UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 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 July 31, 1999 was 17,765,865.
ACCENT COLOR SCIENCES, INC.
FORM 10-Q
For The Quarterly Period Ended June 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 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
ACCENT COLOR SCIENCES, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 436,878 $ 1,048,425
Accounts receivable 948,910 1,321,782
Inventories (Note 3) 1,967,646 2,269,016
Prepaid expenses and other
assets 151,638 216,564
------------ -----------
Total current assets 3,505,072 4,855,787
Fixed assets, net 1,546,585 1,933,043
Other assets, net 71,181 71,575
------------ -----------
Total assets $ 5,122,838 $ 6,860,405
============ ===========
Liabilities and Shareholders'
Equity (Deficit)
Current liabilities:
Obligations under capital
leases $ 52,043 $ 64,014
Accounts payable 1,197,034 961,626
Accrued expenses 1,008,757 588,966
Customer advances and deposits 355,000 -
Deferred revenue 714,000 595,000
----------- ----------
Total current liabilities 3,326,834 2,209,606
Obligation under capital leases - 23,116
Long-term debt, net of discount
(Note 6) 2,301,695 2,235,593
Other long-term liabilities 534,822 601,759
----------- ----------
Total non-current
liabilities 2,836,517 2,860,468
----------- ----------
Total liabilities 6,163,351 5,070,074
----------- ----------
Mandatorily redeemable convertible
preferred stock, no par value,
500,000 shares authorized,
2,028 and 0 issued and
outstanding (Note 5) 2,943,230 -
----------- ----------
Shareholders' equity (deficit):
Preferred stock, no par value,
500,000 shares authorized,
0 and 3,500 issued and
outstanding (Note 4) - 3,049,691
Common stock, no par value,
35,000,000 shares authorized,
17,385,832 and 12,841,881
shares issued and outstanding 46,477,065 46,355,604
Accumulated deficit (50,460,808) (47,614,964)
----------- ----------
Total shareholders'
equity (deficit) (3,983,743) 1,790,331
----------- ----------
Total liabilities and
shareholders'
equity (deficit) $ 5,122,838 $ 6,860,405
=========== ===========
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
CONSENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
Revenue (Note 2) $ 2,604,408 $ 421,517 $ 4,853,905 $ 1,338,250
Costs and expenses:
Costs of production 2,361,626 1,149,207 4,505,932 2,777,255
Research and
development 661,741 1,049,155 1,613,571 2,528,102
Marketing, general and
administrative 670,080 1,210,130 1,393,321 2,119,472
---------- ---------- ---------- ----------
3,693,447 3,408,492 7,512,824 7,424,829
---------- ---------- ---------- ----------
Other (income) expense:
Interest expense 96,969 7,310 194,783 15,093
Interest income (2,595) (39,681) (7,858) (71,696)
---------- ---------- ---------- ----------
94,374 (32,371) 186,925 (56,603)
---------- ---------- ---------- ----------
Net loss (1,183,413) (2,954,604) (2,845,844) (6,029,976)
Imputed dividend on
preferred stock (Note 4) - - - (920,000)
Accretion to redemption
value on mandatorily
redeemable convertible
preferred stock (Note 5) (1,176,154) - (1,176,154) -
---------- ---------- ---------- ----------
Net loss applicable to
common stock $(2,359,567)$(2,954,604) $(4,021,998) $(6,949,976)
========== ========== ========== ==========
Net loss (basic & diluted)
per common share $ (.15)$ (.24) $ (.28) $ (.57)
========== ========== ========== ==========
Weighted average common
shares outstanding 15,264,934 12,198,836 14,516,187 12,096,580
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
1999 1998
Cash flows from operating --------- ---------
activities:
Net loss before accretion to redemption
value on mandatorily redeemable
convertible preferred stock and
imputed dividend $(2,845,844) $(6,029,976)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 584,839 578,690
Loss on disposal of fixed assets 90,893 13,453
Changes in assets and
liabilities:
Accounts receivable 372,872 (238,589)
Inventories 301,370 (1,305,134)
Prepaid expenses and other assets 64,926 130,090
Accounts payable and accrued expenses 655,199 (285,219)
Customer advances and deposits 355,000 (85,600)
Deferred revenue 119,000 784,600
Other long-term liabilities (66,937) 73,375
---------- ----------
Net cash used in operating activities (368,682) (6,364,310)
Cash flows from investing activities:
Proceeds from sale of fixed assets 48,163 -
Purchases of fixed assets (270,941) (126,592)
Cost of patents - (17,825)
---------- ----------
Net cash used in investing activities (222,778) (144,417)
Cash flows from financing activities:
Payment of capital lease obligations (35,087) (32,012)
Proceeds from exercise of options & warrants - 44,625
Deferred offering costs 15,000 -
Net proceeds from issuance of preferred
stock through offerings and conversion
of debt - 3,921,038
---------- ----------
Net cash provided by (used in)
financing activities (20,087) 3,933,651
---------- ----------
Net decrease in cash
and cash equivalents (611,547) (2,575,076)
Cash and cash equivalents at
beginning of period 1,048,425 4,005,563
---------- ----------
Cash and cash equivalents at
end of period $ 436,878 $ 1,430,487
========== ==========
The accompanying notes are an integral part of these financial statements.
