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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NUMBER 0-29048
ACCENT COLOR SCIENCES, INC.
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-1380314
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 CONNECTICUT BOULEVARD, EAST HARTFORD, CONNECTICUT 06108
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (860) 610-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares outstanding of the registrant's common stock as of October
31, 1999 was 18,865,865.
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ACCENT COLOR SCIENCES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 16
Item 2. Changes in Securities and Use of Proceeds............................. 16
Item 3. Defaults Upon Senior Securities....................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................... 16
Item 5. Other Information..................................................... 16
Item 6. Exhibits and Reports on Form 8-K...................................... 16
Signatures ...................................................................... 17
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ACCENT COLOR SCIENCES, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,456,989 $ 1,048,425
Accounts receivable 282,100 1,321,782
Inventories (Note 3) 1,990,620 2,269,016
Prepaid expenses and other assets 217,992 216,564
------------ ------------
Total current assets 3,947,701 4,855,787
Fixed assets, net 1,316,689 1,933,043
Other assets, net 70,983 71,575
------------ ------------
Total assets $ 5,335,373 $ 6,860,405
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obligations under capital leases $ 35,916 $ 64,014
Accounts payable 982,151 961,626
Accrued expenses 778,249 588,966
Customer advances and deposits 920,000 --
Deferred revenue 874,000 595,000
Note payable, net of discount (Note 4) 486,000 --
------------ ------------
Total current liabilities 4,076,316 2,209,606
------------ ------------
Obligation under capital leases -- 23,116
Long-term debt, net of discount (Note 6) 2,334,746 2,235,593
Other long-term liabilities 510,115 601,759
------------ ------------
Total non-current liabilities 2,844,861 2,860,468
------------ ------------
Total liabilities 6,921,177 5,070,074
------------ ------------
Mandatorily redeemable convertible preferred stock,
no par value, 500,000 shares authorized, 1,828 and 3,500
issued and outstanding (Note 5) 2,372,953 3,097,368
------------ ------------
Shareholders' equity (deficit):
Common stock, no par value, 35,000,000
shares authorized, 18,865,862 and 12,841,881
shares issued and outstanding 47,630,061 46,307,927
Accumulated deficit (51,588,818) (47,614,964)
------------ ------------
Total shareholders' equity (deficit) (3,958,757) (1,307,037)
------------ ------------
Total liabilities, mandatorily redeemable convertible
preferred stock and shareholders' equity (deficit) $ 5,335,373 $ 6,860,405
============ ============
The accompanying notes are an integral part of these financial statements.
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ACCENT COLOR SCIENCES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue (Note 2) $ 1,475,004 $ 664,689 $ 6,328,909 $ 2,002,939
Costs and expenses:
Costs of production 1,318,789 861,495 5,824,721 3,638,749
Research and development 538,612 895,614 2,152,184 3,423,716
Marketing, general and administrative 631,321 885,268 2,024,641 3,004,740
------------ ------------ ------------ ------------
2,488,722 2,642,377 10,001,546 10,067,205
------------ ------------ ------------ ------------
Other (income) expense:
Interest expense 118,040 81,740 312,823 96,833
Interest income (3,748) (31,427) (11,606) (103,122)
------------ ------------ ------------ ------------
114,292 50,313 301,217 (6,289)
------------ ------------ ------------ ------------
Net loss (1,128,010) (2,028,001) (3,973,854) (8,057,977)
Imputed dividend on preferred stock (Note 5) -- -- -- (920,000)
------------ ------------ ------------ ------------
Accretion to redemption value on mandatorily
redeemable convertible preferred stock (Note 5) 396,009 -- (780,145) --
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (732,001) $ (2,028,001) $ (4,753,999) $ (8,977,977)
============ ============ ============ ============
Net loss (basic & diluted) per common share $ (.04) $ (.16) $ (.30) $ (.74)
============ ============ ============ ============
Weighted average common shares
Outstanding 18,021,641 12,440,308 15,688,027 12,212,415
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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ACCENT COLOR SCIENCES, INC.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before accretion to redemption value on
mandatorily redeemable convertible preferred
stock
And imputed dividend $(3,973,854) $(8,057,977)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 825,858 893,588
