-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HhbHvWaxCGZIMCTXUpA0fItdJpJlf4ivsxNFTmx1EKQSegTTXJYB5BmZYy+E9OkJ 5SgyQ1liWbE7zgLeB3lZFA== 0000914039-99-000516.txt : 19991117 0000914039-99-000516.hdr.sgml : 19991117 ACCESSION NUMBER: 0000914039-99-000516 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCENT COLOR SCIENCES INC CENTRAL INDEX KEY: 0000921898 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 061380314 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29048 FILM NUMBER: 99754701 BUSINESS ADDRESS: STREET 1: 800 CONNECTICUT BLVD CITY: EAST HARTFORD STATE: CT ZIP: 06103 BUSINESS PHONE: 8606104000 MAIL ADDRESS: STREET 1: 800 CONNECTICUT BLVD CITY: EAST HARTFORD STATE: CT ZIP: 06108 10-Q 1 10-Q 1 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. 2 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
2 3 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. 3 4 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. 4 5 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. 6 6 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. 6 7 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. 7 8 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. 8 9 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. 9 10 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 10 11 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. 11 12 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 12 13 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. 13 14 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. 14 15 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. 15 16 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. 16 17 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 17 EX-10.1 2 EX-10.1 1 EXHIBIT 10.1 PURCHASE AGREEMENT SERIES A CONVERTIBLE SUBORDINATED NOTES, COMMON STOCK AND WARRANTS ------------------------------------------ This Series A Convertible Subordinated Note, Common Stock and Warrant Purchase Agreement, dated as of September 7, 1999, is by and between ACCENT COLOR SCIENCES, INC., a Connecticut corporation (the "Company"), each of the investors listed on Schedule A attached hereto, who are each referred to individually as an "Investor," and who are collectively referred to as the "Investors," and Pennsylvania Merchant Group (the "Placement Agent"). INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual agreements stated below, the parties agree as follows: 1. Purchase and Sale of Series A Convertible Subordinated Notes and Warrants. 1.1 Sale and Issuance of Series A Convertible Subordinated Notes, Common Stock and Warrants. Subject to the terms and conditions of this Agreement, (i) each Investor agrees, severally, to purchase at the Closing (as hereafter defined), and the Company agrees to sell and issue to each Investor at such closing Series A Convertible Subordinated Notes of the Company in the form attached hereto as Exhibit I in the principal amount (in denominations of $1,000) (individually, a "Note" and collectively the "Notes") and/or Common Stock (the "Shares") set forth opposite each Investor's name on Schedule A hereto and (ii) the Company agrees to deliver for the benefit of each Investor a warrant in the form attached hereto as Exhibit II to purchase the number of shares of the Company's Common Stock set forth opposite such Investor's name on Schedule A hereto (individually a "Warrant" and collectively the "Warrants"). The Notes, the Shares and the Warrants are hereinafter sometimes referred to as the "Securities". 1.2 Closing. The purchase and sale of the Securities shall take place at the offices of Murtha, Cullina, Richter and Pinney LLP, CityPlace I, 185 Asylum Street, Hartford, Connecticut at 10:00 a.m. on September 7, 1999, or at such other time and place as the Company and the Investors mutually agree upon (which time and place are designated as the "Closing"); provided, however, that if acceptable to the Company and the Investors, the Closing may be effected by facsimile transmission of executed copies of the documents delivered at the Closing and payment of the purchase price specified in Section 1.1 and by sending original copies of the documents delivered at the Closing by reputable overnight delivery service, postage or delivery charges prepaid, for delivery to the parties at their addresses stated on the signature page of this Agreement by the third business day following the Closing. At the Closing the Company shall deliver to or for the benefit of each Investor, a Note substantially in the form of Exhibit I and/or Share certificate in the principal amount or for the number of Shares set forth opposite such Investor's name on Schedule A hereto and a Warrant in the form attached hereto as Exhibit II to purchase that number of shares of the Company's Common Stock set forth opposite such Investor's name on Schedule A hereto against payment of the purchase price therefor by check, wire transfer, or any combination thereof, to which such Investor is entitled. 2 2. Representations and Warranties of the Company. Knowing that each Investor is relying thereon, the Company hereby represents and warrants to each Investor that: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Connecticut and has all requisite corporate power and authority to carry on its business as now conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2 Capitalization and Voting Rights. The authorized capital of the Company will consist immediately prior to the Closing, of 35,000,000 shares of common stock, without par value ("Common Stock"), of which 17,765,865 shares are issued and outstanding, and 500,000 shares of Preferred Stock, without par value, of which 1,828 shares designated as Series B Convertible Preferred Stock, stated value $1,000.00 per share ("Series B Preferred Stock"), are issued and outstanding. Such shares of currently outstanding Series B Preferred Stock are now redeemable in cash or convertible into shares of Common Stock in accordance with the terms thereof, at the election of the holder. The outstanding shares of Common Stock and Series B Preferred Stock are all duly and validly authorized and issued, fully paid and nonassessable. 2.3 Options and Warrants. There are outstanding options to purchase 1,335,250 shares of Common Stock and warrants to purchase 2,227,607 shares of Common Stock. The Board of Directors of the Company has granted options to purchase an additional 1,842,500 shares of Common Stock conditional on shareholder approval of a 2,000,000 share increase in shares of Common Stock available under the Company's 1995 Stock Incentive Plan out of which such shares would then be reserved. 2.4 Except as otherwise set forth above and in the Company's filings with the Securities and Exchange Commission, there are no other authorized, issued or outstanding securities of the Company and there is no outstanding subscription, option, convertible or exchangeable security, preemptive right, warrant, call or agreement (other than this Agreement) relating to the Common Stock or any other obligation or commitment to issue any shares of capital stock of the Company. 2.5 Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization and execution and delivery of this Agreement, the Securities and the Registration Rights Agreement in the form attached hereto as Exhibit III (the "Registration Rights Agreement") the performance of all obligations of the Company hereunder and thereunder, and the authorization and issuance (or reservation for issuance) of the Shares and the Common Stock issuable upon conversion of the Notes and exercise of the Warrants, has been taken or will be taken prior to the Closings. This Agreement, the Securities and the Registration Rights Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. -2- 3 2.6 Valid Issuance of Common Stock. The Shares and the Common Stock issuable upon conversion of the Notes and exercise of the Warrants have been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Company's Certificate of Incorporation, the Securities will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, the Notes and the Warrants and under applicable state and U.S. federal securities laws. 2.7 Offering. Subject in part to the truth and accuracy of the Investors' representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Securities as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.8 Use of Proceeds. The net proceeds received by the Company from the sale of the Securities shall be used by the Company for working capital purposes. 2.9 Filed Information. The Company has delivered to each Investor a true and complete copy of its latest Annual Report on Form 10-K and its latest Quarterly Report on Form 10-Q. All reports, registrations, documents, statements and other filings required to be made by the Company with the Securities and Exchange Commission ("SEC") have been timely filed. None of the such materials contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company is in discussion with the staff concerning the proper reporting for financial statement purposes of its Series B Preferred Stock in response to an assertion by the staff of the SEC that such stock should be reported in the "mezzanine" section of the balance sheet as of the end of 1998 and the quarter ended March 31, 1999 in the same manner as such stock is recorded on the balance sheet of the Company as of June 30, 1999. In the event that the Company is unsuccessful in persuading the staff of the SEC of the correctness of the Company's position, then the Company may be required to amend its Annual Report on Form 10-K for the year ended December 31, 1998 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 in order to revise the recording of its Series B Preferred Stock in a manner similar to the manner in which such stock is recorded on the balance sheet of the Company as filed with its Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. Such Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 may also be amended to reflect certain allocations between the first and second quarters of 1999 as a result of any amendment to the report for the quarter ended March 31, 1999. 3. Representations and Warranties of the Investors. Each Investor hereby represents and warrants severally (and not jointly) that: 3.1 Authorization. The Investor has full power and authority to enter into this Agreement, and such Agreement constitutes such Investor's valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting -3 4 enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. All actions on the part of the Investors necessary for the authorization, execution and delivery of this Agreement and performance of all the obligations contemplated hereby, have been taken or will be taken prior to the Closing. 3.2 Purchase Entirely for Own Account. This Agreement is made with such Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Securities to be received by such Investor and the Common Stock issuable upon conversion and exercise thereof (the "Underlying Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof except in accordance with the Act, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same, by executing this Agreement, such Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities or Underlying Securities. 3.3 Disclosure of Information. Such Investor acknowledges receipt of the reports referred to in Sections 2.9 of this Agreement. Such Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. Such Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of such Investor to rely thereon. 3.4 Investment Experience. Such Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities. Investor also represents it has not been organized for the purpose of acquiring the Securities. 3.5 Accredited Investor. Such Investor is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. 3.6 Restricted Securities. Such Investor understands that the Securities and Underlying Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or -4- 5 any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 provided and to the extent this Section is then applicable; and: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) (i) Such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a reasonably detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act; provided that the Company will not require opinions of counsel for transactions made pursuant to Rule 144. 3.8 Legends. It is understood that the certificates evidencing the Securities and Underlying Securities may bear legends to the following effect: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND SUCH STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. 4. Placement Agent. The Company has authorized Pennsylvania Merchant Group (the "Placement Agent") to act as Placement Agent with regard to the offer and sale to certain Investors of the Securities, and the Placement Agent represents and agrees with the Company as follows: 4.1 Sales to Accredited Investors. The Placement Agent has and will only make offers and sales of the Securities to Investors or potential Investors it reasonably believes to be "accredited investors" as that term is defined in Section 3.5 hereof. 