ACCENT COLOR SCIENCES, INC.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Preferred Stock Accumulated
Shares Amount Shares Amount Deficit Total
---------- ---------- ---------- ---------- ---------- ----------
December 31, 1997 11,989,855 $45,114,633 - $ - $(37,845,111) $7,269,522
Proceeds from
sale - - 4,500 3,921,037 - 3,921,037
Exercise of
options 37,500 44,625 - - - 44,625
Conversion of
Series B Preferred
Stock 814,526 871,346 (1,000) (871,346) - -
Warrants issued
with debt - 325,000 - - - 325,000
Net loss before
imputed dividend - - - - (9,769,853) (9,769,853)
---------- ---------- --------- ---------- ----------- ----------
December 31, 1998 12,841,881 46,355,604 3,500 3,049,691 (47,614,964) 1,790,331
Conversion of
Series B Preferred
Stock 4,483,951 1,282,615 (1,472) (1,282,615) - -
Reclassification
of Series B Preferred
Stock to Mandatorily
Redeemable Convertible
Preferred Stock
(Notes 4 & 5) - - (2,028) (1,767,076) - (1,767,076)
Accretion to
redemption
amount (Note 5) - (1,176,154) - - - (1,176,154)
Common stock
issued to
service provider 60,000 15,000 - - - 15,000
Net loss - - - - (2,845,844) (2,845,844)
---------- ---------- --------- ---------- ----------- ----------
June 30, 1999
(unaudited) 17,385,832 $46,477,065 - $ - $(50,460,808) $ (3,983,743)
========== ========== ========= ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
1. Interim Condensed Financial Statements
In the opinion of the Company, the accompanying unaudited
condensed financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly its financial position as of June 30, 1999 and the
results of operations and cash flows for the six months ended
June 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 on
Form 10-K for the year ended December 31, 1998.
The results of operations for the six months ended June 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
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. 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 primary
OEM customer. The Company will continue to defer revenue on
shipments to its second OEM customer until systems are in
production and are past the warranty period or until the Company
has adequate warranty history with that product.
3. Inventories
Inventories consist of the following:
June 30, December 31,
1999 1998
Raw materials and components $ 686,894 $1,185,529
Work-in-process 397,207 299,271
Finished goods 883,545 784,216
---------- ----------
$1,967,646 $2,269,016
========== ==========
4. Shareholders' Equity
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 June 30, 1999, 2,472 shares of Series B
Stock had been converted into 5,298,477 shares of common stock at
an average conversion price of $0.58 per share.
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.
The Company elected in April, following discussions with the
holders of the Series B Stock, not to pay the liquidated damages
and let their right to pre-empt redemption expire. As a result
of the expiration of the Company's right to prevent demand
redemption during the second quarter of 1999, the Company was
required to reclassify the outstanding shares of the Series B
Stock into Mandatorily Redeemable Convertible Preferred Stock
("Redeemable Preferred Stock") as of June 30, 1999 (See Note 5).
As of the date of this report no holder of Series B Stock has
redeemed its stock for cash.