Loss on disposal of fixed assets 91,313 15,706
Changes in assets and liabilities:
Accounts receivable 1,039,682 (564,587)
Inventories 278,396 (2,005,978)
Prepaid expenses and other assets (1,428) 201,717
Accounts payable and accrued expenses 209,808 (417,918)
Customer advances and deposits 920,000 (85,600)
Deferred revenue 279,000 1,784,600
Other long-term liabilities (91,644) 56,071
----------- -----------
Net cash used in operating activities (422,869) (8,180,378)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 49,195 6,875
Purchases of fixed assets (234,267) (138,374)
Cost of patents -- (17,825)
----------- -----------
Net cash used in investing activities (185,072) (149,324)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (51,214) (44,984)
Proceeds from issuance of debt 470,000 --
Proceeds from issuance of warrants 80,000 325,000
Net proceeds from issuance of common stock 502,719 --
Proceeds from exercise of options & warrants -- 44,625
Common stock issued to service provider 15,000 --
Net proceeds from issuance of preferred
stock through offerings and conversion of debt -- 3,921,038
Increase in long term debt -- 2,175,000
----------- -----------
Net cash provided by financing activities 1,016,505 6,420,679
----------- -----------
Net increase (decrease) in cash and cash
equivalents 408,564 (1,909,023)
Cash and cash equivalents at beginning of
period 1,048,425 4,005,563
----------- -----------
Cash and cash equivalents at end of period $ 1,456,989 $ 2,096,540
=========== ===========
The accompanying notes are an integral part of these financial statements.
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ACCENT COLOR SCIENCES, INC.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
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 before imputed dividend (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 4,863,984 1,504,560 -- 1,504,560
Accretion to redemption
Amount (Note 5) -- (780,145) -- (780,145)
Common stock issued to
service provider 60,000 15,000 -- 15,000
Warrants issued with debt -- 80,000 -- 80,000
Proceeds from sale (Note 4) 1,100,000 502,719 -- 502,719
Net loss (3,973,854) (3,973,854)
---------- ------------ ------------ ------------
SEPTEMBER 30, 1999 (UNAUDITED) 18,865,865 $ 47,630,061 $(51,588,818) $ (3,958,757)
========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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ACCENT COLOR SCIENCES, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. INTERIM CONDENSED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly its financial position as of September
30, 1999 and the results of operations and cash flows for the nine months ended
September 30, 1999 and 1998. The December 31, 1998 balance sheet has been
derived from the Company's audited financial statements at that date. These
interim condensed financial statements should be read in conjunction with
Management's Discussion and Analysis and financial statements included in the
Company's Annual Report for the year ended December 31, 1998.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these financial
statements are as follows:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
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.
The Company recognizes revenue when it establishes sufficient warranty
experience to estimate future warranty costs or, for new products, when the
warranty period has expired. Prior to October 1, 1998, the Company did not have
adequate information and experience to estimate potential returns, allowances
and warranty costs, and accordingly, revenue resulting from Truecolor Systems
was deferred until the end of the warranty period. During the fourth quarter of
1998, the Company concluded that it had adequate warranty information and
experience to begin recognizing revenue upon the shipment of systems to its
original OEM customer. Revenue is generally recognized upon product shipment for
spare parts and consumables.
3. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1999 1998
---- ----
Raw materials and components $ 496,735 $1,185,529
Work-in-process 519,805 299,271
Finished goods 974,080 784,216
---------- ----------
$1,990,620 $2,269,016
========== ==========
4. INTERIM FINANCING
On September 7, 1999, the Company received $502,719 from the sale of 1,100,000
shares of common stock. 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 $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. On the same day, the Company also
sold $550,000 worth of Series A Convertible Subordinated Notes. In conjunction
with the sale of the Notes the Company issued 275,000 warrants to purchase
common stock. It also issued 275,000 warrants to purchase common stock
contingent upon the Noteholders converting their 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 Notes accrue interest at the rate of 7% per year.
