UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NUMBER 1 TO THE QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 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 April 30, 1999 was 14,693,434. The Registrant is amending its quarterly report on Form 10-Q for the quarter ended March 31, 1999 to include amendments to Item 1. ACCENT COLOR SCIENCES, INC. FORM 10-Q/A For The Quarterly Period Ended March 31, 1999 INDEX Part I. Financial Information Item 1. Financial Statements 3 Signatures 14 ACCENT COLOR SCIENCES, INC. CONDENSED BALANCE SHEETS March 31, December 31, 1999 1998 (unaudited) Assets Current assets: Cash and cash equivalents $ 918,369 $ 1,048,425 Accounts receivable 849,328 1,321,782 Inventories (Note 3) 2,660,489 2,269,016 Prepaid expenses and other assets 209,677 216,564 --------- --------- Total current assets 4,637,863 4,855,787 Fixed assets, net 1,852,161 1,933,043 Other assets, net 71,378 71,575 --------- --------- Total assets $ 6,561,402 $ 6,860,405 ========= ========= Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit) Current liabilities: Obligations under capital leases $ 64,231 $ 64,014 Accounts payable 1,856,391 961,626 Accrued expenses 792,572 588,966 Customer advances and deposits 260,000 - Deferred revenue 595,000 595,000 --------- --------- Total current liabilities 3,568,194 2,209,606 Obligation under capital leases 5,737 23,116 Long-term debt, net of discount 2,268,644 2,235,593 (Note 5) Other long-term liabilities 590,927 601,759 --------- --------- Total non-current liabilities 2,865,308 2,860,468 --------- --------- Total liabilities 6,433,502 5,070,074 --------- --------- Mandatorily redeemable convertible preferred stock, no par value, 500,000 shares authorized, 2,735 and 3,500 issued and outstanding (Note 4) 2,383,116 3,097,368 --------- --------- Shareholders' equity: Common stock, no par value, 35,000,000 shares authorized, 14,614,314 and 12,841,881 shares issued and outstanding 47,022,179 46,307,927 Accumulated deficit (49,277,395) (47,614,964) ---------- ---------- Total shareholders'equity(deficit)( 2,255,216) (1,307,037) ---------- ---------- Total liabilities, mandatorily redeemable convertible preferred stock and shareholders' equity $ 6,561,402 $ 6,860,405 ========= ========== The accompanying notes are an integral part of these financial statements. ACCENT COLOR SCIENCES, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended March 31, 1999 1998 Revenue (Note 2) $ 2,249,498 $ 916,733 Costs and expenses: Costs of production 2,144,306 1,628,047 Research and development 951,830 1,478,947 Marketing, general and administrative 723,241 909,342 3,819,377 4,016,336 Other (income) expense: Interest expense 97,814 7,783 Interest income (5,262) (32,014) 92,552 (24,231) Net loss (1,662,431) (3,075,372) Imputed dividend on mandatorily redeemable convertible preferred stock (Note 4) - (920,000) Net loss applicable to common stock $(1,662,431) $(3,995,372) Net loss (basic & diluted) per common share $ (.12) $ (.33) Weighted average common shares Outstanding 13,759,120 11,993,188 The accompanying notes are an integral part of these financial statements. ACCENT COLOR SCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, 1999 1998 Cash flows from operating activities: Net loss before imputed dividend $(1,662,431) $(3,075,372) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 305,963 288,321 (Gain) loss on disposal of fixed assets (300) 13,453 Changes in assets and liabilities: Accounts receivable 472,454 (183,218) Inventories (391,473) (572,976) Prepaid expenses and other assets 6,887 47,512 Accounts payable and accrued expenses 1,098,371 167,122 Customer advances and deposits 260,000 (47,280) Deferred revenue - 102,800 Other long-term liabilities (10,832) 49,357 Net cash provided by (used in) operating activities 78,639 (3,210,281) Cash flows from investing activities: Purchases of fixed assets (191,533) (9,982) Net cash used in investing activities (191,533) (9,982) Cash flows from financing activities: Payment of capital lease obligations (17,162) (15,747) Proceeds from exercise of options & warrants - 44,625 Net proceeds from issuance of preferred stock through offerings and conversion of debt - 3,921,038 Net cash provided by (used in) financing activities (17,162) 3,949,916 Net increase (decrease) in cash and cash equivalents (130,056) 729,653 Cash and cash equivalents at beginning of period 1,048,425 4,005,563 Cash and cash equivalents at end of period $ 918,369 $ 4,753,216 The accompanying notes are an integral part of these financial statements. 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 Exercise of options 37,500 44,625 - 44,625 Imputed dividend on mandatorily redeemable convertible preferred stock - (920,000) - (920,000) Conversion of Series B 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 Series B Preferred Stock 1,772,433 714,252 - 714,252 Net loss - - (1,662,431) (1,662,431) March 31, 1999 14,614,314 $47,022,179 $(49,277,395) $(2,255,216) (unaudited) The accompanying notes are an integral part of these financial statements. ACCENT COLOR SCIENCES, INC. NOTES TO CONDENSED 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 March 31, 1999 and the results of operations and cash flows for the three months ended March 31, 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 three months ended March 31, 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: March 31, December 31, 1999 1998 Raw materials and components $ 1,541,274 $ 1,185,529 Work-in-process 329,980 299,271 Finished goods 789,235 784,216 $ 2,660,489 $ 2,269,016 4. 