4.2 Regulation D Compliance. Offers and sales of the Securities have and will be made in compliance with Regulation D under the Act, to the extent applicable to the Placement Agent, and the Placement Agent has not and shall not offer to sell the Securities by any form of general solicitation or general advertising that is prohibited by Rule 502(c) promulgated under the Act. -5- 6 4.3 Compliance Generally. The Placement Agent has and will observe all securities laws and regulations applicable to it in any jurisdiction in which it has or may offer, sell or deliver the Securities and it will not, directly or indirectly, offer, sell or deliver the Securities or distribute or publish any prospectus, circular, advertisement or other offering material in relation to the Securities in or from any state in the United States or country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. 4.4 Sales Commissions. In consideration of the Placement Agent's services hereunder, the Company shall pay Placement Agent in cash on the Closing Date a commission of seven percent (7%) of the total proceeds to the Company from the sale of the Securities. 5. State Securities Laws. The Company will provide applicable notices and legends as may be required by applicable state securities laws. 6. Covenants of the Company. 6.1 Delivery of Financial Statements. The Company shall deliver to each Investor: (a) as soon as practicable, but in any event within one hundred and twenty (120) days after the end of each fiscal year of the Company, financial statements audited and certified by independent public accountants of nationally recognized standing selected by the Company. (b) as soon as practicable, but in any event within sixty (60) days after the end of each of the first three (3) quarters of each fiscal year of the Company, unaudited financial statements for such fiscal quarter. 6.2 Indebtedness. Without the written consent of the Investors holding a majority of the Notes, the Company shall not incur aggregate indebtedness in excess of $1,000,000. 6.3 Compensation. The Company shall not use the proceeds received from the sale of the Securities to pay any management fees or bonuses to any executive employee of the Company without the written consent of the Investors holding a majority of the Notes. 6.4 Dividends. Without the written consent of the Investors holding a majority of the Notes, the Company shall not declare, set aside, or pay any cash or other dividend or make any cash or other distribution with respect to its Common Stock. 6.5 Preferred Stockholder Commitment. The Company has received the commitment of holders of Series B Preferred Stock to grant the Company 90 days from September 1, 1999 to either: (a) Redeem all Series B Preferred Stock for face amount plus accrued 6% premium; or -6- 7 (b) Convert all Series B Preferred Stock into Common Stock on the same terms as the sale of Common Stock in a private placement resulting in gross proceeds of at least $4 million (less any part of the aggregate principal amount of the Notes not required to be repaid out of such proceeds) which closes during such 90-day period. This commitment is contingent upon the purchase of Securities resulting in net proceeds to the Company of at least $1,000,000. 7. Miscellaneous. 7.1 Survival of Warranties. The warranties, representations and covenants of the Company, the Investors and the Placement Agent contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors. 7.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities). Nothing in this Agreement express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Connecticut without giving effect to conflict of law principles. The parties irrevocably consent to the exclusive jurisdiction of the Superior Court of the State of Connecticut at Hartford, Connecticut or the United States District Court for the District of Connecticut. 7.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 7.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 Notices. Unless otherwise provided, all notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the signature page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding -7- 8 sentence. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section, except that any such change of address notice shall not be effective unless and until received. 7.7 Finder's Fee. Except the fees to be paid to the Placement Agent under Section 4 of this Agreement, each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. The Company agrees to indemnify and hold harmless each Investor from any liability for any finder's fee, commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) incurred by the Company or for which the Company or any of its officers, employees or representatives is responsible. 7.8 Expenses. Irrespective of whether a Closing is effected, each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Majority Investors and, as to any modification of Sections 4.4 or 7.7, the Placement Agent. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.11 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement with respect to the subject matter hereof among the parties, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 7.12 Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. 7.13 Interpretation. The parties acknowledge that each has been represented by counsel in connection with this Agreement, and that the provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties, without regard to which party or party's counsel drafted this Agreement. -8- 9 ACCENT COLOR SCIENCES, INC. SERIES A CONVERTIBLE SUBORDINATED NOTES BRIDGE LOAN SIGNATURE PAGE Please complete two copies of the Signature Page and return both copies to: Pennsylvania Merchant Group, Four Falls Corporate Center, West Conshohocken, PA 19428-2961, Attn: Mary E. Bowler. - --------------------------------- ------------------------------------ Purchasor's Name-Please Print Nominee Name (if appropriate) - -------------------------------- ------------------------------------ Social Security/Tax I.D. Number Telephone Number ------------------------------------ Fax Number - -------------------------------- ------------------------------------ Address City, State and Zip Code _____/s/_________________________ ____________________________________ Signature Date - ---------------------------------------------------------------------------- PRINCIPAL AMOUNT TO BE PURCHASED $_______________ FUNDS SHOULD BE WIRED TO: SUMMIT BANK/TRUST, Attention: Shernetta Harris Hackensack, NJ ABA #021202162 GL A/C 477-02. For credit to the Account of Accent Color Sciences, Inc. Trust Account #2970056498. - ---------------------------------------------------------------------------- AGREED TO AND ACCEPTED: PENNSYLVANIA MERCHANT GROUP By: /s/ Date: - ------------------------------------- -------------------------------- Mary E. Bowler Vice President - Administration ACCENT COLOR SCIENCES, INC. By:/s/ Date: - --------------------------- -------------------------------- Charles E. Buchheit -9- 10
Schedule A Investors: Original Principal Name/Address Amount of Notes Number of Shares Warrants Orbis Pension Trustees Limited $550,000.00 ---- 550,000 shares The PMG Eagle Fund ---- 1,100,000 550,000 shares
EX-10.2 3 EX-10.2 1 EXHIBIT 10.2 THIS NOTE AND THE SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE AND SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND ALL OTHER APPLICABLE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. $------------ (ORIGINAL PRINCIPAL AMOUNT) NO.------------ ACCENT COLOR SCIENCES, INC. SERIES A CONVERTIBLE SUBORDINATED NOTE September ___, 1999 1. GENERAL. Accent Color Sciences, Inc., a Connecticut corporation (the "Company"), for value received, hereby promises to pay to the order of (the "Lender"), or the holder hereof, the principal amount of _________ Thousand Dollars ($_______), on the earlier of (i) February 1, 2000, and (ii) the date that is three business days after the Company consummates its next Equity Financing (the "Payment Date"), in such currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debt. Interest at the rate of 7% per year shall accrue on the outstanding principal balance of this Note. Interest accrued on the outstanding principal balance from the date of this Note until the Payment Date shall be paid on the Payment Date. All payments of principal and interest on this Note shall be paid by Company check sent first class mail, postage prepaid, to such address as the holder hereof shall notify the Company of in writing, or, absent such notice, to the last address of such holder as recorded in the Company's books. Interest shall be computed on the basis of a 365-day year. The Company shall have the right from time to time to prepay without penalty all or any portion of the principal and interest due under this Note upon three business days prior written notice to the holder hereof. 2. THE NOTE. As used herein, the term "Note" refers to this Series A Convertible Subordinated Note and to any Note or Notes executed and delivered by the Company in exchange or replacement hereof pursuant to Section 4 and in accordance with the terms of the Series A Convertible Subordinated Note, Common Stock and Warrant Purchase Agreement between the Company and the investors listed on Schedule A thereto dated as of September ___, 1999 (the "Purchase Agreement"). Unless the context otherwise requires, the term holder is used to mean the person named as Lender in Section 1 or any other person who shall at the time be a legal successor to the Lender or the assignee of this Note. 3. SUBORDINATION. The Company hereby agrees, and the holder of this Note by its acceptance agrees, that the payment of the principal of and interest on the Note is hereby expressly -1- 2 made subordinate and junior in right of payment, to the extent set forth in the following paragraphs (a), (b) and (c), to the prior payment in full of all Senior Debt (as defined in Section 5 below) of the Company, whether such Senior Debt, except as provided in Section 5 below, is incurred prior to, on or after the date hereof: (a) In the event of insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings relative to the Company or to any of the property of the Company, or in the event of any proceedings for voluntary liquidation, dissolution, or other winding-up of the Company, whether or not involving insolvency or bankruptcy, then the holders of Senior Debt shall be entitled to receive payment in full of all principal of and interest on all Senior Debt before the holder of this Note shall be entitled to receive any payment on account of principal or interest on this Note, and to that end the holders of Senior Debt shall be entitled to receive for application in payment thereof any payment or distribution of any kind or character, whether in cash or property or securities, which may be payable or deliverable in any such proceedings in respect of this Note. (b) In the event that this Note is declared due and payable prior to its stated maturity, by reason of the occurrence of an Event of Default hereunder (under circumstances when the provisions of the foregoing paragraph (a) shall not be applicable), then all principal of and interest on all Senior Debt outstanding at the time of such declaration shall first be paid in full, before any payment on account of principal or interest is made upon this Note. (c) The Company may make payments and, subject to Section 1 of this Note, prepayments of the principal of and interest of this Note if, at the time of the payment and immediately after giving effect thereto, (i) there exists no default in any payment with respect to any Senior Debt and (ii) there shall not have occurred an event of default (other than a default in the payment of amounts due thereon) with respect to any Senior Debt, as defined in the instrument under which the same is outstanding, permitting the holders thereof to accelerate the maturity thereof, other than an event of default which shall have been cured or waived or shall have ceased to exist. Should the holder of this Note, while there exists a default or an event of default as provided in the immediately preceding sentence, and after being notified by the holder of the Senior Debt of the default, receive any such payment, or should the holder of this Note receive any distribution in bankruptcy, dissolution, or similar insolvency proceedings in regard to the Company, the holder of the Note will hold such payment or distribution in trust for the holder of the Senior Debt and will pay over such amounts to such holder to apply to the Senior Debt until the same is paid in full. The provisions of this Section 3 are for the purpose of defining the relative rights of the holders of Senior Debt and the holder of the Note against the Company and its property. Nothing herein shall impair, as between the Company and the holder of this Note, the obligation of the Company, which is unconditional and absolute, to pay to the holder the principal and interest in accordance with the terms and the provisions hereof; nor shall anything herein prevent the holder of this Note from exercising all remedies otherwise permitted by applicable law or hereunder upon default under this Note, subject to the rights, if any, under this Section 3 of holders of Senior Debt to receive cash, property, stock or obligation otherwise payable or deliverable to the holder of this Note. The Company acknowledges and agrees that the rights of the holder of this Note with respect to the Company's cash, property, rights and other assets of any kind are senior and prior to the rights -2- 3 of any holder of capital stock of the Company arising from such capital stock and the Company shall issue no other notes or debt instruments except such as comply with the