5. Mandatorily Redeemable Convertible Preferred Stock
On April 6, 1999, the Company elected to forgo its right to
prevent demand redemption on its outstanding shares of Series B
Preferred Stock (see Note 4 above), 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. As of June 30, 1999, there were 7,402,874 shares
of common stock reserved for issuance pursuant to the
conversion of the remaining 2,028 shares of Redeemable
Preferred Stock issued and outstanding. The features
and rights of the Redeemable Preferred Stock remain the same as
those explained in Note 4 above, 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Quarter Ended June 30, 1999 compared to Quarter Ended June 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. 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. 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 June 30, 1999 the Company had
deferred revenue of $714,000 related to Truecolor Systems
shipped. Total net sales were $2,604,000 for the three months
ended June 30, 1999 compared to $422,000 for the three months
ended June 30, 1998. Printer sales represented 84% of total net
sales for the three months ended June 30, 1999 while sales of
consumables and spare parts represented 16%.
Printers. Printer sales were $2,187,000 for the three months
ended June 30, 1999 compared to $194,000 for the three months
ended June 30, 1998. During the second quarter of 1998, revenue
from printer shipments was deferred until the end of the warranty
period, resulting in revenue recognition on a total of 3 systems
of which 2 were Truecolor System upgrades. Sales for the second
quarter of 1999 reflected the shipment of 16 new systems and 2
system upgrades.
Consumables and Spare Parts Sales. Consumables and spare parts
sales were $417,000 for the three months ended June 30, 1999
compared to $227,000 for the three months ended June 30, 1998.
This increase of 84% was due to a larger printer installed base
in the second quarter of 1999 compared to 1998 resulting in the
consumption of more ink and spare parts.
Costs of Production. Costs of production increased 106% from
$1,149,000 for the three months ended June 30, 1998 to $2,362,000
for the three months ended June 30, 1999. This increase was
attributed to the cost of goods sold related to increased
sales of printers and consumables totaling $1,683,000 and was
offset by a decrease in payroll costs of $368,000 and reductions
in other production related costs totaling $104,000.
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 $1,049,000 for the three
months ended June 30, 1998 to $662,000 for the three months ended
June 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 three major factors:
(i) a reduction in payroll and related costs due to a reduction
in personnel, (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 materials, supplies and
design costs associated with research and development activities.
Marketing, General and Administrative Expenses. Marketing,
general and administrative expenses decreased 45% from $1,210,000
for the three months ended June 30, 1998 to $670,000 for the
three months ended June 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
$67,000 resulting from the reclassification of service related
costs. Service costs, consisting primarily of customer technical
support, were classified as costs of production during 1998,
while in 1999, such costs are now classified as marketing,
general and administrative.
Interest Expense and Other (Income) Expense. Interest expense
increased from $7,000 for the three months ended June 30, 1998 to
$97,000 for the three months ended June 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 $40,000 for
the three months ended June 30, 1998 to $3,000 for the three
months ended June 30, 1999. This decrease in interest income was
attributed to a greater amount of cash available for investment
in the second quarter of 1998 due to the private equity financing
completed in January 1998.
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998.
Total Net Sales. Total net sales were $4,854,000 for the six
months ended June 30, 1999 compared to $1,338,000 for the six
months ended June 30, 1998. Printer sales represented 82% of
total net sales for the six months ended June 30, 1999 while
sales of consumables and spare parts represented 18%.
Printers. Printer sales were $3,996,000 for the six months ended
June 30, 1999 compared to $687,000 for the six months ended June
30, 1998. In the first six months of 1998, revenue from printer
shipments was deferred until the end of the warranty period,
resulting in revenue recognition on a total of 8 systems of which
2 were Truecolor System upgrades. Sales for the first six months
of 1999 reflected the shipment of 30 new systems and 3 system
upgrades.
Consumables and Spare Parts Sales. Consumables and spare parts
sales were $858,000 for the six months ended June 30, 1999
compared to $651,000 for the six months ended June 30, 1998. This
increase of 32% was due to a larger printer installed base in the
first half of 1999 compared to the first half of 1998 resulting
in the consumption of more ink and spare parts.
Costs of Production. Costs of production increased 62% from
$2,777,000 for the six months ended June 30, 1998 to $4,506,000
for the six months ended June 30, 1999. This increase was
attributed to the cost of goods sold related to increased
sales of printers and consumables totaling $2,702,000 and was
offset by a decrease in payroll costs of $752,000 and reductions
in other production related costs totaling $143,000.
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 36% from $2,528,000 for the six
months ended June 30, 1998 to $1,614,000 for the six months ended
June 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, (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 materials, supplies and equipment
associated with research and development activities.