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. The warrants issued are exercisable into 300,000 shares of common stock with an exercise price of $2.75 and an expiration date of January 9, 2003. Additionally, warrants exercisable into 115,385 shares of common stock with an exercise price of $2.50 and an expiration date of January 9, 2003 were issued to the placement agent for services provided. The deemed fair market value of these warrants has been reflected as an increase to common shareholders' equity and a reduction of mandatorily redeemable convertible preferred stock. In connection with the sale of the units, the Company agreed to register the common stock issuable upon the conversion of the Series B Stock and the execution of the warrants. The Series B Stock, no par value per share, is convertible into such number of shares of common stock as is determined by dividing the stated value ($1,000) of each share of Series B Stock (as such value is increased by an annual premium of 6%) by the then current conversion price of the Series B Stock (which is determined, generally, by reference to 85% of the average of the closing market price of the common stock during the five consecutive trading days immediately preceding the date of determination) subject to certain restrictions and adjustments. The Series B Stock has voting rights as defined in the Company's Certificate of Incorporation, bears no dividends and ranks senior to the Company's common stock and Series A Preferred Stock. In the event of any voluntary or involuntary liquidation of the Company, the Series B holders shall be entitled to a liquidation preference equal to the stated value of the stock plus the accrued premium through the date of final distribution. Upon occurrence of specific events, as defined in the agreement, the holder may redeem the Series B Stock for cash. In certain, but not all, redemption events, the Company has the unilateral right to pre-empt the right of holders of the Series B Stock from demanding cash redemption of their shares by paying to them within five days of the specific event, as liquidated damages, 25% of the face amount of the Series B Stock then outstanding. Such liquidated damages can be paid in cash or shares at the Company's election. Management does not consider any of the events that would trigger mandatory redemption to be probable events, has determined a reasonable estimate of when the circumstances that would result in the shares becoming mandatorily redeemable cannot be made, and therefore at March 31, 1999 does not accrue for accretion. The Company initially reserved 6,300,000 shares of common stock for issuance pursuant to the conversion of the Series B Stock. This number of shares represented an estimate based on 200% of the number of common shares that would have been issuable upon conversion with an exercise price of $1.875 per share (4,800,000) plus 1,500,000 shares issuable under the terms of the Certificate of Designation in the event of certain failures by the Company to comply with various provisions thereof, including maintaining its common stock listing on the NASDAQ Stock Market. In addition, 415,385 shares of common stock, subject to adjustments in accordance with the terms of each warrant, were reserved for issuance pursuant to the exercise of the warrants described above. On August 10, 1998 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. As of March 31, 1999, there were 10,114,392 shares of common stock reserved for issuance pursuant to the conversion of the remaining 2,735 shares of Series B Stock issued and outstanding. The actual number of shares issuable upon conversion could be materially less or more than this number depending on factors that cannot be predicted by the Company. The number of shares issuable upon conversion is dependent on the market price of the common stock at the time of the conversion. As of March 31, 1999, 1,765 shares of Series B Stock had been converted into 2,586,959 shares of common stock at an average conversion price of $.79 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 Convertible Preferred Stock has the right, beginning March 31, 1999, to require the Company to redeem such holder's shares of Series B Preferred Stock, in cash or, at the Company's option, in common stock, at a redemption price specified in the Company's Certificate of Incorporation. The Company is not aware that any such holder intends to require such redemption, but cannot predict what each holder may elect to require. In the event a holder of Series B Preferred Stock were to demand redemption at a time when the Company's resources are insufficient to redeem such holder's shares, the rights of such holder would include the right to receive interest at the annual rate of 24% on the defaulted payment amount. In the course of a review of a Securities Act filing, the staff of the Securities and Exchange Commission ("the Commission") raised an issue regarding the classification of the Company's mandatorily redeemable convertible preferred stock. Due to certain of mandatory redemption features, the carrying value of the preferred shares, which were previously presented as a component of shareholders' equity (deficit), has been reclassified as temporary equity, outside of shareholders' equity (deficit) at March 31,1999. The reclassification of the preferred shares for thematter described above had no effect on the Company's net loss,total assets or total liabilities. The Company's redeemable equity and total shareholders' equity (deficit) at March 31,1999, as previously reported and reclassified, are as follows: March 31, 1999 Redeemable equity - previously reported $ - Adjustment related to the presentation of the mandatorily redeemable