Purchase Agreement and are subordinated to this Note in right of payment on the same basis on which this Note is subordinated to Senior Debt as provided in this Section, and except that the Company may have additional Senior Debt. 4. EXCHANGE OR REPLACEMENT OF NOTE. (a) Subject to Section 13 of this Note, the holder of this Note may in person or by duly authorized attorney surrender the Note for exchange at the office of the Company, and at the expense of the Company receive in exchange therefor a new Note in the same aggregate principal amount as the aggregate unpaid principal amount of the Note so surrendered and bearing interest at the same rate as the Note so surrendered, each such new Note to be dated as of the date to which interest has been paid on the Note so surrendered and to be in such principal amount and payable to such permitted assignee or transferee, as such holder may designate in writing; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any new Note in a name other than that of the holder of the Note surrendered in exchange therefor. Five days prior written notice of the holder's intention to make such exchange shall be given to the Company. (b) Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note and (in case of loss, theft or destruction) of indemnity reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Note, if mutilated, the Company will make and deliver a new Note of like tenor in lieu of this Note. Any Note made and delivered in accordance with the provisions of this paragraph (b) shall be dated as of the date to which interest has been paid on this Note. 5. DEFINITIONS. As used herein, the following terms have the following respective meanings: "Person" shall mean an individual, a company, a limited liability company, a partnership, a trust, an unincorporated organization and a government or any department, agency or political subdivision thereof, or any other legal entity. "Equity Financing" shall mean a private or public offering of the Company's Common Stock resulting in receipt of at least $1,100,000 in gross proceeds by the Company. "Senior Debt" shall mean the principal of, interest on and, if applicable, any premium on (i) indebtedness for money borrowed of the Company outstanding as of the date hereof, (ii) additional indebtedness incurred by the Company after date hereof for money borrowed from a customer of the Company; (iii) additional indebtedness incurred by the Company after the date hereof for money borrowed from a bank, savings and loan association trust company, insurance company or similar financial institution, (iv) purchase money secured debt, (v) obligations of the Company as lessee under leases of real or personal property which are treated as capital lease obligations under generally accepted accounting principals, (vi) any other indebtedness for money -3- 4 borrowed of the Company which the Company and holders of at least a majority of the principal amount of the Notes then outstanding from time to time expressly and specifically agree in writing shall constitute "Senior Debt" and (vii) any deferrals, renewals, refinancings or extensions of any of the foregoing. 6. REMEDIES. 6.1 EVENTS OF DEFAULT DEFINED. The entire principal amount of and all accrued interest on this Note shall, at the option of the holder hereof exercised by written notice to the Company (except under Section 6.1(d) and Section 6.1(e) below, in which case the entire principal amount of and all accrued interest on the Note shall automatically become due and payable), forthwith become and be due and payable (subject, however, to the enforcement provisions contained in Section 6.2) if any one or more of the following events (herein called "Events of Default") shall have occurred and be continuing (for any reason whatsoever and whether such happening shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree of order of any court or any order, rule or regulation of any administrative or governmental body): (a) if default shall be made in the due and punctual payment of the principal of or interest on this Note or on any other indebtedness of the Company to Lender, when and as the same shall become due and payable, whether at the maturity of any installment thereof, by acceleration, or otherwise; (b) if any material default, breach or violation shall be made in the performance or observance of any of the other covenants, agreements, representations, warranties or conditions of the Company contained in this Note, any other instrument evidencing indebtedness of the Company to Lender, or in the Purchase Agreement; provided that no Event of Default, not otherwise specifically stated in this Section 6.1, shall be deemed to have occurred if the Company cures such default, breach or violation within 30 days after having received notice thereof from the holder of this Note; (c) if the Company shall default beyond any period of grace provided with respect thereto in the payment of principal of or interest on any Senior Debt or in the performance or observance of any other material obligation, term or condition under such Senior Debt or otherwise fail promptly to pay such Senior Debt when due and payable, unless such holder shall have waived such default or non-payment after its occurrence or unless such holder shall have failed to give any notice required to create a default thereunder; (d) if the Company shall (1) admit in writing its inability to pay its debts generally as they become due, (2) file a petition in bankruptcy or a petition to take advantage of any insolvency act, -4- 5 (3) make an assignment for the benefit of its creditors, (4) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, (5) on a petition in bankruptcy filed against it, be adjudicated a bankrupt, or (6) file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof; (e) if a court of competent jurisdiction shall enter an order, judgment or decree appointing, without the consent of the Company, a receiver of the Company or of the whole or any substantial part of its property, or approving a petition filed against it seeking reorganization or arrangement of the Company under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any State thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within 60 days from the date of entry thereof; (f) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Company or of the whole or any substantial part of its property and such custody or control shall not be terminated or stayed within 60 days from the date of assumption of such custody or control; or (g) if the Company enters into a merger, consolidation, liquidation, dissolution, sale of all or substantially all of its stock or assets, or similar restructuring or reclassification. 6.2 SUITS FOR ENFORCEMENT. In case any one or more of the Events of Default specified in Section 6.1 hereof shall have occurred, the holder of this Note may, subject to Section 3, proceed to protect and enforce its rights either by suit in equity and/or by action at law, whether for the specific performance of any covenant or agreement contained in this Note, other instrument, or the Purchase Agreement or in aid of the exercise of any power granted in this Note, other instrument, or the Purchase Agreement, or proceed to enforce the payment of this Note or to enforce any other legal or equitable right of the registered holder of this Note. In addition to any amounts otherwise payable under this Note, the holder shall be entitled to recover all reasonable costs and expenses related to enforcement of this Note, including without limitation, legal and accounting fees and court costs. The remedies of the holder provided herein, in the Purchase Agreement, and in the documents referred to therein shall be cumulative and concurrent, and may be pursued singly, successively, or together at the sole discretion of the holder, and may be exercised as often as occasion therefor shall occur; and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release thereof. -5- 6 Except as expressly set forth herein, the Company hereby waives demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, and all other notices not specifically required hereby in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Note, and agrees that its liability hereunder shall be unconditional. The holder shall not be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by the holder, and then only to the extent specifically set forth in writing. A waiver of one event shall not be construed as continuing or as a bar to or waiver of any right or remedy to a subsequent event. 6.3 REMEDIES CUMULATIVE. No remedy herein conferred upon the holder of this Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 6.4 REMEDIES NOT WAIVED. No course of dealing between the Company and the holder hereof or any delay on the part of the holder hereof in exercising any rights hereunder shall operate as a waiver of any rights of such holder. 7. CONVERSION OF NOTE 7.1 RIGHT TO CONVERT (a) The holder of this Note shall have the right, at such holder's option, at any time prior to maturity of this Note or prior to receipt of notice of the Company's intent to prepay this Note pursuant to Section 1 hereof, to convert all or any portion of the unpaid principal amount hereof plus all accrued and unpaid interest (the sum of the unpaid principal amount plus all accrued and unpaid interest as calculated at any time during the Term of this Note shall be referred to as the "Note Value") into shares of the Company's Common Stock, no par value (the "Common Stock") at the lower of (i) $.50 per share and (ii) 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, subject to adjustment from time-to-time pursuant to Section 7.2 hereof ("Conversion Price"). (b) Upon conversion of all or a portion of the Note Value hereof, the obligation due hereunder shall be deemed reduced to the extent of the value of the aggregate Conversion Price of the Common Stock acquired thereby. The reduction of the obligation due hereunder upon the conversion of a portion of the Note Value shall first reduce accrued and unpaid interest and then reduce the unpaid principal amount. 7.2 ADJUSTMENTS The Conversion Price and the number of shares purchasable hereunder are subject to adjustment from time-to-time as follows: -6- 7 (a) ISSUANCE OF ADDITIONAL STOCK. (i) If the Company shall issue any Additional Stock without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall forthwith be adjusted to a price per share equal to the product obtained by multiplying the Conversion Price in effect immediately prior to the issuance of such Additional Stock by a fraction, (i) the numerator of which is equal to the sum of (x) the number of shares of Common Stock deemed outstanding on a fully as-converted basis immediately prior to such issuance (including shares deemed to be outstanding as provided in Section 7.2(a)(vi)) and (y) the quotient of the aggregate consideration received by the Company upon such issuance, divided by the Conversion Price in effect immediately prior to the issuance of such Additional Stock and (ii) the denominator of which is the total number of shares of Common Stock deemed outstanding on a fully as-converted basis (including shares deemed outstanding as provided in Section 7.2(a)(vi)) immediately after (and including) such issuance. (ii) No adjustment of the Conversion Price shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. No adjustment of such Conversion Price pursuant to Section 7.2(a)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (iii) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for underwriting or otherwise in connection with the issuance and sale thereof. (iv) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (v) In the event Additional Stock is issued together with other shares or securities or other assets of the Company for consideration which covers both, the consideration allocable to the Additional Stock shall be the proportion of such consideration so received, computed as provided in Sections 7.2(a) (iii) and (iv) above, as determined in good faith by the Board of Directors. (vi) In the case of the issuance (after September ___, 1999 (the "Original Issue Date")) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 7.2(a): -7- 8 (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 7.2(a)(iii), (iv) and (v)) if any, received by the Company upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. Notwithstanding anything to the contrary herein, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 7.2(a)(iii), (iv) and (v)). Notwithstanding anything to the contrary herein, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise -8- 9 of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Section 7.2(a)(vi)(1) and (2) shall be appropriately adjusted to reflect any change, termination, or expiration of the type described in either Section 7.2(a)(vi)(3) or (4). (6) The consideration for Common Stock deemed paid pursuant to Sections 7.2(a)(vi)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 7.2(a)(vi)(3) and (4). (vii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 7.2(a)(vi)) by the Company after the Original Issue Date other than: (1) Common Stock issued pursuant to the events described in Sections 7.2(b), (c), (d) or (e) hereof; (2) shares of Common Stock issuable to employees, agents, consultants, advisors or directors of the Company pursuant to stock options or stock awards granted or to be granted, provided that the grant of such