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ACCENT COLOR SCIENCES, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
Pursuant to provisions in certain warrant agreements, anti-dilution adjustments
are to be made to the exercise price and/or the number of common shares
purchasable under the warrant in certain circumstances. During 1999, adjustments
were made to previously issued warrants that will increase the number
outstanding by 40,770 giving a total of 3,093,377 warrants outstanding on
September 30, 1999. The range of exercise prices for the warrants is from $0.50
to $6.66. The range on June 30, 1999 was from $1.00 to $7.04. From June 30, 1999
to September 30, 1999, 825,000 new warrants have been issued.
5. 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. The
warrants issued are exercisable into 300,000 shares of common stock with an
exercise price of $2.75 and an expiration date of January 9, 2003. Additionally,
warrants exercisable into 115,385 shares of common stock with an exercise price
of $2.50 and an expiration date of January 9, 2003 were issued to the placement
agent for services provided. In connection with the sale of the units, the
Company agreed to register the common stock issuable upon the conversion of the
Series B Stock and the exercise of the warrants.
The Series B Stock, no par value per share, is convertible into such number of
shares of common stock as is determined by dividing the stated value ($1,000) of
each share of Series B Stock (as such value is increased by an annual premium of
6%) by the then current conversion price of the Series B Stock (which is
determined, generally, by reference to 85% of the average of the closing market
price of the common stock during the five consecutive trading days immediately
preceding the date of determination) subject to certain restrictions and
adjustments. The Series B Stock has voting rights as defined in the Company's
Certificate of Incorporation, bears no dividends and ranks senior to the
Company's common stock. In the event of any voluntary or involuntary liquidation
of the Company, the Series B holders shall be entitled to a liquidation
preference equal to the stated value of the stock plus the accrued premium
through the date of final distribution. Upon occurrence of specific events, as
defined in the agreement, the holder may redeem the Series B Stock for cash. The
Company, however, has the unilateral right to pre-empt the right of holders of
the Series B Stock from demanding cash redemption of their shares by paying to
them within five days of the specific event, as liquidated damages, 25% of the
face amount of the Series B Stock then outstanding. Such liquidated damages can
be paid in cash or shares at the Company's election. The Company also has
optional redemption rights.
The Company initially reserved 6,300,000 shares of common stock for issuance
pursuant to the conversion of the Series B Stock. This number of shares
represented an estimate based on 200% of the number of common shares that would
have been issuable upon conversion with an exercise price of $1.875 per share
(4,800,000) plus 1,500,000 shares issuable under the terms of the Certificate of
Designation in the event of certain failures by the Company to comply with
various provisions thereof, including maintaining its common stock listing on
the NASDAQ Stock Market. In addition, 415,385 shares of common stock, subject to
adjustments in accordance with the terms of each warrant, were reserved for
issuance pursuant to the exercise of the warrants described above.
On August 10, 1998 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 of September 30, 1999, 2,672 shares of Series B Stock had been converted into
5,678,510 shares of common stock at an average conversion price of $0.58 per
share.
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ACCENT COLOR SCIENCES, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
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 Preferred Stock , which
resulted in the reclassification of 2,028 shares of the Series B Stock at a
carrying value of $1,767,076 into Mandatorily Redeemable Convertible Preferred
Stock. An additional $1,176,154 was accreted to Redeemable Preferred Stock to
reflect the increase in redemption value from April 6, 1999 to June 30, 1999 in
accordance with the redemption price specified in the Company's Certificate of
Incorporation. Such accretion was charged against common stock and also
increased the net loss applicable to common shareholders.
From June 30, 1999 to September 30, 1999 a decrease of $396,009 in the
redemption value of the Series B Preferred Stock was credited to common stock
and also decreased the net loss applicable to common shareholders. As of
September 30, 1999 there were 7,022,841 shares of common stock reserved for
issuance pursuant to the conversion of the 1,828 shares of Redeemable Preferred
Stock issued and outstanding. The features and rights of the Redeemable
Preferred Stock remain the same as those explained with the exception that the
remaining holders may demand redemption of their outstanding shares at any point
in time.
6. MODIFICATION OF DEBT TERMS
On August 2, 1999, the Company and IBM Corporation entered into an agreement to
defer the interest payments owed by ACS to IBM arising out of the original Loan
Agreement between the two companies dated July 21, 1998. This modification
provides that the interest payments of approximately $63,000 due on the first
day of each quarter during 1999 be deferred until December 31, 2000. Beginning
with the interest payment due on January 1, 2000, the Company, however, is to
make interest payments on the first day of each quarter during 2000 as required
by the original Loan Agreement.