convertible preferred shares as redeemable 2,383,116 ---------- As restated $ 2,383,116 ========== Shareholders' equity (deficit) - previously reported $ 127,900 Adjustment related to the presentation of the mandatorily redeemable convertible preferred shares as redeemable (2,383,116) ---------- As restated $(2,255,216) ========== 5. Subsequent Event On April 30, 1999, in an effort to retain key personnel, the Board of Directors approved an increase in the number of shares of common stock available under the Company's 1995 Stock Incentive Plan from 2,000,000 shares to 4,000,000 shares and the issuance of 1,942,500 options under the Plan to active employees and directors of Accent Color Sciences at an exercise price of $.22 per share, the fair market value as of that date. This amendment is, and indirectly substantially all of such options are, subject to shareholder approval in accordance with the terms of the Plan. 4. 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. The warrants issued are exercisable into 300,000 shares of common stock with an exercise price of $2.75 and an expiration date of January 9, 2003. Additionally, warrants exercisable into 115,385 shares of common stock with an exercise price of $2.50 and an expiration date of January 9, 2003 were issued to the placement agent for services provided. In connection with the sale of the units, the Company agreed to register the common stock issuable upon the conversion of the Series B Stock and the execution of the warrants. The Series B Stock, no par value per share, is convertible into such number of shares of common stock as is determined by dividing the stated value ($1,000) of each share of Series B Stock (as such value is increased by an annual premium of 6%) by the then current conversion price of the Series B Stock (which is determined, generally, by reference to 85% of the average of the closing market price of the common stock during the five consecutive trading days immediately preceding the date of determination) subject to certain restrictions and adjustments. The Series B Stock has voting rights as defined in the Company's Certificate of Incorporation, bears no dividends and ranks senior to the Company's common stock and Series A Preferred Stock. In the event of any voluntary or involuntary liquidation of the Company, the Series B holders shall be entitled to a liquidation preference equal to the stated value of the stock plus the accrued premium through the date of final distribution. Upon occurrence of specific events, as defined in the agreement, the holder may redeem the Series B Stock for cash or shares at the option of the Company. The Company also has optional redemption rights. The Company initially reserved 6,300,000 shares of common stock for issuance pursuant to the conversion of the Series B Stock. This number of shares represented an estimate based on 200% of the number of common shares that would have been issuable upon conversion with an exercise price of $1.875 per share (4,800,000) plus 1,500,000 shares issuable under the terms of the Certificate of Designation in the event of certain failures by the Company to comply with various provisions thereof, including maintaining its common stock listing on the NASDAQ Stock Market. In addition, 415,385 shares of common stock, subject to adjustments in accordance with the terms of each warrant, were reserved for issuance pursuant to the exercise of the warrants described above. On August 10, 1998 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. As of March 31, 1999, there were 10,114,392 shares of common stock reserved for issuance pursuant to the conversion of the remaining 2,735 shares of Series B Stock issued and outstanding. The actual number of shares issuable upon conversion could be materially less or more than this number depending on factors that cannot be predicted by the Company. The number of shares issuable upon conversion is dependent on the market price of the common stock at the time of the conversion. As of March 31, 1999, 1,765 shares of Series B Stock had been converted into 2,586,959 shares of common stock at an average conversion price of $.79 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 Convertible Preferred Stock has the right, beginning March 31, 1999, to require the Company to redeem such holder's shares of Series B Preferred Stock, in cash or, at the Company's option, in common stock, at a redemption price specified in the Company's Certificate of Incorporation. The Company is not aware that any such holder intends to require such redemption, but cannot predict what eachholder may elect to require. In the event a holder of Series B Preferred Stock were to demand redemption at a time when the Company's resources are insufficient to redeem such holder's shares, the rights of such holder would include the right to receive interest at the annual rate of 24% on the defaulted payment amount. 5. Subsequent Event On April 30, 1999, in an effort to retain key personnel, the Board of Directors approved an increase in the number of shares of common stock available under the Company's 1995 Stock Incentive Plan from 2,000,000 shares to 4,000,000 shares and the issuance of options respecting 1,942,500 shares under the Plan to active employees and directors of Accent Color Sciences at an exercise price of $.22 per share, the fair market value as of that date. This amendment is, and indirectly substantially all of such options are, subject to shareholder approval in accordance with the terms of the Plan. 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 September 17, 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)