options or awards shall have been approved by the Board of Directors; (3) shares of Common Stock issuable pursuant to warrants outstanding as of the Original Issue Date or any Warrants issued or to be issued pursuant to the Purchase Agreement; or (4) shares of Common Stock issued or issuable upon conversion of shares of Series B Preferred Stock outstanding on the date hereof. (b) Merger, Sale of Assets, etc. If at any time while this Note, or any portion thereof, is outstanding, there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale of transfer of the Company's properties and assets as, or substantially as, en entirety to any other person, this Note shall thereafter represent the right to acquire the number of shares of stock or other securities which the holder of this Note would have owned immediately after the consummation of such reorganization, merger, consolidation, sale or transfer, if this Note had been converted immediately before the effective date of the reorganization, merger, consolidation, sale or transfer. -9- 10 (c) Reclassification, etc. If the Company, at any time while this Note, or any portion hereof, remains outstanding by reclassification of securities or otherwise, shall change any of the securities as to which conversion rights under this Note exist into the same or a different number of securities of any other class or classes, this Note shall thereafter represent the right to acquire such number and kind of securities that were subject to the conversion rights under this Note immediately prior to such reclassification or other change and the Conversion Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 7.2. (d) Split, Subdivision or Combination of Shares. If the Company at any time while this Note, or any portion hereof, remains outstanding shall split, subdivide or combine the securities as to which conversion rights under this Note exist, into a different number of securities of the same class, the Conversion Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. (e) Adjustments for Dividends in Stock or Other Securities. If while this Note, or any portion hereof, remains outstanding, the holders of the securities as to which conversion rights under this Note exist at the time shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities of the Company by way of dividend or distribution, then and in each case, this Note shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this conversion, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon conversion of this Note on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 7.2. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 7.2, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of this Note a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request, at any time, of any such holder, furnish or cause to be furnished to such holder a like certificate setting forth: (i) such adjustments and readjustments; (ii) the Conversion Price at the time in effect; and (iii) the number of shares that at the time would be received upon the conversion of the Note. 7.3 EXERCISE OF CONVERSION PRIVILEGE. In order to exercise the conversion privilege, the holder of this Note shall present it to the Company at the office of the Company, accompanied by written notice to the Company that the holder elects to convert this Note, or, if less than the entire Note Value hereof is to be converted, the portion hereof to be converted. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares that shall be issuable on such conversion shall be issued. As soon as practicable after the receipt of such notice and the presentation of this Note, the Company shall issue and shall deliver to the holder -10- 11 of this Note a certificate or certificates for the number of full shares issuable upon the conversion of this Note (or portion hereof), and provision shall be made for any fraction of a share as provided in Section 7.4 hereof. Such conversion shall be deemed to have been effected immediately prior to the close of business on the date on which such notice shall have been received by the Company and this Note shall have been presented as aforesaid, the conversion shall be at the conversion price in effect at such time, and at such time the rights of the holder of this Note as such holder shall cease (to the extent this Note is so converted) and the person or persons in whose name or names any certificate of certificates for shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. Upon conversion of only a part of the Note Value of this Note, appropriate notation shall be made on this Note of the principal amount so converted, and the holder following such notation shall retain this Note. Upon conversion of the balance of the Note Value of this Note, the holder shall surrender this Note to the Company. 7.4 ADJUSTMENT FOR FRACTIONAL SHARES. No fractional shares or scrip shall be issued upon conversions of the Note. The number of full shares issuable upon conversion thereof shall be computed on the basis of the aggregate Note Value of the Note (or portion thereof) so surrendered. The remaining Note Value shall be paid in cash. 7.5 RESERVATION OF SHARES. The Company will at all times reserve and keep available out of its Common Stock, solely for the purpose of issuance upon conversion of this Note as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of this Note pursuant to the terms of this Section 7. The Company covenants that all shares which will be so issuable shall, upon the conversion of this Note as herein provided, be duly and validly issued and fully paid and nonassessable by the Company. 7.6 TAXES. The issuance of certificates for shares upon conversion of this Note shall be made without charge to the holder of this Note for any issuance tax in respect thereto. 8. Amendments and Waivers. Amendments of this Note may be made or compliance with any term, covenant, agreement, condition or provision set forth herein may be omitted or waived (either generally or in a particular instance and either retroactively or prospectively), upon the written consent of the Company and the holders of at least a majority of the principal amount of the Notes then outstanding; provided, however, that no amendment, omission or waiver of this Note shall be made without the written consent of the holder of this Note if such amendment, omission or waiver would (i) cause any change in the principal amount or rate of interest under this Note, (ii) extend the time of payment of this Note, (iii) affect or impair in any way the obligation of the Company in respect of the principal of or interest on this Note or (iv) cause any change in this Section 8 hereof. Any such amendment or waiver shall be binding upon the holder, upon each future holder of this Note and upon the Company, whether or not this Note shall have been marked to indicate such amendment or waiver, but any substitute Note issued thereafter shall bear a notation referring to any such amendment or continuing waiver. 9. SUCCESSORS AND ASSIGNS. This Note shall be binding upon the parties and their respective successors and assigns. -11- 12 10. SEVERABILITY. Should any part but not the whole of this Note for any reason be declared invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in force and effect as if this Note had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties that they would have executed the remaining portion of this Note without including any such part which may, for any reason, be hereafter declared invalid. 11. CAPTIONS. The descriptive headings of the various Sections or parts of this Note are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. 12. GOVERNING LAW. This Note shall be governed and construed under the laws of the State of Connecticut without giving effect to the conflict of law principles . The parties irrevocably consent to the exclusive jurisdiction of the Superior Courts of the State of Connecticut at Hartford, Connecticut or the United States District Court for the District of Connecticut. 13. RESTRICTIONS. This Note shall not be transferable except in compliance with the provisions of Sections 3 and 4 of the Purchase Agreement. - ------------------------------------------------------------------------------- ATTEST: ACCENT COLOR SCIENCES, INC. By: - ---------------------------- Name: Willard F. Pinney, Jr. /s/ ----------------------------------------------- Title: Secretary Name: Charles E. Buchheit Title: President and Chief Executive Officer -12- EX-10.3 4 EX-10.3 1 EXHIBIT 10.3 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SAID ACT AND ALL OTHER APPLICABLE SECURITIES LAWS OR ANY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. No. W - _____ Warrant to Purchase up to ____ Shares of Common Stock (subject to adjustment and including Contingent Shares, as defined below) Date: September ___, 1999 WARRANT TO PURCHASE COMMON STOCK OF ACCENT COLOR SCIENCES, INC. Void after September ___, 2004 --------------------------------------------------------------- This certifies that, for value received, _______, or registered assigns ("Holder") is entitled, subject to the terms and conditions set forth below, to purchase from ACCENT COLOR SCIENCES, INC. (the "Company"), a Connecticut corporation, up to ____ shares of common stock of the Company, no par value (or such other number of shares of common stock as may be determined in accordance with Section 2 hereof) (the "Common Stock"), as constituted on the date hereof (the "Warrant Issue Date"), upon surrender hereof, at the principal office of the Company referred to below, with the subscription form attached hereto duly executed, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant, which is one of a series of warrants issued for the Common Stock, and any warrants delivered in substitution or exchange therefor as provided herein. This Warrant is issued in connection with the transactions described in Section 1 of the Series A Convertible Subordinated Note, Common Stock and Warrant Purchase Agreement between the Company and the investors listed on Schedule A thereto, dated as of September ___, 1999 (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Holder of this Warrant purchased a Series A Convertible Subordinated Note in the principal amount of _____________________ ($_________) (the "Note") and/or shares of the Company's Common Stock (the "Shares). The Holder of this Warrant is subject to certain restrictions set forth in the Purchase Agreement and shall be entitled to certain rights and privileges set forth in the Purchase 2 Agreement. This Warrant is one of the Warrants referred to as the "Warrants" in the Purchase Agreement. 1. TERM OF WARRANT. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, during the term ("Term") commencing at 9:00 a.m., Hartford, Connecticut time, on the date hereof and ending at 5:00 p.m., Hartford, Connecticut time, on September ___, 2004, and shall be void thereafter. If this Warrant relates to the purchase of a Note, then this Warrant shall be exercisable as to ______ shares of Common Stock, at any time after issuance. This Warrant shall be exercisable as to the remaining _____ shares of Common Stock (the "Contingent Shares"), only after the Holder has voluntarily converted any principal amount under the Holder's Note, pursuant to Section 7.1(a) thereof, into Common Stock, and only in the same proportion that the amount of principal converted into Common Stock bears to the original principal balance of the Note. By way of example, if Holder has converted $5,000 of principal of a Note into Common Stock, and the Note had an original principal balance of $10,000, then the Holder would be entitled to exercise his Warrant for up to 50% of the Contingent Shares covered by his Warrant. 2. EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price at which this Warrant may be exercised shall be the lower of (i) $.50 per share of Common Stock and (ii) 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 Exercise Price is subject to adjustment from time to time pursuant to Section 11 hereof. If the Exercise Price shall be less than $.50 as a result of clause (ii) of the first sentence of this Section 2, the number of shares that this Warrant shall thereafter evidence the right to receive shall be determined by (a) dividing the principal amount of the Note purchased by the Holder of this Warrant by such Exercise Price, or (b) dividing the total number of Shares purchased by the Holder of this Warrant, as adjusted for any such lower equity offering price in accordance with the Purchase Agreement, by two. 3. EXERCISE OF WARRANT. (a) MANNER OF EXERCISE. The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), upon payment (i) in cash or by check acceptable to the Company, (ii) by cancellation by the Holder of indebtedness of the Company to the Holder, or (iii) by a combination of (i) and (ii), of the purchase price of the shares to be purchased. (b) TIME OF EXERCISE. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within 10 days thereafter, the Company at its expense, will issue and deliver to the person or persons -2- 3 entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense, shall execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. (c) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise and notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: Y (A-B) X = ------- A X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, fair market value of one share of Common Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that where there exists a public market for the Company's Common Stock at the time of such exercise, the fair market value per share shall be the average of the closing bid and asked prices of the Common Stock quoted in the Over-the-Counter Market Summary or the last reported sale price of the Common Stock or the closing price quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Eastern Edition of The Wall Street Journal for the five trading days prior to the date of determination of fair market value. Notwithstanding the foregoing, in the event the Warrant is exercised in connection with the Company's initial public offering of Common Stock, the fair market value per share shall be the per share offering price to the public of the Company's initial public offering. 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share -3- 4 to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. 6. RIGHTS OF SHAREHOLDERS. Subject to Sections 9 and 11 of this Warrant, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein. 7. TRANSFER OF WARRANT. (a) WARRANT REGISTER. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (b) WARRANT AGENT. The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 7(a) above, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent. (c) TRANSFERABILITY AND NONNEGOTIABILITY OF WARRANT. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the "Act") and subject to Section 3 of the Purchase -4- 5 Agreement, title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. (d) EXCHANGE OF WARRANT UPON A TRANSFER. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Act and with the limitations on assignments and transfers contained in this Section 7, and Section 3 of the Purchase Agreement, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. (e) RESTRICTIONS ON TRANSFER. The Holder of this Warrant by acceptance hereof agrees that the transfer of this Warrant and the shares of Common Stock issuable upon the exercise of all or any portion of this Warrant (the "Securities") are subject to the provisions of Sections 3 and 4 of the Purchase Agreement, which include restrictions on transfer of the Securities; and this Warrant and the Securities shall be entitled to all rights and benefits accorded thereto in the Purchase Agreement, and the applicable provisions of the Purchase Agreement are hereby incorporated herein by reference. 8. RESERVATION OF STOCK. The Company covenants that during the term this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its Certificate of Incorporation (the "Certificate") to provide sufficient reserves of shares of Common Stock issuable upon exercise of the Warrant. The Company further covenants that all shares that may be issued upon the exercise of rights represented by this Warrant, upon exercise of the rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 9. NOTICES OF CERTAIN EVENTS. (a) In case: (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into -5- 6 another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or (iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Holder or Holders a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least 15 days prior to the date therein specified. (b) All such notices, advices and communications shall be deemed to have been received (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or deliver charges prepaid. Notices, advices and communications may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. 10. AMENDMENTS AND WAIVERS. (a) MANNER OF AMENDMENT. Any term of this Warrant may be amended or waived upon the written consent of the Company and the Holder and further provided that the number of shares of Common Stock subject to the Warrant and the Exercise Price may not be amended, and the right to exercise this Warrant may not be waived, without the written consent of the Holder of this Warrant (it being agreed that an amendment to or waiver under any of the provisions of Section 11 of this Warrant shall not be considered an amendment of the number of shares subject to the Warrant or the Exercise Price). (b) NO CONTINUING WAIVER. No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, further or continuing waiver of any such term, condition or provision. 11. ADJUSTMENTS. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: -6- 7 (a) ISSUANCE OF ADDITIONAL STOCK. (i) If the Company shall issue any Additional Stock without consideration or for a consideration per share less than the Exercise Price in effect immediately prior to the issuance of such Additional Stock, the Exercise Price in effect immediately prior to each such issuance shall forthwith be adjusted to a price per share equal to the product obtained by multiplying the Exercise Price in effect immediately prior to the issuance of such Additional Stock by a fraction, (i) the numerator of which is equal to the sum of (x) the number of shares of Common Stock deemed outstanding on a fully as-converted basis immediately prior to such issuance (including shares deemed to be outstanding as provided in Section 11(a)(vi)) and (y) the quotient of the aggregate consideration received by the Company upon such issuance, divided by the Exercise Price in effect immediately prior to the issuance of such Additional Stock, and (ii) the denominator of which is the total number of shares of Common Stock deemed outstanding on a fully as-converted basis (including shares deemed outstanding as provided in Section 11(a)(vi)) immediately after (and including) such issuance. (ii) No adjustment of the Exercise Price shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. No adjustment of such Exercise Price pursuant to Section 11(a)(i) shall have the effect of increasing the Exercise Price above the Exercise Price in effect immediately prior to such adjustment. (iii) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for underwriting or otherwise in connection with the issuance and sale thereof. (iv) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (v) In the event Additional Stock is issued together with other shares or securities or other assets of the Company for consideration which covers both, the consideration allocable to the Additional Stock shall be the proportion of such consideration so received, computed as provided in Sections 11(a) (iii) and (iv) above, as determined in good faith by the Board of Directors. (vi) In the case of the issuance (after September ___, 1999 (the "Original Issue Date")) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to -7- 8 purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 11(a): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 11(a)(iii), (iv) and (v)) if any, received by the Company upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. Notwithstanding anything to the contrary herein, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 11(a)(iii), (iv) and (v)). Notwithstanding anything to the contrary herein, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related -8- 9 to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Section 11(a)(vi)(1) and (2) shall be appropriately adjusted to reflect any change, termination, or expiration of the type described in either Section 11(a)(vi)(3) or (4). (vii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 11(a)(vi)) by the Company after the Original Issue Date other than: (1) Common Stock issued pursuant to the events described in Sections 11(b), (c), (d) or (e) hereof; (2) shares of Common Stock issuable to employees, agents, consultants, advisors or directors of the Company pursuant to stock options or stock awards granted or to be granted, provided that the grant of such options or awards shall have been approved by the Board of Directors; (3) shares of Common Stock issuable pursuant to warrants outstanding as of the Original Issue Date or any Warrants issued or to be issued pursuant to the Purchase Agreement; (4) shares of Common Stock issued or issuable upon conversion of shares of Series B Preferred Stock issued and outstanding on the date hereof; or (b) MERGER, SALE OF ASSETS, ETC. If at any time while this Warrant or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property whether in the form of securities, cash or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, this Warrant shall thereafter represent the right to acquire the number of shares of stock or other securities which the Holder of this Warrant would have owned immediately after the consummation of such reorganization, merger, consolidation, sale or transfer, if the Holder of this Warrant had exercised this Warrant immediately before the effective date of the reorganization, merger, consolidation, sale or transfer. (c) RECLASSIFICATION, ETC. If the Company, at any time while this Warrant, or any portion thereof, remains outstanding and unexpired by reclassification of securities or -9- 10 otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 11. (d) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, into a different number of securities of the same class, the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. (e) ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES. If while this Warrant, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available to it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 11. (f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment pursuant to this Section 11, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each Holder of this Warrant a certificate setting forth, in reasonable detail, the event requiring the adjustment or readjustment, the amount of such adjustment or readjustment, the method by which such adjustment or readjustment was calculated, the Exercise Price at the time in effect, and the number of shares and the amount, if any, of other property that at the time would be received upon the exercise of the Warrant. The Company shall upon the written request, at any time, of any such Holder, furnish or cause to be furnished to such Holder a like certificate. (g) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Exercise Price pursuant to this Section 11, this Warrant shall thereafter evidence the right to receive upon payment of the adjusted Exercise Price that number of shares of Common Stock (calculated to the nearest hundredth) obtained from the following formula: -10- 11 X = Y x A --- B X = the adjusted number of shares of Common Stock issuable upon exercise of the Warrant by payment of the adjusted Exercise Price. Y = the number of shares of Common Stock previously issuable upon the exercise of the Warrant by payment of the Exercise Price prior to adjustment. A = the Exercise Price prior to adjustment. B = the adjusted Exercise Price. * * * -11- 12 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above written, intending to be legally bound hereby. ACCENT COLOR SCIENCES, INC. By:/s/ --------------------------------------- Name: Title: -12- 13 NOTICE OF EXERCISE To: ACCENT COLOR SCIENCES, INC. The undersigned hereby elects to purchase shares of Common Stock of Accent Color Sciences, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ----------------------------------- (Name) ----------------------------------- (Name) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ----------------------------------- (Name) ----------------------------------- (Name) - -------------------------------- (Date) -13- 14 ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below: NAME OF ASSIGNEE ADDRESS NO. OF SHARES and does hereby irrevocably constitute and appoint Attorney - ------------------------- to make such transfer on the books of Accent Color Sciences, Inc. maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof or conversion thereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof or conversion thereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee has acknowledged that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. ----------------------------- Signature of Holder Dated - ----------------------- -13- EX-10.4 5 EX-10.4 1 EXHIBIT 10.4 ACCENT COLOR SCIENCES, INC. REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement ("Agreement"), dated as of September 7, 1999, is between Accent Color Sciences, Inc., a Connecticut corporation (the "Company"), and each investor set forth on Schedule A hereto (individually an "Investor" and collectively with all other Investors, the "Investors"). BACKGROUND Pursuant to that certain Series A Convertible Subordinated Note, Common Stock and Warrant Purchase Agreement, dated the date hereof, between the Company and the Investors (the "Purchase Agreement"), the Company has conducted a bridge financing in which it has offered for sale Series A Convertible Subordinated Notes (the "Notes"), shares of Common Stock (the "Bridge Shares") and Warrants (the "Warrants") to purchase the Company's common stock. In order to induce the Investors to purchase the Notes, the Bridge Shares and the Warrants, the Company has agreed to provide the registration rights set forth in this Agreement. AGREEMENT Now, therefore, in consideration of the various covenants and agreements contained herein and in the Purchase Agreement, and intending to be legally bound hereby, the Company agrees with the Investors as follows: 1. REGISTRATION RIGHTS. 1.1 CERTAIN DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (b) "Common Stock" shall mean the common stock, no par value, of the Company. (c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (d) "Investors" shall have the meaning assigned in the preamble to this Agreement and shall include each assignee or successor to each Investor. 