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ACCENT COLOR SCIENCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998.
Total Net Sales. The Company currently sells its Truecolor system with a 90-day
warranty, which starts when the printer is installed at the end-user customer
site. The Company recognizes revenue when it has established sufficient warranty
experience to estimate future warranty costs or, for new products, when the
warranty period has expired. 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, concluded that
it had adequate warranty experience to begin recognizing revenue upon shipment
of printers to its primary OEM customer. As of September 30, 1999 the Company
had deferred revenue of $874,000 related to Truecolor Systems shipped. Total net
sales were $1,475,000 for the three months ended September 30, 1999 compared to
$665,000 for the three months ended September 30, 1998. Printer sales
represented 61% of total net sales for the three months ended September 30, 1999
while sales of consumables and spare parts represented 39%.
Backlog. At September 30, 1999, the Company has a backlog of 57 systems. The
Company has a contractual commitment for an additional 50 systems.
Printers. Printer sales were $903,000 for the three months ended September 30,
1999 compared to $140,000 for the three months ended September 30, 1998. During
the third quarter of 1998, revenue from printer shipments was deferred until the
end of the warranty period, resulting in revenue recognition on a total of 1
system. Revenue for the third quarter of 1999 reflected the shipment of 7 new
systems.
Consumables and Spare Parts Sales. Consumables and spare parts sales were
$572,000 for the three months ended September 30, 1999 compared to $525,000 for
the three months ended September 30, 1998. This increase of 9% was due to a
larger installed printer base in the third quarter of 1999 compared to 1998
resulting in the consumption of more ink and spare parts.
Costs of Production. Costs of production increased 53% from $861,000 for the
three months ended September 30, 1998 to $1,319,000 for the three months ended
September 30, 1999. This increase was attributed to the cost of goods sold
related to increased sales of printers and consumables totaling $673,000 and was
offset by a decrease in other production related costs totaling $215,000.
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 40% from $896,000 for the three
months ended September 30, 1998 to $539,000 for the three months ended September
30, 1999 as the Company continued to direct 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 a reduction
in payroll and related costs due to a reduction in personnel.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses decreased 29% from $885,000 for the three months ended
September 30, 1998 to $631,000 for the three months ended September 30, 1999.
This decrease was primarily due to a reduction in payroll related costs due to
headcount reductions in addition to a decrease in general, professional and
consulting costs. These items were offset by an increase of $31,000 reflecting
higher payroll related costs necessary to maintain skilled service technicians.
Interest Expense and Other (Income) Expense. Interest expense increased from
$82,000 for the three months ended September 30, 1998 to $118,000 for the three
months ended September 30, 1999. This increase was attributed to interest and
debt discount amortization on the IBM loan, which was obtained by the Company in
July 1998. Interest income decreased from $31,000 for the three months ended
September 30, 1998 to $4,000 for the three months
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ACCENT COLOR SCIENCES, INC.
ended September 30, 1999. This decrease in interest income was attributed to a
greater amount of cash available for investment in the third quarter of 1998 due
to the private equity financing completed in January 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998.
Total Net Sales. Total net sales were $6,329,000 for the nine months ended
September 30, 1999 compared to $2,003,000 for the nine months ended September
30, 1998. Printer sales represented 77% of total net sales for the nine months
ended September 30, 1999 while sales of consumables and spare parts represented
23%.
Printers. Printer sales were $4,899,000 for the nine months ended September 30,
1999 compared to $827,000 for the nine months ended September 30, 1998. In the
first nine months of 1998, revenue from printer shipments was deferred until the
end of the warranty period, resulting in revenue recognition on a total of 9
systems of which 2 were Truecolor System upgrades. Revenue for the first nine
months of 1999 reflected the shipment of 37 new systems and 3 system upgrades.
Consumables and Spare Parts Sales. Consumables and spare parts sales were
$1,430,000 for the nine months ended September 30, 1999 compared to $1,176,000
for the nine months ended September 30, 1998. This increase of 22% was due to a
larger installed printer base in the first nine months of 1999 compared to the
first nine months of 1998 resulting in the consumption of more ink and spare
parts.
