and related costs due to the
reduction of personnel in 1999, (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, and (iii) a
decrease in general design and development costs.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses were $2,900,000 for the year ended December 31, 1999, a
decrease from $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 1999 and a reduction in professional
service costs. These items were offset by an increase in technical support
expenses of approximately $174,000.
Interest Expense and Other (Income) Expense. Interest expense was $451,000 for
the year ended December 31, 1999, an increase of 126% from $200,000 for the year
ended December 31, 1998. This increase was due to the Company's interest and
debt amortization for the full year on the outstanding loan from IBM as well as
the interest and debt amortization on the interim financing of September 1999.
Interest income was $37,000 for the year ended December 31, 1999, a decrease of
68% from $117,000 for the year ended December 31, 1998. This decrease in
interest income was attributed to having less cash available for investment in
1999 as compared to 1998.
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 to IBM, 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
10
<PAGE>
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:
<TABLE>
<CAPTION>
Units Dollars
--------------------------------------- --------------------
New Systems System Upgrades New Systems &
----------- --------------- -------------
Upgrades
--------
<S> <C> <C> <C>
Deferred revenue as of December 31, 1997 26 2 $ 2,496,000
Plus: Shipments in 1998 27 23 4,753,000
Less: Revenue recognized in 1998 (48) (25) (6,654,000)
----------------- ---------------- ------------------
Deferred revenue as of December 31, 1998 5 - $ 595,000
================= ================ ==================
</TABLE>
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.
Interest Expense and Other (Income) Expense. Interest expense decreased 19% 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 lesser amount of cash
available for investment in 1997 as compared to 1998
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The Company's need for funding is stabilizing at its current levels as the
Company directs its energy toward production. To date, the Company has financed
its operations through customer payments, borrowings and the sale of equity
securities.
On January 13, 1998, the Company completed a private equity financing providing
net proceeds to the Company of $3.9 million. Pursuant to the financing, the
Company issued 4,500 shares of Series B Convertible Preferred Stock at a price
of $1,000 per share and warrants to purchase the Company's common stock. The
warrants issued are exercisable into 300,000 shares of common stock with an
exercise price of $2.75 and an expiration date of January 9, 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
11
<PAGE>
issued to the placement agent for services provided. As of March 16, 2000, there
were 1,208 shares of Series B preferred stock outstanding.
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
$132,204 and $60,593 for the year ended December 31, 1999 and 1998,
respectively.
Operating activities consumed $2.3 million in cash in 1999 compared to $9.2
million in 1998. This decrease was primarily attributed to a decrease in the net
loss of the Company and a decrease in inventories, as well as a decrease in
accounts receivable.
Capital expenditures increased 70% from $169,000 for the year ended December 31,
1998 to $287,000 for the year ended December 31, 1999. Capital expenditures
during 1999 primarily reflected acquisitions of equipment to support the
Company's manufacturing activities. This increase was primarily attributed to
the manufacture of 2 test systems for the Company's own usage. The Company had
no significant capital expenditure commitments at December 31, 1999.
During the years from 1997 to 1999, the Company adjusted its staffing levels
from 140 employees as of December 31, 1997 to 47 employees as of December 31,
1999.
On September 7, 1999, the Company received $502,719 from the sale of 1,100,000
shares of common stock to the PMG Eagle Fund. In conjunction with this sale of
common stock the Company issued 550,000 warrants to purchase common stock at an
exercise price of the lower of $.50 per share of common stock or the per share
common stock equivalent price in the Company's next equity offering in which the
company receives net proceeds of at least $1,100,000.
On the same day, the Company also sold a Series A Convertible Subordinated Note
with a face value of $550,000 to Orbis Pension Fund Trustees. In conjunction
with the sale of the Note, the Company issued 275,000 warrants to purchase
common stock. It also issued 275,000 warrants to purchase common stock
contingent upon the Noteholder converting its notes to common stock. The
warrants were issued at an exercise price of the lower of $0.50 per share of
common stock or the per share common stock equivalent price in the Company's
next equity offering in which the Company receives net proceeds of at least
$1,100,000. The Note accrued interest at the rate of 7% per year.
The conversion price of the Series A Convertible Subordinated Note was $0.50 per
share of common stock, provided that both this conversion price and the shares
simultaneously sold were subject to adjustment should the Company's next equity
financing resulting in net proceeds to the Company of at least $1,100,000 be at
a common share equivalent price of less than $0.50 per share. Therefore, the
financing completed by the Company on December 7, 1999 discussed in below
paragraphs resulted in adjustments with respect to the September 7, 1999
financing consisting of the issuance of an additional 275,000 shares to the PMG
Eagle Fund without further consideration thereby adjusting the overall costs of
shares acquired by the PMG Eagle Fund to $0.40 per share, and the adjustment of
the conversion price under the Series A Convertible Subordinated Note sold to
Orbis Pension Fund Trustees and the exercise price under the warrants issued to
both purchasers to $0.40 per common share with corresponding adjustments in the
number of shares into which such Note could be converted and for which such
warrants could be exercised. Simultaneous with the closing of the Company's
offering of Series C convertible preferred stock described in the following
paragraphs, Orbis Pension Fund Trustees converted the Series A Convertible
Subordinated Note into 1,375,000 shares of the Company's common stock.
On December 7, 1999, the Company completed an offering of 33,589 shares of
series C convertible preferred stock. The shares of preferred stock were sold at
a purchase price of $100 per share. The Company's net proceeds from this
issuance was $2,894,822. The series C preferred stock is convertible at any time
into shares of the Company's common stock at a fixed conversion price of $0.40
per share. The number of shares reserved for issuance pursuant to the conversion
of the 33,589 shares of outstanding series C preferred stock was 8,397,250
shares of common stock. In connection with the issuance of the series C
preferred stock, the Company issued warrants to acquire 71,473 shares of common
stock at an exercise price of $.40 per share as partial consideration for
placement agent services.
Series C holders are entitled to receive cumulative dividends at a rate of 8%
per year of the initial purchase price of $100 per share but only upon the
occurrence of a Liquidation Event, provided that any such dividend is coupled
with an equivalent ratable dividend to the holders of the series B preferred
stock. A "Liquidation Event" is defined to include a merger (except a merger in
which Accent Color is the surviving entity), consolidation, dissolution, winding
up or sale of substantially all of the
12
<PAGE>
assets of the company, unless the holders of at least 75% of the series B and
series C stock determine that any such event is not a Liquidation Event.
As of December 31, 1999, the Company's primary source of liquidity was cash and
cash equivalents totaling $2.6 million. Based on the current operating plan of
the Company, the primary requirements for cash through the remainder of 2000
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 and payment of maturing debt. 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 may be required to finance its operations and capital expenditures.
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 the end of the year
2000.
Year 2000
- --------------------------------------------------------------------------------
The year 2000 (Y2K) issue developed as a result of certain hardware, operating
systems software and software application programs being originally developed
using two digits rather than four digits to define a year. The Company began
assessing Y2K issues in 1996 and developed a process to manage the Y2K potential
problems. As a result of this process all of the Company's Information
Technology systems were updated and tested and are Y2k compliant. The Company
also tested and confirmed that all phases of its products were Y2K compliant. As
of March 16, 2000, all systems and products continue to operate normally and the
Company believes that the most critical stages of Y2K have past.
However, since the Company's business operations are heavily dependent on third
party material suppliers, the failure of these parties to resolve their own Y2K
issues in a timely fashion, could result in a material financial risk to the
Company. During 2000, as part of its overall Y2K program, the Company intends to
communicate with third parties to understand Y2K issues as they surface within
third parties' systems.
The Company does not expect any further material cost regarding Y2K issues and
believes it is well positioned to handle any issues that might arise regarding
Y2K.
13
<PAGE>
Factors Affecting Future Results
- --------------------------------------------------------------------------------
In the foregoing Management's Discussion and Analysis section and in the
documents that we incorporate by reference, the Company makes statements that
relate to the Company's future plans, objectives, expectations and intentions
that involve risks and uncertainties. The Company has based these statements on
its current expectations and projections about future events. These statements
may be identified by the use of words such as "expect," "anticipate," "intend,"
"plan," "believe" and "estimate" and similar expressions. Any statements that
refer to expectations, projections or other characterizations of future events
or circumstances are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to the safe
harbor created by that Act.
Forward-looking statements necessarily involve risks and uncertainties. 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.