2 (e) The terms "Register", "Registered" and "Registration" refer to a registration effected by preparing and filing a Registration Statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such Registration Statement by the Commission. (f) "Registrable Securities" shall mean the Shares so long as such shares are ineligible for sale under subparagraph (k) of Rule 144. (g) "Registration Expenses" shall mean all expenses incurred by the Company in complying with Section 1 hereof, including, without limitation, all federal and state registration, qualification and filing fees, Nasdaq or exchange listing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such Registration and the reasonable fees and disbursements of counsel for the Selling Shareholders, as selling shareholders. (h) "Registration Statement" shall mean Form S-1, Form SB-1, Form S-2, Form SB-2 or Form S-3, promulgated by the Commission (or any successor forms) whichever is applicable. (i) "Restriction Termination Date" shall mean, with respect to any Registrable Securities, the earliest of (i) the date that such Registrable Securities shall have been Registered and sold or otherwise disposed of in accordance with the intended method of distribution by the seller or sellers thereof set forth in the Registration Statement covering such securities or transferred in compliance with Rule 144, and (ii) the date that an opinion of counsel to the Company containing reasonable assumptions (which opinion shall be subject to the reasonable approval of counsel to any affected Investor) shall have been rendered to the effect that the legend referred to in Section 3.8(a) of the Subscription Agreement can be properly removed as inapplicable because the Registrable Securities covered thereby can be freely traded and such legend shall have been removed. (j) "Rule 144" shall mean Rule 144 promulgated by the Commission pursuant to the Securities Act. (k) "Securities Act" shall mean the Securities Act of 1933, as amended. (l) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities pursuant to this Agreement. (m) "Selling Shareholders" shall mean the holder or holders of Registrable Securities who requests Registration under Section 1 herein. (n) "Shares" shall mean the Bridge Shares and the Common Stock issued to the Investors upon conversion of the Notes and upon exercise of the Warrants. -2- 3 (p) "Other Registrable Securities" shall mean (i) the Common Stock issued to holders of the Company's Series B Preferred Stock upon conversion of such stock and with respect to which such holders have been granted registration rights pursuant to the Registration Rights Agreement between the Company and such holders, and (ii) the Common Stock held by common shareholders of the Company and with respect to which such shareholders have been granted registration rights pursuant to the Registration Rights Agreement between the Company and such shareholders. 1.2 REQUIRED REGISTRATION. If the Company shall be requested by holders of at least a majority of the outstanding Shares to effect the Registration of Registrable Securities, then the Company shall promptly give written notice of such proposed Registration to all holders of Shares, and thereupon the Company shall promptly use its best efforts to effect the Registration of the Registrable Securities that the Company has been requested to Register for disposition as described in the request of such holders of Shares and in any response received from any of the holders of Shares within ten (10) days or such longer period as shall be set forth in the notice, after the giving of the written notice by the Company; provided, however, that the Company shall not be obligated to effect any Registration except in accordance with the following provisions: (a) The Company shall not be obligated to file and cause to become effective more than one (1) Registration Statement in which Registrable Securities are Registered pursuant to this Section 1.2. (b) Notwithstanding the foregoing, the Company may include in each such Registration requested pursuant to this Section 1.2 any authorized but unissued shares of Common Stock (or treasury shares) for sale by the Company or any issued and outstanding shares of Common Stock for sale by others; provided, however, that, if the number of shares of Common Stock so included pursuant to this clause (b) exceeds the number of Registrable Securities requested by the holders of Shares requesting such Registration, then such Registration shall be deemed to be a Registration in accordance with and pursuant to Section 1.3 of this Agreement (and not this Section 1.2); and provided further, however, that the inclusion of such authorized but unissued shares of Common Stock (or treasury shares) by the Company or issued and outstanding shares of Common Stock by others in such Registration shall not prevent the holders of Shares requesting such Registration from registering the entire number of Registrable Securities requested by them. (c) The Company shall not be required to file a registration statement pursuant to this Section 1.2: (i) within six (6) months after any other registration by the Company or (ii) for six (6) months after the request for Registration under this Section 1.2 if the Company is then engaged in negotiations regarding a material transaction which has not otherwise been publicly disclosed, or such shorter period ending on the date, whichever first occurs, that such transaction is publicly disclosed, abandoned or consummated. 1.3 PIGGYBACK REGISTRATION. -3- 4 (a) Each time that the Company proposes to Register a public offering solely of its Common Stock (not including an offering of Common stock issuable upon conversion or exercise of other securities), other than pursuant to a Registration Statement on Form S-4 or Form S-8 or similar or successor forms (collectively, "Excluded Forms"), the Company shall promptly give written notice of such proposed Registration to all holders of Shares, which shall offer such holders the right to request inclusion of any Registrable Securities in the proposed Registration. (b) Each holder of Shares shall have ten (10) days or such longer period as shall be set forth in the notice from the receipt of such notice to deliver to the Company a written request specifying the number of shares of Registrable Securities such holder intends to sell and the holder's intended plan of disposition. (c) In the event that the proposed Registration by the Company is, in whole or in part, an underwritten public offering of securities of the Company, any request under Section 1.3(b) may specify that the Registrable Securities be included in the underwriting on the same terms and conditions as the shares of Common Stock, if any, otherwise being sold through underwriters under such Registration. (d) Upon receipt of a written request pursuant to Section 1.3(b), the Company shall promptly use its best efforts to cause all such Registrable Securities to be Registered, to the extent required to permit sale or disposition as set forth in the written request. (e) Notwithstanding the foregoing, if the managing underwriter of an underwritten public offering determines and advises in writing that the inclusion of all Registrable Securities proposed to be included in the underwritten public offering, together with any other issued and outstanding shares of Common Stock proposed to be included therein by holders other than the holders of Registrable Securities (such other shares hereinafter collectively referred to as the "Other Shares"), would interfere with the successful marketing of the securities proposed to be included in the underwritten public offering, then the number of such shares to be included in such underwritten public offering shall be reduced, and shares shall be excluded from such underwritten public offering in a number deemed necessary by such managing underwriter, to the extent necessary, pro rata with respect to the Registrable Securities sought to be included therein and all Other Shares otherwise entitled to be included therein. (f) All Shares that are not included in the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 6 months following a public offering, that the managing underwriter reasonably determines as necessary in order to effect the underwritten public offering. The holders of such Shares shall execute such customary documentation as the managing underwriter reasonably requests to evidence this lock-up. 1.4 PREPARATION AND FILING. If and whenever the Company is under an obligation pursuant to the provisions of this Section 1 to use its best efforts to effect the Registration of any Registrable Securities, the Company shall, as expeditiously as practicable: -4- 5 (a) prepare and file with the Commission a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become and remain effective in accordance with Section 1.4(b) hereof, keeping each Selling Shareholder advised as to the initiation, progress and completion of the Registration; (b) prepare and file with the Commission such amendments and supplements to such Registration Statements and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for six months or, if sooner, until all Registrable Securities covered by such Registration Statement have been sold, and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement; (c) furnish to each Selling Shareholder such number of copies of any summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such Selling Shareholder may reasonably request in order to facilitate the public sale or other disposition of such Registrable Securities; (d) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as each Selling Shareholder shall reasonably request and do any and all other acts or things which may be necessary or advisable to enable such holder to consummate the public sale or other disposition in such jurisdictions of such Registrable Securities; provided, however, that the Company shall not be required to consent to general service of process, qualify to do business as a foreign corporation where it would not be otherwise required to qualify or submit to liability for state or local taxes where it is not liable for such taxes; and (e) at any time when a prospectus covered by such Registration Statement is required to be delivered under the Securities Act within the appropriate period mentioned in Section 1.3(b) hereof, notify each Selling Shareholder of the happening of any event as a result of which the prospectus included in such Registration, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing and, at the request of such seller, prepare, file and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances then existing. 1.5 EXPENSES. The Company shall pay all Registration Expenses incurred by the Company in complying with this Section 1; provided, however, that all Selling Expenses applicable to the Registrable Securities covered by registrations effected pursuant to Section 1 hereof shall be borne by the seller or sellers thereof based on the number of Registrable Securities sold by such seller or sellers. -5- 6 1.6 INFORMATION FURNISHED BY INVESTOR. It shall be a condition precedent to the Company's obligations under this Agreement as to any Selling Shareholder that such Selling Shareholder furnish to the Company in writing such information regarding such Selling Shareholder and the distribution proposed by such Selling Shareholder as is required by the Securities Act or otherwise by the Commission. 