Costs of Production. Costs of production increased 60% from $3,639,000 for the
nine months ended September 30, 1998 to $5,825,000 for the nine months ended
September 30, 1999. This increase was attributed to the cost of goods sold
related to increased sales of printers and consumables totaling $3,375,000 and
was offset by a decrease in other production related costs totaling $1,189,000.
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 37% from $3,424,000 for the nine
months ended September 30, 1998 to $2,152,000 for the nine months ended
September 30, 1999 as the Company continued to direct 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 the following: (i) a reduction in payroll and related costs due to the
reduction in personnel and (ii) a decrease in materials, supplies and equipment
associated with research and development activities.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses decreased 33% from $3,005,000 for the nine months ended
September 30, 1998 to $2,025,000 for the nine months ended September 30, 1999.
This decrease was primarily due to a reduction in payroll related costs due to
headcount reductions and the funding of the Company's Marketing personnel by IBM
in addition to a decrease in general, professional and consulting costs. These
items were offset by an increase of $150,000 reflecting higher payroll related
costs necessary to maintain skilled service technicians.
Interest Expense and Other (Income) Expense. Interest expense increased from
$97,000 for the nine months ended September 30, 1998 to $313,000 for the nine
months ended September 30, 1999. This increase was attributed to interest and
debt discount amortization on the IBM loan, which was obtained by the Company in
July 1998. Interest income decreased from $103,000 for the nine months ended
September 30, 1998 to 12,000 for the nine months ended September 30, 1999. This
decrease in interest income was attributed to a greater amount of cash available
for investment in the first quarter of 1998 due to the private equity financing
completed in January 1998.
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ACCENT COLOR SCIENCES, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for funding has continued from period to period as it has
increased its marketing, sales and service efforts, continued its research and
development activities for the enhancement of Truecolor systems and increased
production of Truecolor systems. To date, the Company has financed its
operations through customer payments, borrowings and the sale of equity
securities.
Operating activities consumed $8.2 million in cash during the first nine months
of 1998 compared to $423,000 in the first nine months of 1999. This decrease in
cash utilized was primarily attributed to a decrease in the net loss of the
Company, a decrease in inventory purchases, an increase in payments from
customers and a slowdown in the payment of accounts payable.
Capital expenditures increased from $138,000 for the nine months ended September
30, 1998 to $234,000 for the nine months ended September 30, 1999. Capital
expenditures during the nine months of 1999 primarily reflected acquisitions of
equipment to support the Company's value engineering activities. The Company has
no significant capital expenditure commitments at September 30, 1999.
As of September 30, 1999, the Company's primary source of liquidity was cash and
cash equivalents totaling $1,457,000. Based on the current operating plan of the
Company, the primary requirements for cash through the remainder of 1999 will be
to fund operating losses, commercial production of the enhanced Truecolor
System, marketing and sales activities and the further development and
enhancement of the Company's products. The Company's currently planned research
and development activities are focused on value engineering to improve system
profit margin and developing higher resolution ink jet printing and other
enhancements to the Truecolor Systems.
On September 7, 1999, the Company received $502,719 from the sale of 1,100,000
shares of common stock. In conjunction with this sale of common stock the
Company issued 550,000 warrants to purchase common 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. On the same day, the Company also
sold $550,000 worth of Series A Convertible Subordinated Notes. In conjunction
with the sale of the Notes the Company issued 275,000 warrants to purchase
common stock. It also issued 275,000 warrants to purchase common stock
contingent upon the Noteholders converting their 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 Notes accrue interest at the rate of 7% per year.
On August 2, 1999, the Company and IBM entered into an agreement to defer the
interest payments owed by ACS to IBM arising out of the original Loan Agreement
between the two companies dated July 21, 1998. The agreement provides that the
interest payments due on the first day of each quarter during 1999 be deferred
until December 31, 2000. Beginning with the interest payment due on January 1,
2000, the Company, however, is to make interest payments on the first day of
each quarter during 2000 as required by the original Loan Agreement.