WE HAVE AN ACCUMULATED DEFICIT AND ANTICIPATE FURTHER LOSSES, WHICH COULD
JEOPARDIZE OUR BUSINESS.
We have incurred significant losses since we began doing business and had an
accumulated deficit of $53,298,443, as of December 31, 1999. We expect to incur
quarterly net losses through the end of the year 2000. We cannot assure you that
thereafter we will be able to achieve or sustain revenue growth, profitability
or positive cash flow on either a quarterly or annual basis or that
profitability, if achieved, will be sustained. If we are unable to achieve or
sustain profitability, we may not be financially viable in the future and may
have to curtail, suspend or cease operations.
IF INCREASES IN OUR OPERATING EXPENSES OUTPACE GROWTH IN OUR REVENUES, WE MAY
SUFFER ADDITIONAL LOSSES.
Our manufacturing, marketing and research and development expenses are based
largely on our expectations regarding future revenue and are fixed to a large
extent in the short term. Our planned expenditures are based on sales forecasts
by our customers which are generally not binding. If our revenue levels fall
below expectations we could suffer a disproportionately adverse effect on our
operating results since only a small portion of our expenses vary with revenue
in the short term. In addition, if we are unable to adjust our spending in a
timely manner to compensate for any unexpected revenue shortfalls, we may suffer
additional losses that cause our business to suffer and our stock price to
decline.
If we determine to expand our manufacturing and marketing operations, we
anticipate that our operating expenses will increase. The increase in operating
expenses caused by any expansion of our manufacturing and marketing operations
could harm our operating results if our revenue does not increase at an equal or
greater rate.
IF WE SEEK TO RAISE ADDITIONAL CAPITAL IN THE FUTURE BUT ARE UNABLE TO DO SO, WE
MAY be unable to continue our business.
Depending upon our anticipated levels of revenue, costs of production and cash
flow, we may need to raise additional capital in the future to fund our
operations. If we are unable to obtain needed additional financing or generate
sufficient cash from our operations, we may have to reduce or eliminate
expenditures for research and development, production or marketing, or otherwise
curtail or discontinue our operations.
Since our inception, we have financed our operations through customer payments,
borrowings and the sale of debt and equity securities. From time to time, we
have raised additional funding as we have increased our marketing, research and
development and production activities related to our Truecolor Systems. Although
we experienced a slowdown in shipments of our products during the latter half of
1999, which we believe to be due to year 2000 concerns, we have received
contractual orders and commitments for Truecolor Systems from our OEM customers
of approximately $10 million, which are deliverable in the year 2000.
These currently anticipated levels of revenue and cash flow are subject to many
uncertainties and cannot be assured. Further, we may change our business plans,
or unforeseen events may occur which might require us to raise additional funds.
The need for, and the amount of, additional funds we may require will depend on
many factors, including
o the extent and timing of sales of our Truecolor Systems,
o the cost associated with sales, marketing and customer technical
support efforts, and
o our operating results.
We cannot assure you that, if needed, additional financing will be available, or
available on acceptable terms.
14
<PAGE>
OUR DEPENDENCE ON A SINGLE PRODUCT LINE MAKES US PARTICULARLY VULNERABLE TO THE
POTENTIAL FAILURE TO GAIN MARKET ACCEPTANCE AND THE INTRODUCTION OF COMPETING
PRODUCTS.
Because we do not have a variety of product lines, we anticipate that we will
derive substantially all of our revenue in the foreseeable future from sales of
Truecolor Systems, related consumables and spare parts to our principal OEM
customers. If we are unable to generate enough sales of Truecolor Systems,
wax-based ink and/or spare parts due to market conditions, manufacturing
difficulties or other reasons, we may be unable to continue our business. Since
we only have a single product line, we are particularly vulnerable to the
successful introduction of products made by existing or potential competitors,
including our OEM customers which compete with our Truecolor Systems product
line.
WE HAVE A LIMITED HISTORY OF PRODUCT MANUFACTURING AND MAY NOT BE ABLE TO
SUCCESSFULLY TRANSITION TO HIGH-VOLUME PRODUCTION.
So far, we have manufactured only limited quantities of Truecolor Systems and
manufacturing costs have approximated the average selling price of a unit. To
make a profit we must manufacture our products in enough quantities and at
acceptable costs; however, future production in enough quantities may pose
technical and financial challenges for us. If we fail to successfully transition
to high-volume production and manufacture our products at a cost adequately
below their selling price, our operating results and business could suffer. As a
result, we cannot assure that we can make a successful transition to high-volume
production of our Truecolor Systems.
BECAUSE OUR PRODUCTS ARE NOT YET WIDELY ACCEPTED IN THE MARKETPLACE, WE MAY BE
UNABLE TO ESTABLISH MARKET SHARE AND MAY SUFFER LOSSES.
Our products are designed for the digital, high-speed production printing and
production publishing market segments that have traditionally relied on
monochrome print. Because our products offer the application of a new technology
to the end users in this market segment, we cannot assure that we will
successfully develop or market our existing or future products or, if any of
these products achieve market acceptance, that we can grow or even sustain
market acceptance. A failure of our products to achieve market acceptance could
increase our losses and harm our business.
Our existing and potential customers may conclude that our products suffer from
real or perceived problems. Any actual or perceived problems with our products,
whether or not they are significant, could have a material adverse effect on
market acceptance of these products. Even in the absence of any real or
perceived problems, our products may fail to achieve market acceptance because
potential customers may continue to rely on existing printing and publishing
techniques for their businesses.
THE INTRODUCTION OF COMPETING PRODUCTS COULD SUPPRESS DEMAND FOR OUR TRUECOLOR
SYSTEMS.
Because our Truecolor Systems have yet to gain widespread market acceptance, the
possible introduction of competing products poses a significant threat to our
success. The announcement by us or our OEM customers or other competitors of new
products and technologies designed for the digital, high-speed production
printing and production publishing market could cause customers to defer or
cancel purchases of our existing products. Such deferrals or cancellations could
increase our losses and force us to suspend or discontinue our operations. We
cannot assure you that our OEM customers, including IBM and Xerox, or other
companies will not compete with us in the future.
WE HAVE A CONCENTRATED CUSTOMER BASE, THEREFORE THE LOSS OF A SINGLE CUSTOMER
COULD NEGATIVELY AFFECT OUR REVENUES AND OPERATING RESULTS.
We anticipate that sales of our Truecolor Systems and consumables to a limited
number of customers will account for substantially all of our revenue for the
foreseeable future. Generally, our customers (IBM and Xerox) provide estimates,
but not guarantees, of their future orders. A substantial difference between
estimated orders and actual orders by any one of our customers, or the failure
of our customers to purchase a significant number of our products, could
significantly decrease our revenues and harm our business.
OUR BUSINESS COULD SUFFER IF THIRD PARTY MARKETING, DISTRIBUTION AND SUPPORT
EFFORTS FOR OUR PRODUCTS ARE UNSUCCESSFUL.
A significant element of our marketing strategy is to form alliances with third
parties for the marketing and distribution of our products. Any disruption in
our existing relationships with IBM or Xerox, or any future customer that
markets or distributes our products, may damage our ability to successfully
market our Truecolor Systems to end users and increase our losses. We cannot
assure you that
o we can maintain our existing alliances or form and maintain alliances
with other parties;
o we can satisfy our contractual obligations with our OEM customers; or
15
<PAGE>
o our OEM customers will devote adequate resources to market and
distribute our products successfully.
Since our products are marketed and distributed via third parties, other factors
may have a material adverse effect on the successful marketing and distribution
of our products, including:
o our limited ability to interact with the end users of our products and
to observe their experience with our products;
o our lack of control of the marketing, distribution and support efforts
of our OEM customers that may make us less responsive in recognizing
and correcting any problems experienced by the OEM customers or the
end users;
o our lack of control as to the timing of the introduction of our
products; and
o a lack of information regarding the amount of inventory currently
available which may reduce our ability to predict fluctuations in
revenue due to a surplus or a shortage of inventory.
IF SPECTRA TERMINATES OUR EXCLUSIVE RIGHTS TO INCLUDE ITS PRODUCTS IN OUR
TRUECOLOR SYSTEMS, IT COULD MARKET ITS COMPONENTS TO OUR POTENTIAL COMPETITORS
WHICH COULD DEPRESS DEMAND FOR OUR PRODUCTS.