1.7 INDEMNIFICATION. (a) Company's Indemnification of Investors. The Company shall indemnify each Selling Shareholder, each of its officers, directors and constituent partners, and each person controlling such Selling Shareholder, and each underwriter thereof, if any, and each of its officers, directors, constituent partners, and each person who controls such underwriter, against all claims, losses, damages or liabilities (or actions in respect thereof) suffered or incurred by any of them, to the extent such claims, losses, damages or liabilities arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any Registration Statement covering the sale of Registrable Securities or any related prospectus, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act, the Exchange Act or any state blue sky laws applicable to the Company and relating to actions or inaction required of the Company in connection with any such Registration; and the Company will reimburse each such Selling Shareholder, each such underwriter, each of their officers, directors and constituent partners and each person who controls any such Selling Shareholder or underwriter, for any legal and any other expenses as reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the indemnity contained in this Section 1.7(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if settlement is effected without the consent of the Company (which must not be unreasonably withheld); and provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based upon any untrue statement or omission based upon written information furnished to the Company by such Selling Shareholder, underwriter, controlling person or other indemnified person for use in connection with the offering of securities of the Company. (b) Selling Shareholder's Indemnification of Company. Each Selling Shareholder (severally and not jointly) shall indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's Registrable Securities covered by a Registration Statement, each person who controls the Company or such underwriter within the meaning of the Securities Act, and each other Selling Shareholder, each of its officers, directors and constituent partners and each person controlling such other Selling Shareholder, against all claims, losses, damages and liabilities (or actions in respect thereof) suffered or incurred by any of them and arising out of or based upon any untrue statement (or alleged untrue statement) of a material fact contained in such Registration Statement or related prospectus, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not -6- 7 misleading, which in either case arises from written information provided by the Selling Shareholder for inclusion in such Registration Statement; and will reimburse the Company, each other Selling Shareholders, such directors, officers, partners, persons, underwriters and controlling persons for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action. (c) Indemnification Procedure. Promptly after receipt by an indemnified party under this Section 1.7 of notice of the commencement of any action which may give rise to a claim for indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 1.7, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense of such claim, and shall be entitled to select counsel for the defense of such claim with the approval of any parties entitled to indemnification, which approval shall not be unreasonably withheld. Notwithstanding the foregoing, the parties entitled to indemnification shall have the right to employ separate counsel (reasonably satisfactory to the indemnifying party) to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified parties unless the named parties to such action or proceedings include both the indemnifying party and the indemnified parties and the indemnifying party or such indemnified parties shall have been advised by counsel that there are conflicting interests between the indemnified parties and the indemnifying party (in which case, if the indemnified parties notify the indemnifying party in writing that they elect to employ separate counsel at the reasonable expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action or proceeding on behalf of the indemnified parties; it being understood, however, that the indemnifying party shall not, in connection with any such action or proceeding or separate or substantially similar or related action or proceeding in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate counsel at any time for all indemnified parties, which counsel shall be designated in writing by the Investors of a majority of the Registrable Securities). (d) Contribution. If the indemnification provided for in this Section 1.7 from an indemnifying party is unavailable to an indemnified party hereunder in respect to any losses, claims, damages, liabilities or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the statements or omissions which result in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or indemnified party and the parties' relative intent, knowledge, access to information supplied by such indemnifying party or indemnified party and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses -7- 8 reasonably incurred by such party in connection with investigating or defending any action, suit, proceeding or claim. 2. COVENANTS OF THE COMPANY. The Company agrees as follows: (a) The Company will notify the holders of Registrable Securities included in a Registration Statement of the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings for that purpose. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time. (b) If the Common Stock is then listed on a national securities exchange, the Company will use its best efforts to cause the Registrable Securities to be listed on such exchange. If the Common Stock is not then listed on a national securities exchange, the Company will use its best efforts to facilitate the reporting of the Registrable Securities on the Nasdaq National Market. (c) The Company will take all other reasonable actions necessary to expedite and facilitate disposition of the Registrable Securities by the holders thereof pursuant to the Registration Statement. (d) With a view to making available to the holders of Registrable Securities the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, at all times after 90 days after the effective date of the first Registration Statement filed by the Company for the offering of its securities to the general public; (ii) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (iii) furnish to each holder of Shares, so long as such holder of Shares owns any Shares, forthwith upon written request (a) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), (b) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (c) such other information as may be reasonably requested and as is publicly available in availing the holders of Shares of any rule or regulation of the Commission which permits the selling of any such securities without registration. -8- 9 (e) Prior to the filing of the Registration Statement or any amendment thereto (whether pre-effective or post-effective), and prior to the filing of any prospectus or prospectus supplement related thereto, the Company will provide each Selling Shareholder with copies thereof. 4. MISCELLANEOUS. (a) Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given if given in accordance with the Purchase Agreement. (b) Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of Warrants representing a majority of the shares of Common Stock issuable upon conversion of the Notes. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Investor, each assignee or transferee of such Investor and the Company. (c) This Agreement shall be governed and construed under the laws of the State of Connecticut without giving effect to the conflict of law principles. The parties irrevocably consent to the exclusive jurisdiction of the Superior Courts of the State of Connecticut at Hartford, Connecticut or the United States District Court for the District of Connecticut. (d) If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. (e) This Agreement and the documents referred to herein constitute the entire agreement hereto with respect to the subject matter hereof among the parties, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. IN WITNESS WHEREOF, the Company has caused this Registration Agreement to be duly executed by its authorized officer whose signature appears below. ACCENT COLOR SCIENCES, INC. By: /s/___________________________ Name: Charles E. Buchheit Title: President and Chief Executive Officer -9- 10 SCHEDULE A Investors Orbis Pension Trustees Limited The PMG Eagle Fund -10- EX-10.5 6 EX-10.5 1 T H I R D A M E N D M E N T This is the Third Amendment ("Amendment") to the April 11, 1996 Product Purchase Agreement ("Agreement") that was entered into by and between International Business Machines Corporation ("IBM") and Accent Color Sciences, Inc. ("ACS"). Both IBM and ACS agree to the following terms and conditions: 1.0 ACS' address in the opening paragraph of the Agreement is revised to read, "800 Connecticut Blvd, East Hartford, Connecticut 06108." 2.0 The definition in Section 1.7, "Epidemic Failure," is revised in its entirety to read: "Epidemic Failure" shall mean [*] 3.0 The definition in Section 1.11, "Printer Engines," is revised in its entirety to read: "Printer Engines" shall mean the printing systems, as listed in Attachment 1, sold by Seller to Buyer under this Agreement. 4.0 The definition, "Event of Default," is added to the Agreement as a new Section 1.18 as follows: "Event of Default" shall mean any of the following events: (i) Seller shall fail or be unable for any reason to provide Products, Spare Parts, and/or Supplies within [*] following receipt of written notice of default from Buyer; (ii) Seller shall assign this Agreement in violation of the terms of Section 17.5; (iii) Seller shall fail to provide Buyer Product enhancements as required by Section 8.4 or new Products as required by Section 8.5; (iv) Seller shall fail to comply with any other material term of this Agreement; or (v) Seller shall fail, in a timely fashion, to receive and maintain financing in sufficient - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1 2 amount to maintain its capability to perform its obligations under this Agreement. 5.0 The definition, "Change of Control," is added to the Agreement as a new Section 1.19 as follows: "Change of Control" shall mean the occurrence of any one of the following events: (i) any "person" (as such term is used in Sections 3(a)(9) and 13(d) of the 1934 Act) becomes a "beneficial owner" (as such term is used in Rule 13d-3 promulgated under the 1934 Act) of thirty (30) percent or more of the Seller's capital stock having general voting power to elect the directors of Seller; (ii) the majority of the Seller's board of directors consists of individuals other than the members of the board as of July 21, 1998 (the "Incumbent Directors"); provided that any person becoming a director subsequent to the date hereof whose nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (iii) the merger or consolidation of Seller with or into another corporation and, after such merger or consolidation is consummated, either (A) Seller is not the surviving corporation, or (B) if Seller is the surviving corporation, then Seller is a wholly-owned subsidiary of another corporation and the stockholders of Seller, immediately before such merger or consolidation is consummated, do not own at least 80% of the voting capital stock of Seller's parent corporation immediately after such merger or consolidation is consummated; (iv) the sale, lease, transfer or disposition of 20% or more of Seller's assets outside the normal course of business; or (v) Seller adopts a plan of liquidation providing for the distribution of all or substantially all of its assets. 6.0 Section 2.1 is revised in its entirety to read: TERM. This Agreement shall begin on the Commencement Date and shall continue in effect for six (6) years. 7.0 The following paragraph is added to the Agreement as a new Section 3.8: SUPPORT OF MARKETING AND TECH SUPPORT. In an effort to aid Seller in its support of Buyer's sales efforts concerning the Products, Buyer agrees to pay Seller an 2 3 amount equal to [*] every month for a period commencing on March 1, 1999 and ending on August 31, 1999. Buyer agrees to make its initial payment to Seller within thirty days of this Amendment. Seller agrees to apply such payment for its reasonable marketing expenses incurred supporting Buyer's sales efforts and field technical support, including the salaries of its marketing personnel, the procurement of printing supplies in its demonstration center and travel expenses. This represents a purchase of services by Buyer and not a loan of monies by Buyer. If an Event of Default has occurred, Buyer's obligation under this Section for additional payments shall terminate effective immediately. 8.0 The first sentence of the first paragraph of Section 4.2 is revised in its entirety to read as follows: "Except with respect to Buyer's commitment expressed in Section 4.6 below, purchase orders shall serve as Buyer's only commitment to purchase." 9.0 The paragraph following Table I in Section 4.2 is revised in its entirety to read: The lead time period for purchase of Spare Parts will be three (3) months. The lead time period for purchase of Supplies will be three (3) months for standard ink colors. For special or other non-standard colors, the lead time period will be targeted at three (3) months and Seller will use its commercially reasonable efforts to reach a three (3) month lead time for special, non-standard ink colors. As volumes of sales increase, Seller will use its commercially reasonable efforts to reduce the lead time for delivery of finished Printer Engine units. In addition, Seller will use its commercially reasonable efforts to reduce the lead time for delivery of standard ink colors to sixty (60) days beginning in the first quarter, 2000. 10.0 Section 4.3 is revised in its entirety to read: ORDER ACCEPTANCE. Seller shall provide Buyer with a written or electronic notice of acceptance or rejection of a purchase order no later than seven (7) calendar days after receipt of the written order. Seller may specify phased delivery of Printer Engines as part of order acceptance if such phased delivery is within the purchase order lead time periods as specified in 4.2. Any purchase order to which Seller fails to respond within such seven (7) calendar days shall be deemed to have been accepted by Seller. Any rejection shall include the reason for rejection. Seller may reject a purchase order only if it fails to comply with the forecast, except as permitted herein, and other terms and conditions of this Agreement. 