Marketing, General and Administrative Expenses. Marketing,
general and administrative expenses decreased 34% from $2,119,000
for the six months ended June 30, 1998 to $1,393,000 for the six
months ended June 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 $190,000
reflecting higher payroll related costs necessary to maintain
skilled service technicians in addition to the reclassification
of service related costs. Service costs, consisting primarily of
customer technical support, were classified as costs of
production during 1998, while in 1999, such costs are now
classified as marketing, general and administrative.
Interest Expense and Other (Income) Expense. Interest expense
increased from $15,000 for the six months ended June 30, 1998 to
$195,000 for the six months ended June 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 $72,000 for the six months ended
June 30, 1998 to $8,000 for the six months ended June 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.
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 $6,364,000 in cash during the first
half of 1998 compared to $369,000 in the first half 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 $127,000 for the six months
ended June 30, 1998 to $271,000 for the six months ended June 30,
1999. Capital expenditures during the first half of 1999
primarily reflected acquisitions of equipment to support the
Company's value engineering activities. The Company has no
significant capital expenditure commitments at June 30, 1999.
As of June 30, 1999, the Company's primary source of liquidity
was cash and cash equivalents totaling $437,000. 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 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 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.
In July, the Company received firm orders from IBM and Xerox
exceeding $10 million, which are deliverable in the year 2000.
These orders 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
capital needs. However, there can be no assurance that equity or
debt financing will be available on terms acceptable to the
Company or 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.
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 ("IT")
department began addressing the Y2K issue in 1996 as we evaluated
the purchase of new software applications and hardware systems.
During the fourth quarter of 1996, IT researched methodologies to
manage the Y2K program and established a process that matched the
resources available within the Company. The initial step in the
process was to organize a team of both IT and non-IT employees
and explain their roles in the process. The second step of the
process was to establish an inventory of all potential areas
where the Y2K problem could exist. The inventory included; server
hardware (BIOS), server operating systems, server application
software, network device hardware and software, PC hardware
(BIOS), PC operating systems, PC application software, phone
system, security system, the Company's products (hardware BIOS
and software), and our vendors. Each area listed in the inventory
was assigned to a team member to evaluate the current Y2K
compliance and where required, recommend a solution correct a Y2K
problem. A database was created for all items to track the status
to completion. All IT systems, except the phone system, have been
updated to be Y2K complaint. The phone system will be updated in
third quarter, 1999. Throughout the third quarter of 1999, we
will continue to test the compliance of primary software
applications in our test environment to confirm that vendor
statements are consistent with our test results.
Accent Color Sciences Products. The Company designs and
manufactures high-speed color printing systems for integration
with digital high-speed black on white printers. The Company has
tested and confirmed that the printer's BIOS are compliant where
required. Software that operates on the printer has been tested
and is confirmed to be Y2K compliant. Future software releases
will include as part of the software regression test a
reconfirmation that the software remains Y2K compliant.
Third Party Relationships. The Company's business operations are
heavily dependent on third party materials suppliers. The Company
is working with all key external partners to identify and to
mitigate the potential risks of Y2K. The failure of external
parties to resolve their own Y2K issues, in a timely manner,
could result in a material financial risk to the Company. As part
of the overall Y2K program, the Company is actively communicating
with third parties through correspondence. Because the Company's
Y2K compliance is dependant on the timely Y2K compliance of third
parties, there can be no assurance that the Company's efforts
alone will resolve all Y2K issues.
Contingency Plans. The Company has not conducted its assessment
of the reasonably likely worst case scenario of systems or
product failures and their related consequences. It is expected
that the planned testing of IT systems and the completed testing
of the Company's product testing will greatly reduce the need for
substantial contingency planning. Contingency planning, if
required, would begin in third quarter, 1999.
Costs to Address Year 2000 Issues. The Y2K costs incurred to date
have not been material. Most software applications, BIOS and
operating system upgrades to Y2K compliance were incorporated
into the Company's standard licensing agreements. As part of the
contingency planning effort we will examine additional potential
Y2K costs, where applicable.
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 on Form 10-K for 1998 as
filed with the Securities and Exchange Commission. Any forward-
looking information contained herein should be considered in
light of these factors.
Part II. Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial data schedule
(b) Reports filed on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
June 30, 1999.
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 August 13, 1999 By /s/ Charles E. Buchheit
------------------------
Charles E. Buchheit
President and Chief Executive Officer
By /s/ Tracy L. Hubert
------------------------
Tracy L. Hubert
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)