Truecolor Systems combine our proprietary paper handling technology with
patented ink jet technology from Spectra. We have an exclusive right, under a
supply agreement with Spectra, to supply products including Spectra's ink jet
printheads in the worldwide market for printing color on the output from
specified high-speed, monochrome printers marketed by Xerox, IBM and three other
manufacturers through December 31, 2002, however, we are currently not in
compliance with the volume purchase requirements necessary to maintain such
exclusivity. If Spectra chooses to terminate our right of exclusivity under the
supply contract (but not our right to purchase products from Spectra), it could
market its products to our potential customers which could depress demand for
our products. If this were to occur, our revenues could be adversely impacted
and our business could suffer harm.
WE RELY ON A SOLE SOURCE SUPPLIER FOR A KEY COMPONENT OF OUR PRODUCTS. OUR
BUSINESS WOULD BE HARMED IF WE WERE UNABLE TO OBTAIN SUFFICIENT SATISFACTORY
COMPONENTS.
We rely upon Spectra to act as our sole source supplier of ink jet printheads
and the hot melt, wax-based inks used by Truecolor Systems. As we increase the
production of Truecolor Systems, we will become more reliant upon Spectra's
ability to manufacture and deliver ink jet printheads to us. Any interruption in
our ability to obtain Spectra printheads of an acceptable quality within the
time frame required by us at an affordable cost could result in production
delays and increased costs which would increase our losses and harm our
business. Our reliance on Spectra also involves the risks that we may
o be unable to obtain an adequate supply of required printheads or inks
from another supplier in the event that Spectra is unable or unwilling
to do so; and
o have a reduced level of control over the quality, pricing and timing
of delivery of these items.
WE DEPEND ON MAJOR SUBCONTRACTORS AND SUPPLIERS FOR OTHER MODULES OR PARTS OF
OUR TRUECOLOR SYSTEMS.
We rely on subcontractors and other suppliers to manufacture, subassemble and
perform testing of some modules and parts of Truecolor Systems. Although we
currently perform the final assembly and testing of various Truecolor System
components and of each complete Truecolor System, we plan to hire other parties
to manufacture major components and complete final assembly and testing of
Truecolor Systems in-house. If we do not develop relationships with, or lose,
these subcontractors or suppliers, or if the subcontractors or suppliers fail to
meet our price, quality, quantity and delivery requirements, then we may suffer
losses and fail to achieve our business objectives.
IF WE FACE EXCESSIVE PRODUCT WARRANTY CLAIMS OR FAILURE RATES, WE COULD SUFFER
INCREASED LOSSES.
We warrant that our Truecolor Systems are free of defects in workmanship and
materials. We have also agreed to repair or replace defective products without
charge when defect rates are excessive. If we experience more warranty claims or
product failure rates than we expected when we originally priced our products
and spare parts, we could suffer increased losses which may force us to curtail
or suspend our business operations.
THE LOSS OF OUR SENIOR MANAGEMENT COULD NEGATIVELY AFFECT OUR BUSINESS.
We are substantially dependent on the capabilities and services of our key
technical and management personnel, some of whom have been instrumental in
developing our products and establishing and maintaining strategic relationships
with our key suppliers and major OEM customers. The loss or interruption of the
continued service of, and the failure to promptly replace, these key personnel
could significantly delay and may prevent the achievement of our business
objectives. These key personnel
16
<PAGE>
include Richard J. Coburn, our co-founder and chairman of the board of
directors, and Charles E. Buchheit, our president and chief executive officer.
Mr. Buchheit has an employment agreement with us that expires on April 14, 2001.
Mr. Buchheit may terminate his employment relationships with us at any time with
no penalty other than the loss of future compensation.
In addition, our future success also depends on our continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel. Competition for these employees is intense and increasing. We may not
be able to attract, assimilate or retain qualified technical and managerial
personnel in the future, and the failure of us to do so could negatively affect
our business.
IF WE FAIL TO KEEP PACE WITH RAPID TECHNOLOGICAL ADVANCES IN THE HIGH-SPEED
PRINTER INDUSTRY, WE MAY SUFFER ADDITIONAL LOSSES BECAUSE OF DECLINING PRICES
AND INVENTORY OBSOLESCENCE.
The high-speed printer industry is characterized by evolving technology and
changing market requirements. Our future success depends our ability to continue
to develop and manufacture new products and to enhance existing products. If we
fail to achieve these objectives, we may suffer additional losses on account of
declining prices and inventory obsolescence. These losses may force us to
suspend or discontinue our business operations.
As a result of these competitive pressures, the enhancement of our products is a
development priority. However, in a new and evolving market, customer
preferences can change rapidly and new technology could render existing
technology and product inventory obsolete. Our failure in responding adequately
to changes in our target market, in developing or acquiring new technology or
successfully conforming to market preferences could depress sales of our
existing products and technologies.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. IF WE
FAIL TO DO SO, OUR BUSINESS COULD SUFFER.
Because our business depends on technology, we believe the maintenance of our
patents, trademarks, service marks and other proprietary rights in our
unpatented know-how and common law trademarks and service marks is critical to
our success and competitive position. If we are unsuccessful in maintaining and
protecting these proprietary rights, third parties could copy and market
products which infringe on our proprietary rights, depressing sales of our
products and harming our business.
As of March 3, 2000, we have secured three patents from the U.S. Patent and
Trademark office relative to the mechanical design of our paper handling and
color printing system, which form the core of the Truecolor Systems. In
addition, we have applied for additional U.S. and foreign patent protection
relative to our products. Our efforts to detect misappropriation of these rights
may be inadequate to prevent others, including our OEM customers, from imitating
our products and infringing on our intellectual property rights. It is also
possible that, if challenged, our intellectual property rights may be narrowed
or held invalid by a court of competent jurisdiction. If our proprietary rights
were narrowed or found to be invalid, we could face significant competition from
the sale of products that compete directly with our Truecolor Systems,
preventing us from gaining market share and leading to increased losses.
IF SPECTRA FAILS TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, WE
COULD FACE INCREASED COSTS AND SUFFER LOSSES.
We have an exclusive right under our agreement with Spectra to supply products
including Spectra's ink jet printheads to our OEM customers. To the extent that
wax-based inks and ink jet printheads purchased from Spectra are covered under
patents or licenses, we rely on Spectra's rights under its patents and licenses
and Spectra's willingness and ability to enforce them. If Spectra is unwilling
or unable to enforce its patents and maintain its licenses against third
parties, we may be subject to increased costs (including litigation costs
related to Spectra's intellectual property rights) which could increase our
losses and damage our business reputation.
IF THIRD PARTIES CLAIM THAT WE INFRINGE THEIR PROPRIETARY RIGHTS, WE COULD FACE
INCREASED COSTS AND SUFFER SIGNIFICANT LOSSES.
We believe that our products and technology do not infringe any existing
proprietary rights of others. Other parties (including our OEM customers) could,
however, claim in the future that the products we offer have infringed their
proprietary rights. If we are unable to successfully defend against these
claims, we may face increased costs and suffer significant losses. In addition,
o third party competitors, including our OEM customers, could assert
rights in our intellectual property rights;
o competitors may have filed for patent protection that is not as yet a
matter of public knowledge; or
o a court could interpret a third-party's patents broadly so as to cover
some of our products.
We could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights, whether or
not the assertion of the claim is valid. Any of these claims, if asserted
successfully, could have a
17
<PAGE>
material adverse effect on our business, financial condition and results of
operations. Furthermore, parties making these claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief,
which could effectively block our ability to make, use, sell, distribute or
market its products and services in the U.S. or abroad. Any unfavorable judgment
could significantly damage our business prospects and cause a decrease in our
stock price.
WE MAY BE UNABLE TO SECURE ANY NECESSARY LICENSES TO USE THIRD PARTY
INTELLECTUAL PROPERTY. IF WE FAIL TO DO SO, OUR BUSINESS COULD BE HARMED.
In the event a claim relating to proprietary technology or information is
asserted against us, we may seek licenses of that intellectual property in order
to use technology we need to conduct our business. We cannot assure you that we
could obtain a license on commercially reasonable terms, if at all, or that the
terms of any offered licenses will be acceptable. If we fail to obtain the
necessary licenses or other rights, we could be effectively precluded from the
sale, manufacture or distribution of our products. This could significantly harm
our business and depress our stock price.
IF WE ARE REQUIRED TO INDEMNIFY OUR OEM CUSTOMERS AGAINST THIRD PARTY
INFRINGEMENT CLAIMS, WE COULD SUFFER ADDITIONAL LOSSES.