In July, the Company received orders and contractual commitments from IBM and
Xerox exceeding $10 million, which are deliverable in the year 2000. These
orders and commitments are subject to certain conditions and cancellation rights
in the event of default by the Company. In addition, our value engineering plan
is focused on improving product profit margin and is anticipated to help improve
profits. We, however, expect revenues to be significantly lower for the second
half of 1999 due to the year 2000 transition concerns of our OEM customers.
While the Company continues to control its expenses to align them with revenues,
the Company expects that quarterly net losses will continue through at least the
first half of 2000. As a result, we will need to secure additional financing to
carry us over until the year 2000 shipments provide adequate cash flow to fund
operations. We have engaged an investment banking firm with whom the Company has
had a long relationship to assist in meeting our
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ACCENT COLOR SCIENCES, INC.
capital needs. They were instrumental in obtaining the interim financing.
However, there can be no assurance that additional equity or debt financing will
be available on terms acceptable to the Company or available at all. 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
curtail or discontinue its operations.
The Company expects shipments of its products to be severely curtailed in the
fourth quarter of 1999 reflecting year 2000 concerns on the part of its
customers and users of its products. During this slowdown, the Company is
concentrating on completing its value engineering efforts and expects shipments
of its Truecolor systems in response to its current backlog to resume later in
the first quarter of 2000. Results of operations for the fourth quarter of 1999
and the first quarter may be expected to reflect this slowdown.
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ACCENT COLOR SCIENCES, INC.
YEAR 2000
Year 2000 Compliance. The information presented below related to year 2000
compliance contains forward-looking statements that are subject to risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed below and elsewhere in this Form 10-Q regarding Year 2000
compliance.
Year 2000 Issue Defined. The Year 2000 (Y2K) issue is the result of certain
computer hardware, operating system software and software application programs
having been developed using two digits rather than four digits to define a year.
For example the clock circuit in the hardware may be incapable of holding a date
beyond the year 1999, some operating systems recognize a date using "00" as the
year 1900 rather than 2000 and certain applications may have limited date
processing capabilities. These problems could result in the failure of major
systems or miscalculations, which could have material impact on companies
through business interruption or shutdown, financial loss, damage to reputation,
and legal liability to third parties.
State of Readiness. The Company's Information Technology department (IT) began
addressing the Y2K issue in 1996 as we evaluated the purchase of new software
applications and hardware systems. During the fourth quarter of 1996 IT
researched methodologies to manage the Y2K program and established a process
that matched the resources available within the Company. The initial step in the
process was to organize a team of both IT and non-IT employees and explain their
roles in the process. The second step of the process was to establish an
inventory of all potential areas where the Y2K problem could exist. The
inventory included; server hardware (BIOS), server operating systems, server
application software, network device hardware and software, PC hardware (BIOS),
PC operating systems, PC application software, phone system, security system,
the Company's products (hardware BIOS and software), and our vendors. Each area
listed in the inventory was assigned to a team member to evaluate the current
Y2K compliance and where required, recommend a solution to correct a Y2K
problem. A database was created for all items to track the status to completion.
All IT systems have been updated to be Y2K complaint. The phone system was
updated to be Y2K compliant in third quarter 1999. During second and third
quarters of 1999, we have tested the compliance of primary software applications
in our test environment to confirm that vendor statements are consistent with
our test results.
Accent Color Sciences, Inc. Products. The Company designs and manufactures
high-speed color printing systems for integration with digital high-speed black
on white printers. The Company has tested and confirmed that the printer's BIOS
are Y2K compliant where required. Software that operates on the printer has been
tested and is confirmed to be Y2K compliant. Future software releases will
include as part of the software regression test a reconfirmation that the
software remains Y2K compliant.
Third Party Relationships. The Company's business operations are heavily
dependent on third party materials suppliers. The Company is working with all
key external partners to identify and attempt to mitigate the potential risks of
Y2K. The failure of external parties to resolve their own Y2K issues, in a
timely manner, could result in a material financial risk to the Company. As part
of the overall Y2K program, the Company is actively communicating with third
parties through correspondence. Because the Company's Y2K compliance is
dependant on the timely Y2K compliance of third parties, there can be no
assurance that the Company's efforts alone will resolve all Y2K issues.