We are required to indemnify any of our OEM customers against third party
infringement claims. If any such infringement claims are asserted against our
OEM customers, we may be required to indemnify our OEM customers against any
such claims. If this occurs, we may suffer additional losses which would harm
our business and could depress our stock price.
COMPETITION COULD PREVENT OUR EFFORTS TO ESTABLISH MARKET ACCEPTANCE AND
INCREASE MARKET SHARE FOR OUR PRODUCTS.
We compete, in significant part, on the basis of advanced proprietary technology
in the areas of paper handling, ink jet color printing and interface software
which allows our products to print variable data, in multiple standard and
custom colors at high speeds. Our current and future competitors may be able to
develop products that are more attractive to customers than our products. If we
are unable to compete successfully in this marketplace, we may fail to capture
the market share necessary to achieve profitability and may suffer increased
losses.
Competition to supply high-speed color printing is fragmented. Many of our
competitors and potential competitors have substantially greater financial and
technical resources, longer operating histories, greater name recognition and
more extensive customer bases that could be used to gain market share or product
acceptance. In addition to direct competition from other firms utilizing
high-speed color technologies, we face potential direct competition from firms
improving technologies used in low-speed to medium-speed color printers and
indirect competition from firms producing pre-printed forms.
Other companies may introduce products or product improvements based on new
technologies with little or no advance notice. Manufacturers of high-speed,
monochrome printers may also, in time, develop comparable or more effective
color capability within their own products which may render our products
obsolete. If we are unable to compete against future competitors successfully,
the competitive pressures we face could have a material adverse effect upon the
success of our business.
WE MAY NOT BE SUCCESSFUL IN OUR EFFORTS TO EXPAND INTO INTERNATIONAL MARKETS.
As part of our business strategy, our OEM customers market and sell our products
to end users outside the United States. We intend to increase our revenues
derived from the sale of our products outside the United States, but may be
unable to do so if our OEM customers are unable to successfully market our
products to international end users.
International sales are subject to certain inherent risks, including:
o unexpected changes in regulatory requirements;
o export and import restrictions, tariffs and other trade barriers;
o government controls and potential political instability; and
o potentially adverse tax consequences.
Any of the above factors or events could prevent or depress international demand
for our Truecolor Systems and have a significant negative effect on our revenues
and profitability.
THE PRICE OF OUR COMMON STOCK IS VOLATILE, WHICH COULD HINDER YOUR ABILITY TO
SELL YOUR STOCK AND AVOID A LOSS ON YOUR INVESTMENT.
Since March 1999, our common stock has been quoted and traded in the
over-the-counter market on the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. under the symbol "ACLR." The market
price of our common stock has fluctuated in the past and may continue to be
volatile in the future. As a result of this volatility, you may find it more
18
<PAGE>
difficult to sell our stock in a declining market and avoid a loss on your
investment than if our shares were traded on a national securities exchange or
on the Nasdaq national market.
OUR QUARTERLY OPERATING RESULTS MAY NOT BE A GOOD INDICATOR OF FUTURE RESULTS
AND MAY CAUSE OUR STOCK PRICE TO FLUCTUATE SIGNIFICANTLY. THESE FLUCTUATIONS
COULD RESULT IN LOWER PRICES FOR OUR STOCK.
We expect our quarterly operating results to fluctuate significantly in the
future based upon a number of factors, some of which are outside our control. As
a result, it is possible that our operating results may be below the
expectations of investors in some future period. If this were to occur, the
trading price of our common stock would likely decline, perhaps significantly.
The factors which affect whether our operating results fluctuate include:
o the volume, timing, delivery and acceptance of customer orders;
o the rate of customer and end-user acceptance of our products and the
volume or nature of warranty claims;
o the market acceptance of host printing systems offered by our OEM
customers;
o the possible introduction of competing products that could adversely
affect demand for our Truecolor Systems;
o changes in our pricing policies or those of our OEM customers or
competitors;
o the relative proportion of printer and consumables sales;
o the timely availability of sufficient volume of sole source
components;
o fluctuations in our research and development expenditures;
o the availability of financing arrangements for certain of our
customers; and
o economic conditions specific to the high-speed printer industry and
general economic conditions.
Additionally, because the purchase of a printing system and peripherals is
expensive, it may take a significant amount of time from the first sales
negotiations for a customer to complete and pay for its purchase. We expect
fluctuations in our revenue from quarter to quarter to apply to the purchase of
our systems. Since we sell few units at high average prices, a delay in either
the sale or the receipt of the purchase price for only a few units could have a
considerable adverse effect on the results of operations for a fiscal quarter.
OUR DIVIDEND POLICY COULD DEPRESS OUR STOCK PRICE AND HARM OUR STOCKHOLDERS.
We have never declared or paid dividends on our common stock and do not
anticipate declaring or paying any dividends in the foreseeable future. We plan
to retain any future earnings to reduce our accumulated deficit and finance
growth. As a result, our dividend policy could depress the market price for our
common stock and cause investors to lose some or all of their investment.
OUR ANTI-TAKEOVER PROVISIONS COULD DELAY OR PREVENT A CHANGE IN CONTROL AND
THEREFORE HURT OUR SHAREHOLDERS.
Our Restated Certificate of Incorporation contains provisions that could
discourage a proxy contest or make more difficult the acquisition of a
substantial block of our common stock. For example, our directors are elected on
a rotating basis each year, which could make a change in the composition of the
board of directors more difficult and could hinder a third party attempt to
acquire control of the company, even if such change of control might benefit the
shareholders. If a third party sought to acquire control by offering our
shareholders a premium for their common stock but was prevented from succeeding
with its offer, our shareholders would not be able to realize the value of the
offered premium for their shares.
In addition, the board of directors may issue additional shares of common stock
and preferred stock which, if issued, could dilute and adversely affect various
rights of the holders of shares of common stock. If the board of directors
decides to issue this stock it could discourage an unsolicited attempt to
acquire us. As a Connecticut corporation, we are also subject to the Connecticut
Business Corporation Act, some provisions of which might prevent a change of
control, even a change of control that might benefit the company and its
shareholders.
SHARES ELIGIBLE FOR PUBLIC SALE COULD DILUTE THE INTERESTS OF OUR EXISTING
SHAREHOLDERS AND COULD ADVERSELY AFFECT OUR STOCK PRICE.
We have outstanding options and warrants to acquire 7,426,097 shares of our
common stock. Future sales in the public market of substantial amounts of this
stock will dilute the ownership interests of our existing shareholders. In
addition, the perception that such sales may occur could cause the market price
of our stock to drop significantly, even if our business is doing well. A
19
<PAGE>
decline in our stock price could also impair our ability to raise capital
through the offering of additional debt or equity securities. Such future sales
of common stock include shares:
o issuable upon the exercise of outstanding options we have granted;
o issuable upon the exercise of outstanding warrants we have granted;
and
As of March 3, 2000, we had 22,112,500 shares of common stock issued and
outstanding. If all our outstanding warrants and options are exercised, we will
have a total of 29,538,597 shares, or approximately 25.1% more shares issued and
outstanding.
IF OUR PREFERRED STOCKHOLDERS CONVERT THEIR SHARES AND SELL THEIR COMMON STOCK,
OUR EXISTING SHAREHOLDERS COULD SUFFER DILUTION AND OUR STOCK PRICE MAY DECLINE.
As of March 3, 2000, we had outstanding 1,258 shares of Series B preferred stock
and 33,589 Series C preferred stock which together have the right to convert
into a total of 11,899,522 shares of our common stock. This amount represents
53.8% of our 22,112,500 shares of common stock currently issued and outstanding.
As is the case with our outstanding options and warrants, future sales in the
public market of substantial amounts of this stock will dilute the ownership
interests of our existing shareholders and could depress our stock price.
Both our Series C and Series B preferred stock utilize a fixed conversion price
of $.40 per share. Therefore, our preferred shareholders have an economic
incentive to convert their shares at any time during which the market price of
our common stock exceeds $.40 per share. If all the outstanding shares of series
C and series B preferred stock are converted into shares of common stock and
such common stock is sold, we will have approximately 34,012,022 shares, or
53.8% increase over the amount of our common stock currently issued and
outstanding.
If all the outstanding shares of series C and series B preferred stock are
converted into shares of common stock and if all of our outstanding warrants and
options are exercised, we will have approximately 41,438,119 shares of common
stock issued and outstanding, or a 87.4% increase over the amount of our common
stock currently issued and outstanding.
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.
20
<PAGE>
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, shareholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Accent Color
Sciences, Inc. at December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in the United States,
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 22, 2000
21
<PAGE>
ACCENT COLOR SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,573,764 $ 1,048,425
Accounts receivable 64,544 1,321,782
Inventories (Notes 2 and 4) 1,863,850 2,269,016
Prepaid expenses and other current assets 111,262 216,564
------------ ------------
Total current assets 4,613,420 4,855,787
Fixed assets, net (Notes 2 and 3) 1,156,189 1,933,043
Other assets, net (Note 2) 78,446 71,575
------------ ------------
Total assets $ 5,848,055 $ 6,860,405
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Obligations under capital leases (Note 9) $ 23,116 $ 64,014
Short-term debt, net of discount (Note 5) 2,367,797 --
Accounts payable 516,429 961,626
Accrued expenses (Note 2) 758,139 588,966
Customer advances and deposits (Note 2) 755,000 --
Deferred revenue (Note 2) 874,000 595,000
------------ ------------
Total current liabilities 5,294,481 2,209,606
------------ ------------
Obligations under capital leases (Note 9) -- 23,116
Long-term debt, net of discount (Note 5) -- 2,235,593
Other long-term liabilities (Notes 8 and 9) 390,708 601,759
------------ ------------
Total non-current liabilities 390,708 2,860,468
------------ ------------
Total liabilities 5,685,189 5,070,074
------------ ------------
Commitments and contingencies (Note 9)
Mandatorily redeemable convertible preferred stock (Note 7) 4,313,367 3,097,368
------------ ------------
Shareholders' equity (deficit) (Notes 6 and 8)
Common stock, no par value, 50,000,000 and 35,000,000 shares
authorized, 21,072,578 and 12,841,881 shares issued and
outstanding 49,147,942 46,307,927
Accumulated deficit (53,298,443) (47,614,964)
------------ ------------
Total shareholders' equity (deficit) (4,150,501) (1,307,037)
------------ ------------
Total liabilities, convertible preferred stock and
shareholders' equity (deficit) $ 5,848,055 $ 6,860,405
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Revenue (Note 2) $ 7,343,675 $ 8,219,586 $ 1,577,508
Costs and expenses:
Costs of production 6,863,864 9,836,379 7,396,828
Research and development 2,850,456 4,248,779 8,786,217
Marketing, general and administrative 2,899,397 3,822,113 4,438,518
12,613,717 17,907,271 20,621,563
Other (income) expense:
Interest expense 450,611 199,572 245,550
Interest income (37,174) (117,404) (599,041)
413,437 82,168 (353,491)
Net loss (5,683,479) (9,769,853) (18,690,564)
Imputed dividend on preferred stock (Note 7) 1,626,967 (920,000) --
Net loss applicable to common stock $ (7,310,446) $(10,689,853) $(18,690,564)
Net loss (basic and diluted) per common share (Note 2):
$ (.44) $ (.87) $ (1.77)
Weighted average common shares
Outstanding (Note 2) 16,647,285 12,330,903 10,566,890
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (5,683,479) $ (9,769,853) $(18,690,564)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 893,516 1,208,368 1,128,533
Expense related to stock, warrants and options
granted 92,205 13,054 345,230
Loss on disposal of fixed assets 165,134 4,552 11,460
Changes in assets and liabilities:
Accounts receivable 1,257,238 (881,848) (410,463)
Inventories 405,166 2,342,200 (1,248,964)
Prepaid expenses and other assets 105,302 106,742 188,327
Accounts payable and accrued expenses (276,024) (350,484) (717,230)
Customer advances and deposits 755,000 (85,600) (1,301,800)
Deferred revenue 279,000 (1,901,000) 1,546,000
Other long-term liabilities (232,870) 87,061 293,642
------------ ------------ ------------
Net cash used in operating activities (2,239,812) (9,226,808) (18,855,829)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets 138,283 58,475 --
Purchases of fixed assets (287,085) (168,776) (1,256,244)
Cost of patents (7,661) (19,524) (21,666)
Net cash used in investing activities (156,463) (129,825) (1,277,910)
------------ ------------ ------------
Cash flows from financing activities:
Payment of capital lease obligations (64,014) (66,167) (69,146)
Net proceeds from issuance of convertible debt 493,088 -- --
Proceeds from issuance of warrants 80,000 325,000 --
Net proceeds from issuance of common stock 502,719 -- 4,486,326
Proceeds from exercise of options and warrants -- 44,625 1,783,587
Net proceeds from issuance of preferred stock 2,894,821 3,921,037
Proceeds from long-term debt -- 2,175,000 --
Common stock issued to service provider 15,000 -- --
Repayment of debentures -- -- (2,350,000)
------------ ------------ ------------
Net cash provided by financing activities 3,921,614 6,399,495 3,850,767
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,525,339 (2,957,138) (16,282,972)
Cash and cash equivalents at beginning of period 1,048,425 4,005,563 20,288,535
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,573,764 $ 1,048,425 $ 4,005,563
============ ============ ============
Supplemental disclosure
Cash paid for:
Interest $ 77,591 $ 75,089 $ 167,188
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
ACCENT COLOR SCIENCES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
<S> <C> <C> <C> <C>
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 of common stock 1,313,739 4,486,326 -- 4,486,326
Net loss
-- -- (18,690,564) (18,690,564)
December 31, 1997 11,989,855 45,114,633 (37,845,111) 7,269,522
------------ ------------ ------------- ------------
Proceeds from sale of warrants -- 810,000 -- 810,000
Imputed dividend on mandatorily
redeemable convertible preferred stock -- (920,000) -- (920,000)
Exercise of options 37,500 44,625 -- 44,625
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)
Conversion of mandatorily
redeemable convertible preferred stock 5,420,697 1,631,151 -- 1,631,151
Common stock issued to service provider 60,000 15,000 -- 15,000
Proceeds from sale of common stock 1,375,000 502,719 -- 502,719
Conversion of note 1,375,000 493,088 -- 493,088
Warrants issued with debt -- 80,000 -- 80,000
Accretion to carrying value for preferred
stock -- 47,761 -- 47,761
Warrants issued and repriced 70,386 70,386
Net loss
-- -- (5,683,479) (5,683,479)
------------ ------------ ------------- ------------
December 31, 1999 21,072,578 $ 49,147,942 $ (53,298,443) $ (4,150,501)
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
25
<PAGE>
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.
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, 1999, $7.3 million or 99%
of total sales were attributed to the Company's two primary OEM customers. For
the year ended December 31, 1998, $8.1 million 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 may be required to finance its operations and capital expenditures.
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 the end of the year
2000.
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
original OEM customer. The Company will continue to defer revenue on past
shipments to its second OEM customer until notification from the customer that
the machines are accepted. The Company has and is deferring revenue on shipments
of Beta units of its re-engineered Truecolor Systems to its two OEM customers
until the customers accept the Beta units. As of December 31, 1999 and 1998, the
Company had deferred revenue of $874,000 and $595,000 related to Truecolor
Systems shipped. In addition, estimated warranty costs of $230,025 and $344,206
were accrued by the Company as of December 31, 1999 and 1998, respectively.
Warranty expense was $19,529, $180,251, and $164,000 for the years ended
December 31, 1999, 1998 and 1997, 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
26
<PAGE>
or the useful life of the asset.
Patent
Patent costs of $81,059 and $73,399 at December 31, 1999 and 1998, 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 $2,613, $1,823, and $1,177 at December 31,
1999, 1998 and 1997, 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, 1999 and 1998. Amounts offset against research and
development expense were $0, $0, and $600,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Customer Deposits
Based on sales contracts with customers, the Company is entitled to a percentage
of the sales price upon receipt of firm purchase orders. Customer deposits of
$755,000 were deferred at December 31, 1999.
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,
1999 1998
---- ----
Equipment $1,607,175 $1,643,851
Computers 814,441 838,367
Furniture and fixtures 339,519 487,627
Leasehold improvements 507,115 950,755
Purchased software 357,838 369,252
Assets held for sale 143,852 --
Capital leases - equipment 294,397 294,397
Construction in process -- 29,317
---------- ----------
4,064,337 4,613,566
Less: accumulated depreciation and amortization 2,908,148 2,680,523
---------- ----------
$1,156,189 $1,933,043
========== ==========
Amortization expense for capital leases amounted to $73,846, $78,887, and
$77,250 for the years ended December 31, 1999, 1998 and 1997, respectively.