Contingency Plans. The Company's testing of its IT systems and software indicate
that computer-based systems do not require additional Y2K activity. Where
practicable, contingency plans for utilities, communications, security and
facilities are in place. We cannot give any assurance that we will be able to
develop contingency plans that will address all issues that may arise in the
year 2000.
Costs to Address Year 2000 Issues. The Y2K costs incurred to date have not been
material. Most software applications, BIOS and operating system upgrades to Y2K
compliance were incorporated into the Company's standard licensing agreements.
As part of the contingency planning effort we will examine additional potential
Y2K costs, where applicable.
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ACCENT COLOR SCIENCES, INC.
FORWARD-LOOKING STATEMENTS
The foregoing statements and analysis contain forward-looking statements and
information including information with respect to the Company's plans and
strategy for its business. Such forward-looking statements are made pursuant to
the "safe harbor" provisions of Section 21E of the Securities Exchange Act of
1934, as amended, which were enacted as part of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements contained in the
foregoing analysis include marketing, revenue and expenditure expectations, and
other strategies and anticipated events. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, (i) the level of customer acceptance of the
Company's products; (ii) the ability of the Company to raise capital sufficient
to support its business plan; (iii) the rights of customers of the Company to
modify or cancel orders under the terms of related product purchase agreements,
as amended; (iv) the dependence of the Company on third party suppliers for
certain key technology elements; (v) the dependence of the Company on third
party marketing, distribution and support, including the control by the
Company's OEM customers over the timing of the introduction of its products and
the need for the Company to complete and satisfy extensive testing requirements
of its products on a timely basis; (vi) the potential fluctuations in the
Company's quarterly results of operations; and (vii) the ability of the Company
to identify and remediate significant internal Year 2000 problems and ensure
that corrective action, if necessary, is being taken by the Company's customers
and suppliers. Further information on factors that could cause actual results to
differ from those anticipated is detailed in the Company's Annual Report for
1998 as filed with the Securities and Exchange Commission. Any forward-looking
information contained herein should be considered in light of these factors.
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ACCENT COLOR SCIENCES, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On September 7, 1999, the company issued 1,100,000 shares of common stock;
$550,000 worth of Series A Convertible Subordinated Notes; 550,000 warrants to
purchase stock at $0.50 to the common stock purchasers; 275,000 warrants to
purchase stock at $0.50 to the Note purchasers; 275,000 warrants to purchase
stock at $0.50 to the Note purchasers, if they convert their notes. The Notes
accrue interest at the rate of 7% per year. Net proceeds to the Company were
$1,020,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - Purchase Agreement Series A Convertible Subordinated Notes,
Common Stock and Warrants
Exhibit 10.2 - Series A Convertible Subordinated Note
Exhibit 10.3 - Warrant to Purchase Common Stock of Accent Color Sciences, Inc.
Exhibit 10.4 - Registration Rights Agreement
Exhibit 10.5 - Third Amendment to the April 11, 1996 Product Purchase Agreement
between International Business Machines Corporation and Accent Color Sciences,
Inc.
Exhibit 10.6 - Variations to Agreement between ACS and SET dated 27th August
1997
Exhibit 27 - Financial data schedule
(b) Reports filed on Form 8-K
On July 15, 1999, Accent Color Sciences, Inc. (the "Company"), announced that it
has received a commitment for orders totaling in excess of $5 million for
calendar year 2000 from IBM Corporation ("IBM"). The Company issued a press
release entitled "Accent Color Sciences Receives Substantial IBM Orders for
2000" on July 15 1999.
On July 22, 1999, Accent Color Sciences, Inc. (the "Company"), announced that it
has received a commitment for orders totaling in excess of $5 million for
calendar year 2000 from SET International, a Xerox Company ("SET"). This
commitment, in conjunction with the commitment for orders already received by
IBM Corporation provides Accent with commitments for orders totaling in excess
of $10 million dollars for calendar year 2000. The Company issued a press
release entitled "Accent Color Sciences Receives Substantial Orders from SET
International, A Xerox Company" on July 22, 1999.
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ACCENT COLOR SCIENCES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCENT COLOR SCIENCES, INC.
Dated November 15, 1999 By
-------------------------------------------
Charles E. Buchheit
President and Chief Executive Officer
and Principal Financial and Accounting Officer
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