Depreciation expense was $686,676, $1,068,241, and $971,601 for the years ended
December 31, 1999, 1998 and 1997, respectively.
27
<PAGE>
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
Raw materials and components $ 692,397 1,185,529
Work-in-process 268,206 299,271
Finished goods 903,247 784,216
$ 1,863,850 $ 2,269,016
5. Debt
The following table summarizes the Company's current outstanding debt:
Stated Interest December 31,
Rate Maturity 1999 1998
---- -------- ---- ----
Debt, net of unamortized
<S> <C> <C> <C> <C>
discount of $132,203 and $264,407 10.00% December 31, 2000 $ 2,367,797 $ 2,235,593
Less: current portion (2,367,797) 0
------------ -----------
$ 0 $ 2,235,593
============ ===========
</TABLE>
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 since 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 $132,204 and $60,593 for the years ended December 31, 1999 and 1998,
respectively.
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, $0 and $78,362 for the years
ended December 31, 1999, 1998 and 1997, respectively. Both of these warrants
were exercised in 1997.
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.
28
<PAGE>
Series A Convertible Subordinated Note
On September 7, 1999, the Company received $502,719 from the sale of 1,100,000
shares of common stock to the PMG Eagle Fund. In conjunction with this sale of
common stock the Company issued 550,000 warrants to purchase common stock at an
exercise price of the lower of $.50 per share of common stock or the per share
common stock equivalent price in the Company's next equity offering in which the
company receives net proceeds of at least $1,100,000.
On the same day, the Company also sold a Series A Convertible Subordinated Note
with a face value of $550,000 to Orbis Pension Fund Trustees. In conjunction
with the sale of the Note, the Company issued 275,000 warrants to purchase
common stock. It also issued 275,000 warrants to purchase common stock
contingent upon the Noteholder converting its notes to common stock. The
warrants were issued at an exercise price of the lower of $0.50 per share of
common stock or the per share common stock equivalent price in the Company's
next equity offering in which the Company receives net proceeds of at least
$1,100,000. The Note accrued interest at the rate of 7% per year.
The conversion price of the Series A Convertible Subordinated Note was $0.50 per
share of common stock, provided that both this conversion price and the shares
simultaneously sold were subject to adjustment should the Company's next equity
financing resulting in net proceeds to the Company of at least $1,100,000 be at
a common share equivalent price of less than $0.50 per share. Therefore, the
financing completed by the Company on December 7, 1999 (see note 7) resulted in
adjustments with respect to the September 7, 1999 financing consisting of the
issuance of an additional 275,000 shares to the PMG Eagle Fund without further
consideration thereby adjusting the overall costs of shares acquired by the PMG
Eagle Fund to $0.40 per share, and the adjustment of the conversion price under
the Series A Convertible Subordinated Note sold to Orbis Pension Fund Trustees
and the exercise price under the warrants issued to both purchasers to $0.40 per
common share with corresponding adjustments in the number of shares into which
such Note could be converted and for which such warrants could be exercised.
Simultaneous with the closing of the Company's offering of Series C convertible
preferred stock described in note 7, Orbis Pension Fund Trustees converted the
Series A Convertible Subordinated Note into 1,375,000 shares of the Company's
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. In May 1998 the number of authorized shares of common
stock was increased to 35,000,000. On October 8, 1996, as authorized by the
Board of Directors, the Company split its common stock 3-for-1. In November
1999, the number of authorized common shares was increased to 50,000,000.
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.
On May 25, 1999, the Company issued 60,000 shares of common stock to a financial
advisor for his efforts to find funding for the Company, whereby the Company
recorded $15,000 of compensation expense.
On September 7, 1999, the Company received $502,719 from the sale of 1,100,000
shares of common stock to the PMG Eagle Fund. In conjunction with this sale of
common stock the Company issued 550,000 warrants to purchase common stock at an
29
<PAGE>
exercise price of the lower of $.50 per share of common stock or the per share
common stock equivalent price in the Company's next equity offering in which the
company receives net proceeds of at least $1,100,000.
On the same day, the Company also sold a Series A Convertible Subordinated Note
with a face value of $550,000 to Orbis Pension Fund Trustees. In conjunction
with the sale of the Note, the Company issued 275,000 warrants to purchase
common stock. It also issued 275,000 warrants to purchase common stock
contingent upon the Noteholder converting its notes to common stock. The
warrants were issued at an exercise price of the lower of $0.50 per share of
common stock or the per share common stock equivalent price in the Company's
next equity offering in which the Company receives net proceeds of at least
$1,100,000. The Note accrued interest at the rate of 7% per year.
The conversion price of the Series A Convertible Subordinated Note was $0.50 per
share of common stock, provided that both this conversion price and the shares
simultaneously sold were subject to adjustment should the Company's next equity
financing resulting in net proceeds to the Company of at least $1,100,000 be at
a common share equivalent price of less than $0.50 per share. Therefore, the
financing completed by the Company on December 7, 1999 discussed in the above
paragraphs resulted in adjustments with respect to the September 7, 1999
financing consisting of the issuance of an additional 275,000 shares to the PMG
Eagle Fund without further consideration thereby adjusting the overall costs of
shares acquired by the PMG Eagle Fund to $0.40 per share, and the adjustment of
the conversion price under the Series A Convertible Subordinated Note sold to
Orbis Pension Fund Trustees and the exercise price under the warrants issued to
both purchasers to $0.40 per common share with corresponding adjustments in the
number of shares into which such Note could be converted and for which such
warrants could be exercised. Simultaneous with the closing of the Company's
offering of Series C convertible preferred stock described in the following
paragraphs, Orbis Pension Fund Trustees converted the Series A Convertible
Subordinated Note into 1,375,000 shares of the Company's common stock.
Warrants
As of December 31, 1999, the Company had outstanding common stock purchase
warrants exercisable into an aggregate of 4,268,347 shares. Such shares have
been authorized and reserved.
The following summarizes the activity of outstanding warrants:
<TABLE>
<CAPTION>
Shares under warrant Exercise price Warrants
(per share) Exercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
==========
Anti-dilution adjustments pursuant to warrant
agreements 594,267 $ 1.00 - $ 4.96
Granted to Interim Financing Holders 1,375,000 $ 0.40
Granted to advisors in preferred stock offering 71,473 $ 0.40
----------
Outstanding at December 31, 1999 4,268,347 $ 0.40 - $ 4.96 4,268,347
==========
</TABLE>
30
<PAGE>
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 1999, adjustments were made
for certain warrants in connection with stock issued to an advisor, the interim
financing agreement, re-pricing of warrants of an advisor and the preferred
stock 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.
Prior to November 30, 1999, the Series B Stock, no par value per share, was
convertible into such number of shares of common stock 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 was 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. Prior to November 30, 1999, upon occurrence of specific events, as
defined in the agreement, the holder could have redeemed the Series B Stock for
cash. In certain, but not all, redemption events, the Company had 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 could have been paid in cash or shares at
the Company's election. Management did not consider any of the events that would
trigger mandatory redemption to be probable events, and 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 did 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 and March 22, 1999, 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 and 3,833,699 shares, respectively. 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. 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 the market price of the common stock at the time of the conversion.
As December 31, 1999, 2,872 shares of Series B Stock had been converted into
6,235,223 shares of common stock at an average conversion price of $.49 per
share.
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.
31
<PAGE>
The Company's common stock was delisted from the NASDAQ Stock Market effective
March 17, 1999 as the Company was not in compliance with NASDAQ's minimum bid
price and net tangible asset level. Consequently, each holder of the Company's
Series B Stock had the right to require the Company to redeem such holder's
shares of Series B Stock at a redemption price specified in the Company's
Certificate of Incorporation.
On April 6, 1999, the Company elected to forgo its right to prevent demand
redemption on its outstanding shares of Series B Stock, which resulted in the
reclassification of the Series B Stock into Mandatorily Redeemable Convertible
Preferred Stock..
On November 30, 1999, the Series B stockholders agreed to fix the conversion
rate at $0.40 per share. This fixed the number of shares of common stock
reserved for issuance pursuant to conversion of the outstanding 1,828 shares of
Series B stock at 5,088,351.
On December 7, 1999, the Company completed an offering of 33,589 shares of
Series C Convertible Preferred Stock ("Series C Stock"). The shares of stock
were sold at a purchase price of $100 per share. The Company's net proceeds from
this issuance was $2,894,822. The Series C Stock is convertible at any time into
shares of the Company's common stock at a fixed conversion price of $0.40 per
share. The number of shares reserved for issuance pursuant to the conversion of
the 33,589 shares of outstanding Series C Stock was 8,397,250 shares of common
stock. In connection with the issuance of the Series C Stock, the Company issued
warrants to acquire 71,473 shares of common stock at an exercise price of $.40
per share as partial consideration for placement agent services.
The terms of conversion of the Series C 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
$1,626,967 and has the effect of increasing the net loss per common share by
$0.10 per share for the twelve months ended December 31, 1999. The imputed
dividend has been recorded as a reduction to common shareholders' equity.
Series C Stock holders are entitled to receive cumulative dividends at a rate of
8% per year of the initial purchase price of $100 per share but only upon the
occurrence of a Liquidation Event, provided that any such dividend is coupled
with an equivalent ratable dividend to the holders of the Series B Stock. A
"Liquidation Event" is defined to include a merger (except a merger in which
Accent Color is the surviving entity), consolidation, dissolution, winding up or
sale of substantially all of the assets of the company, unless the holders of at
least 75% of the Series B and Series C Stock determine that any such event is
not a Liquidation Event.
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 was
increased to 2,000,000. In November 1999, the number of shares was increased to
4,000,000. 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.
32
<PAGE>
The 1995 Stock Incentive Plan activity is summarized as follows:
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1999 December 31, 1998
---------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,681,475 $ 1.23 1,318,850 $ 3.85
Granted 2,037,775 0.23 2,870,450 2.03
Exercised 0 - (37,500) 1.19
Canceled (561,500) 1.45 (2,470,325) 3.56
---------- ---------- -----------
Outstanding at period end 3,157,750 .55 1,681,475 1.23
========== ===========
Options exercisable at period end 785,004 1.02 314,000 2.26
========== ===========
Weighted average fair value of options
granted during the period $ 0.21 $ 1.61
=========== ===========
</TABLE>
By action of the Board of Directors on April 14, 1998, the Company re-priced all
options outstanding under the 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 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, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Number
Outstanding at Weighted Average Weighted Exercisable at Weighted
December 31, Remaining Average December 31, Average
Exercise Prices 1999 Contractual Life Exercise Price 1999 Exercise Price
--------------- ---- ---------------- -------------- ---- --------------
<S> <C> <C> <C> <C> <C>
$ .22 1,884,500 9.06 0.22 100,000 0.22
.23 25,000 4.22 0.23 0 -
.63 35,000 7.06 0.63 20,000 0.63
.71 20,000 9.55 0.71 0 -
.73 4,275 9.03 0.73 0 -
.91 160,825 8.10 0.91 66,950 0.91
1.00 872,900 5.98 1.00 443,720 1.00
1.19 114,000 3.83 1.19 114,000 1.19
2.31 1,000 8.05 2.31 334 2.31
3.13 40,250 3.00 3.13 40,000 3.13
--------- --------
3,157,750 7.84 0.55 785,004 1.02
========= ========
</TABLE>
Had compensation expense been recognized based on the fair value of the options
at their grant dates, as prescribed in Financial Accounting Standard No. 123,
the Company's net loss and net loss (basic and diluted) per share would have
been as follows:
33
<PAGE>
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Net loss:
<S> <C> <C>
As reported $ (7,310,446) $ (10,689,853)
Pro forma under FAS 123 $ (7,753,650) $ (12,470,414)
Pro forma net loss (basic and diluted) per share
(unaudited):
As reported $ (.44) $ (.87)
Pro forma under FAS 123 $ (.47) $ (1.01)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: dividend yield of 0% for both periods;
risk-free interest rates ranging from 4.76% to 6.10% for options granted during
the year ended December 31, 1999 and 4.24% to 5.74% for options granted during
the year ended December 31, 1998; expected volatility factors of 98% and 90% for
the year ended December 31, 1999 and 1998, respectively; and an expected option
term ranging from five to ten years for the year ended December 31, 1999 and 2
to 10 years for the year ended December 31, 1998.
Compensation expense of approximately $364,572 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 $4,317, $118,671 and
$174,420 was recognized as of December 31, 1999 ,1998 and 1997, respectively.
9. Commitments and Contingencies
Operating Leases
At December 31, 1999, the Company was committed under operating leases for
equipment and facilities with initial terms of more than one year. The original
facility lease agreement provides for escalation of the lease payments over the
term of the lease, however, rent expense was recognized using the straight-line
method. Accrued rent related to this facility lease was $232,870 as of December
31, 1998. On June 1, 1999, the facility lease was amended to provide for equal
lease payments for the remainder of the lease. Based on this lease amendment the
remaining portion of the accrued rent was written off in 1999 and subsequent
lease payments have been expensed as incurred. Rental expense related to
operating leases was $609,644 in 1999, $729,573 in 1998, and $740,772 in 1997.
Minimum lease payments under the noncancelable leases are as follows:
2000 $ 434,834
2001 827
2002 207
2003 -
2004 -
=========
Total minimum obligations $ 435,868
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:
2000 $ 23,116
2001 -
2002 -
2003 -
2004 -
--------
Total minimum obligations 23,116
Less: current portion 23,116
========
$ 0
34
<PAGE>
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 through 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, 1999, 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, 1999, if such employees under contract were to be terminated by the
Company without cause (as defined), the Company's liability would be
approximately $485,000.
At December 31, 1999 the Company had an outstanding purchase commitment of
$403,000 for certain printer parts.
10. Income Taxes
Deferred tax assets and liabilities are as follows:
December 31,
1999 1998
---- ----
Gross deferred tax assets:
Carryforwards:
Research tax credits $ 1,589,000 $ 1,484,000
Net operating losses 19,455,000 17,667,000
Other assets 603,000 1,114,000
----------- -----------
Gross deferred tax assets 21,647,000 20,265,000
----------- -----------
Gross deferred tax liabilities (31,000) (29,000)
----------- -----------
Valuation allowance (21,616,000) (20,236,000)
----------- -----------
$ - $ -
=========== ===========
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, 1999, the Company had approximately $50 million of federal net
operating loss carryforwards that expire in years 2008 through 2019,
approximately $49 million of state net operating loss carryforwards that expire
in years 2000 through 2004 and research and development tax credit carryforwards
of approximately $1.6 million that expire in years 2009 through 2019.
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, 1999 the approximate
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 common stock issued upon conversion of Series B Stock and
Series C Stock , or exercise of outstanding warrants and the timing of such
conversions (see notes 6 and 7), the transactions may result in further annual
limitations of net operating loss carryforwards.
11. 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.
35
<PAGE>
The estimated fair value of the Company's debt (see note 5) approximates its
carrying value as of December 31, 1999 and December 31, 1998.
12. Related Party Transactions
The advisor for the Company's private financing in 1999 was granted a warrant to
purchase commons stock. A fund managed by the advisor purchased stock and was
awarded a warrant to purchase stock as part of the 1999 private financing. The
founder, chairman, and Chief Executive Officer of the advisor is a nominee for
director of the Company. Several corporate officers, directors and a partner of
the advisor purchased Series C Stock, at the same price as purchased by other
investors (see note 7), as part of the 1999 private placement financing.
A member of the Company's Board of Directors is a partner with the Company's
primary legal firm.
36
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors and Executive Officers of the Company may
found under the caption "Election of Directors" in the Proxy Statement for the
2000 Annual Meeting to be held on May 22, 2000 (the "Proxy Statement"). Such
information is incorporated herein by reference.
Item 11. Executive Compensation
The information in the Proxy Statement set forth under the captions "Executive
Compensation" and "Compensation of Directors" in the Proxy Statement for the
2000 Annual Meeting to be held on May 22, 2000 (the "Proxy Statement") is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Principal Shareholders and Key
Personnel" in the Proxy Statement for the 2000 Annual Meeting to be held on May
22, 2000 (the "Proxy Statement") is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" in the Proxy
Statement for the 2000 Annual Meeting to be held on May 22, 2000 (the "Proxy
Statement") is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report on Form
10-K are incorporated herein by reference.
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.
(b) Reports on Form 8-K
On December 17, 1999, Accent Color filed a current report on Form 8-K to
report under item 5 its successful completion of the private placement of
33,589 shares of its Series C Preferred Stock.
(c) Exhibit Listing
Exhibit
No. Exhibit
- --- -------
3.1 Restated Certificate of Incorporation of the Company, as amended
(1).
3.2 Certificate of Amendment to Restated Certificate of Incorporation,
dated Nov. 29, 1999 (1).
3.3 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock (1).
37
<PAGE>
3.4 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock, dated Nov. 29, 1999 (1).
3.5 Bylaws of the Company, as amended on Dec. 29, 1996(2).
4.1 Letter agreement with holders of Series B Convertible Preferred
Stock modifying rights to conform with Series C Convertible
Preferred Stock (1).
10.1 Product Development and Distribution Agreement dated February 16,
1996 between the Company and Xerox Corporation (3).
10.2 Letter of Understanding dated July 2, 1996 between the Company and
Xerox Corporation supplementing the Product Development and
Distribution Agreement (3).
10.3 Amendment to Product Development and Distribution Agreement between
the Company and Xerox Corporation dated Feb. 29, 1996 (3).
10.4 Product Purchase Agreement dated Apr. 16, 1996 between the Company
and International Business Machines Corporation (3).
10.5 Letter Agreement supplementing Product Purchase Agreement between
the Company and International Business Machines Corporation dated
Feb. 23, 1996 (3).
10.6 OEM Supply Agreement dated Jan. 8, 1996 between the Company and
Spectra, Inc.(3) .
10.7 Amendment No. 1 to the OEM Supply Agreement dated July 12, 1996
between the Company and Spectra, Inc. (3).
10.8 Lease Agreement dated Feb. 16, 1996 between the Company and John
Hancock Mutual Life Insurance company (3).
10.9 Accent Color Sciences, Inc. 1995 Stock Incentive Plan, as amended
through Nov. 29, 1999 (1).
10.10 Employment Agreement dated Dec. 14, 1993 between the Company and
Norman L. Milliard (3).
10.11 Amendment No. 1 to Employment Agreement between the Company and
Norman L. Milliard dated as of Jan. 1, 1995 (3).
10.12 Form of nondisclosure agreement between the Company and its
employees (3).
10.13 Form of Registration Rights Agreement Relating to Warrants issued in
connection with Series IV Debentures of the Company (3).
10.14 Form of Registration Rights Agreement Relating to sale of Common
Stock of the Company (3).
10.15 Registration Rights Agreement Relating to Warrants issued by the
Company to Xerox Corporation (3).
10.16 Form of Registration Rights Agreement Relating to Warrants issued
pursuant to sale of Interim Notes (3).
10.17 Form of Securities Purchase Agreement dated as of Jan. 9, 1998 (4).
10.18 Form of Warrant issued in connection with the 1998 Private Placement
(4).
10.19 Form of Registration Rights Agreement dated as of Jan. 9, 1998 (4).
10.20 Employment Agreement dated Apr. 15, 1998 between Charles E. Buchheit
and the Company (5).
10.21 Loan Agreement between the Company and International Business
Machines Corporation (6).
10.22 Promissory Note between the Company and International Business
Machines Corporation (6).
38
<PAGE>
10.23 Security Agreement between the Company and International Business
Machines Corporation (6).
10.24 Purchase Agreement for Series A Convertible Subordinated Notes,
Common Stock and Warrants, dated Sept. 7, 1999 (7).
10.25 Form of Series A Convertible Subordinated Note (7).
10.26 Form of Warrant to Purchase Common Stock of Accent Color Sciences,
Inc. (7).
10.27 Registration Rights Agreement, dated Sept. 7, 1999 (7).
10.28 Third Amendment to the Apr. 11, 1996 Product Purchase Agreement
Between International Business Machines Corporation and Accent Color
Sciences, Inc. (7).
10.29 Letter dated July 21, 1999 containing variations to agreement
between Accent Color and SET dated Aug. 27, 1997 (7).
10.30 Form of Securities Purchase Agreement dated as of Nov. 30, 1999 (8).
10.31 Form of Warrant Agreement dated as of Nov. 30, 1999 (8).
10.32 Form of Registration Rights Agreement dated as of Nov. 30, 1999 (8).
23 Consent of PricewaterhouseCoopers LLP.
24 Power of attorney pursuant to which this Form 10-K is signed by our
directors.
(1) incorporated by reference from Accent Color's registration statement filed
as Form S -3/A on Form S-2 (file no. 333-30130) on Feb. 24, 2000.
(2) incorporated by reference from Accent Color's registration statement on Form
S-3 (file no. 333-43467) filed on Dec. 30, 1997, as amended.
(3) incorporated by reference from Accent Color's registration statement (file
no. 333-14043) on Form S-1 filed on Oct. 15, 1996, as amended.
(4) incorporated by reference from Accent Color's registration statement (file
no. 333-45321) on Form S-3 filed on Jan. 30, 1998, as amended.
(5) incorporated by reference from Accent Color's quarterly report on Form 10-Q
for the quarter ended June 30, 1998.
(6) incorporated by reference from Accent Color's quarterly report on Form 10-Q
for the quarter ended Sept. 30, 1998.
(7) incorporated by reference from Accent Color's quarterly report on Form 10-Q
for the period ended Sept. 30, 1999.
(8) incorporated by reference from Accent Color's registration statement (file
no. 333-30130) on Form S-3 filed on Feb. 11, 2000.
39
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of East
Hartford, State of Connecticut, on March 30, 2000.
ACCENT COLOR SCIENCES, INC.
By____________________________________
Charles E. Buchheit
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on March 30, 2000.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Charles E. Buchheit
- -------------------------------
Charles E. Buchheit President, Chief Executive Officer March 30, 2000
(Principal Executive Officer)
/s/Ronald C. Derby
- -------------------------------
Ronald C. Derby Acting Chief Financial Officer March 30, 2000
(Principal Financial and Accounting Officer)
*
- -------------------------------
Joseph T. Brophy Director March 30, 2000
*
- -------------------------------
Richard J. Coburn Director March 30, 2000
*
Norman L. Millard Director March 30, 2000
*
- -------------------------------
Willard F. Pinney, Jr. Director March 30, 2000
*
- -------------------------------
Robert H. Steele Director March 30, 2000
*By: Charles E. Buchheit
- -------------------------------
Charles E. Buchheit
Attorney-in-fact
</TABLE>
40
Exhibit 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement of Post-Effective Amendment No.
1 on Form S-8 (No. 333-29407), the Registration Statement on Form S-3 (No.
333-45321), and the Registration Statement on Form S-3 (No. 333-66779) of Accent
Color Sciences, Inc. of our report dated March 22, 2000 appearing on page 21 of
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- --------------------------------------
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 29, 2000
- --------------
41
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby appoint
and constitute Richard J. Coburn and Charles E. Buchheit and each of them as his
agent and attorney-in-fact to execute in his name, place and stead (whether on
behalf of the undersigned individually or as an officer or director of Accent
Color Sciences, Inc. or otherwise) the annual report on Form 10-K for the year
ended December 31, 1999 of Accent Color Sciences, Inc. and any and all
amendments thereto and to file such Form 10-K and any such amendment thereto
with the Securities and Exchange Commission. Each of the said attorneys shall
have the power to act hereunder with or without the other.
IN WITNESS WHEREOF, the undersigned have executed this instrument this 27th day
of March, 2000.
/s/ Joseph T. Brophy /s/ Robert H. Steele
- ----------------------------------- ------------------------------------
Joseph T. Brophy Robert H. Steele
/s/ Richard J. Coburn /s/ Norman L.Milliard
- ----------------------------------- ------------------------------------
Richard J. Coburn Norman L. Milliard
/s/ Willard F. Pinney, Jr.
- ----------------------------------- ------------------------------------
Willard F. Pinney, Jr.
42
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,573,764
<SECURITIES> 0
<RECEIVABLES> 64,544
<ALLOWANCES> 0
<INVENTORY> 1,863,850
<CURRENT-ASSETS> 4,613,420
<PP&E> 4,064,337
<DEPRECIATION> 2,908,148
<TOTAL-ASSETS> 5,848,055
<CURRENT-LIABILITIES> 5,294,481
<BONDS> 0
4,313,367
0
<COMMON> 49,147,942
<OTHER-SE> (53,298,443)
<TOTAL-LIABILITY-AND-EQUITY> 5,848,055
<SALES> 7,343,675
<TOTAL-REVENUES> 7,343,675
<CGS> 6,863,864
<TOTAL-COSTS> 6,863,864
<OTHER-EXPENSES> 2,850,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 450,611
<INCOME-PRETAX> (5,683,479)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,683,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,683,479)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