11.0 The following paragraph is added to the Agreement as a new Section 4.6: FIRM PURCHASE COMMITMENT. Buyer agrees to buy a minimum of [*] Printer - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 3 4 Engines of the valued-engineered version from Seller during the calendar year 2000; provided, however, such commitment to purchase is subject to the following conditions: (i) Spare Parts, Supplies and Options and Features are readily available to Buyer from Seller as specified in Section 4.2; (ii) such Printer Engines comply with the Printer Specifications; (iii) such Printer Engines are readily available to Buyer with initial deliveries beginning no later than March 31, 2000; (iv) no Epidemic Failures which substantially, given clear and convincing evidence, affect Buyer's ability to market such Printer Engines occur during the twelve (12) month period; (v) such Printer Engines remain competitive. In the event a competing product is introduced which significantly, given clear and convincing evidence, impacts Buyer's overall sales of the Printer Engines, Buyer shall be relieved of the minimum commitment; (vi) all Printer Engines purchased before December 31, 2000, regardless of whether developmental or production versions, shall count as part of [*] unit commitment; and (vii) an Event of Default has not occurred. 12.0 The following paragraph is added to the Agreement as a new Section 4.7: PROJECTED LIVES OF SPARE PARTS AND SUPPLIES. The parties agree to meet regularly to monitor Spare Part and Supply item failures that are adversely affecting Buyer's cost estimate for supplying maintenance services on the Products. Whenever a Spare Part or Supply item is consistently failing early such that Buyer is contemplating invoking its rights to corrective action as described below, Buyer agrees to provide Seller with such failed Spare Parts or Supply items in an amount sufficient to determine base causes of such failures or with results from laboratory simulations of such failures. In the event any Spare Part or Supply item consistently fails to meet its projected life expectancy set forth in Attachment 8 such that it materially affect Buyer's cost estimate for supplying maintenance services on the Products, then Seller agrees to implement a mutually agreed upon corrective action plan within [*] days after Buyer gives Seller written notice of such failures and has given Seller either representative failed Spare Parts or Supply items or the results of the simulation - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 4 5 analysis. Such corrective action plan shall include compensation given by Seller to Buyer's for its increased costs, both labor and material, and a plan to correct the design and/or manufacture so that the affected item meets its projected life expectancy. In the event Seller's corrective action plan includes a remanufacturing process, Buyer agrees to supply Seller with such failed Spare Parts or Supply items. 13.0 Section 5.2 is revised in its entirety to read: DELIVERY. Delivery of Products shall be F.O.B. Seller's location at 800 Connecticut Blvd, East Hartford, Connecticut 06108. 14.0 Section 7.2 is revised in its entirety to read: TERMS OF PAYMENT. For invoices received before January 1, 2001, Buyer shall pay Seller in full in U.S. dollars for Products it purchases as soon as practical but no later than [*] days of receipt of Seller's invoice therefor. For invoices received on or after January 1, 2001, Buyer shall pay Seller in full in U.S. dollars for Products it purchases within [*] days of receipt of Seller's invoice therefor. For those Printer Engines ordered in compliance with Section 4.6, Seller may invoice Buyer [*] dollars for each such Printer Engine at such time it needs to start ordering supplies for the manufacture of such Printer Engine. Buyer shall be entitle to a lien on Seller's total inventory of goods to the extent that Buyer has made Printer Engine down payments for which no deliveries to Buyer have been made. Seller shall only use such down payment for the purchase of such components for Buyer's ordered Printer Engines. 15.0 Section 8.5 is revised by adding the following to the end, "The parties agree, no later than October 1, 1999, using commercially reasonable efforts, to put a plan in place for the development of the [*] Printer Engine [*]." 16.0 The existing Sections 10.6, "Epidemic Failures," and 10.7, "Limitation of Warranties," are renumbered to Section 10.7, "Epidemic Failures," and 10.8, "Limitation of Warranties." 17.0 The following paragraph is added to the Agreement as a new Section 10.6: REMEDY FOR BREACH OF WARRANTY FOR CERTAIN SPARE PARTS. For certain Spare Parts, the list of which the parties will mutually agree, in lieu of any of the remedies listed above in Section 10.5 for breaches of the warranty set forth in Section 10.1, [*] - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 5 6 18.0 The following paragraph is added to the Agreement as a new Section 10.9: SALE NOTIFICATION. Seller covenants that it shall promptly notify Buyer, in accordance with Section 17.9, upon Seller's decision to take steps or upon learning that a third party intends to take, or has taken, steps that, if successful, would result in a Change of Control. 19.0 The following paragraph is added to the Agreement as a new Section 12.4: REMANUFACTURE OF PRODUCTS. Seller agrees to provide a remanufacturing program upon mutually agreeable terms for certain Products during the term of this Agreement at a time when the volume of such used Products warrants such a program. 20.0 The following paragraph is added to the Agreement as a new Section 12.5: MAINTENANCE OF SKILLS. Seller agrees to retain the services of sufficient number of employees with sufficient skills and training such that Seller maintains its capability to perform its obligations under this Agreement. 21.0 Section 17.5 is revised in its entirety to read: ASSIGNMENT. Neither party shall assign this Agreement to any other party without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, a party may assign its rights or any of its obligations to a third party in connection with a merger or consolidation of the assignor or a transfer or sale to such third party of all or substantially all of the Seller assets in the case of such transfer or sale involving the Seller, or all or substantially all of the assets of the division of Buyer presently known as the IBM Printing Systems Company in the case of such transfer or sale involving the Buyer, except that, notwithstanding the foregoing, Seller may not assign its rights or delegate its duties hereunder to any person (natural or otherwise) which has not agreed to be bound by the obligations of this Agreement. Any assignment contrary to these terms shall be void and considered an Event of Default. 22.0 Section 17.9 is revised in its entirety to read: NOTICES Any notice which may be or is required to be given under this Agreement shall be in writing, and shall be deemed to have been received: a) when delivered personally, b) when sent by confirmed facsimile, c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or d) one (1) day after deposit with a commercial overnight carrier with written verification 6 7 of receipt. All notices shall be sent to the addresses set forth below: Notices regarding technical information: BUYER: SELLER: [*] [*] Senior Engineer Director of Programs 6300 Diagonal Highway 800 Connecticut Blvd. Boulder, CO 80301 East Hartford, CT 06108 Notices regarding contract administration, daily operations and updates and modifications to the contract attachments: BUYER: SELLER: [*] [*] Contract Administrator/Engineer Director 1701 North Street 800 Connecticut Blvd. Endicott, NY 13760 East Hartford, CT 06108 Notices regarding contract modifications and contract interpretation: BUYER: SELLER: [*] [*] Director, Business Alliances President & CEO 6300 Diagonal Highway 800 Connecticut Blvd. Boulder, CO 80301 East Hartford, CT 06108 23.0 Section 17.19 is revised in its entirety to read: NO MINIMUM COMMITMENT. Except with respect to Section 4.6, both Buyer and Seller understand and agree that the Agreement does not obligate Buyer to purchase a minimum amount of Products. 24.0 Attachment 1 is deleted in its entirety and replaced with Attachment 1 as attached hereto. - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7 8 25.0 The fourth paragraph under the heading, "Technical Support,"of Attachment 6 is revised in its entirety to read: Technical support outside of normal business hours will only be requested after Buyer has exhausted all other technical support channels. These include an on site customer engineer, a district customer engineer and Boulder level 2 support. Both Buyer's engineering and Seller's engineering staffs will be responsible for level 3 support. Seller will provide a telephone number and fax number which will be available twenty-four (24) hours per day and seven (7) days per week. 26.0 Attachment 6 is revised to add the following the first paragraph under the heading, "On Site Support": Weekdays (Monday through Friday: 8 am -5 pm) [*] After Hours (M, Tu, Wed and Th: 5:01 pm to 7:59 am) [*] Weekends (5:01 pm Friday through 7:59 am Monday) and Holidays (per [*] Buyer's schedule)
1. There will be no charge for technical support if the problem is due to a Defect in design, manufacturing or a Seller supplied diagnostic tool, resulting in a failure of the Products to conform to the agreed upon Product Specifications. Both Buyer and Seller agree to implement a process to ensure that travel situations are charged to the appropriate party. 2. Travel costs to and from Buyer's designated site and Seller's location in East Hartford, Conn. are not covered in above table. 3. The minimum charge will be for 8 hours. 4. The rates listed above cover labor, lodging, meals and local transportation. Spare Parts and Supplies provided by Seller will be charged in accordance with Attachments 8 and 10. 27.0 Attachment 8 is deleted in its entirety and replaced with the Spare Parts table attached hereto and the following: - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 8 9 World Wide Emergency Order Process: Note: Buyer will place Emergency Orders only after it has searched through its various field stocking locations and has determined that the part is not available. If the situation should arise where Buyer or Seller deem that the Emergency Order process is not being properly used both parties agree to meet and reach a solution which is mutually agreeable to both parties. In the event that the Buyer has to place an Emergency Order because a Spare Part was not available through the normal parts replenishment process the handling fees described below should be waived. Buyer and Seller will agree when these situations occur. 1. Buyer's Emergency Order shall be placed against separate purchase orders issued at the time of order execution. 2. Seller will use its resources to attempt to meet a [*] compliance to ship all Emergency Orders within 24 hours unless otherwise specified by Buyer. 3. Emergency Orders shall be limited to one (1) line item per Order and a maximum of one (1) piece per each line item. 4. Seller will make every reasonable effort to make Emergency Orders available at its East Hartford, CT facility. 5. Freight charges from Sellers designated delivery point for Emergency Orders to Buyers designated destination are the responsibility of the Buyer. 6. Buyer's EO's shall be invoiced at the agreed upon Spare Parts price plus the following fees for special handling per line item. 7. Seller's Delivery point is FOB East Hartford, Connecticut. Buyer's designated shipper will be responsible for all customs and international shipping documentation, customs fees, duty fees, etc. - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9 10 8. The fees and times for handling Emergency Orders are described below:
TIME FEE Normal Working [*] Hours Off Hours on [*] Weekends Weekends and [*] Holidays
The times in the above table are defined in Attachment 6. In addition the Seller may specify parts to be shipped within 48 to 72 hours after notification from Buyer. The charge for handling this type of order is [*]. This will be known as a "2-to-3 day" order. All of the other conditions described in this section remain in effect for this type of order. Maintenance Parameters: - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 10 11 Both Buyer and Seller agree that the following table outlines the objectives which both parties will work to. Any changes to the table will require the consent of both Buyer and Seller. [*] 28.0 Attachment 10 is deleted in its entirety and replaced with Attachment 10 as attached hereto. 29.0 The remaining terms and conditions contained in the Agreement shall be unchanged. 30.0 This Amendment embodies the entire understanding of the parties with respect to the subject matter described herein and shall supersede all previous communications, representations and understandings, either oral or written, between the parties relating to the subject matter hereof. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed by the duly authorized representatives of the parties. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective authorized representatives. INTERNATIONAL BUSINESS MACHINES CORPORATION By: (Signature) Name: Title: Date: ACCENT COLOR SCIENCES, INC. By: (Signature) Name: Title: Date: - ---------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 11 12 Attachment 1: Printer, Options, and Features [*] Attachment 10: Supplies Listing, Prices, and Order Process [*] [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 12 EX-10.6 7 EX-10.6 1 Exhibit 10.6 Groupe SET International (A Xerox Company) ZI de Villemilan 2 Boulevard Arago 91320 Wissous France Accent Color Sciences Inc 800 Connecticut Boulevard East Hartford CT 06108 USA For the attention of Chuck Buchheit 21st July 1999 RE: VARIATIONS TO AGREEMENT BETWEEN ACS AND SET DATED 27TH AUGUST 1997 ("ACS CONTRACT") Dear Chuck Following our discussions and negotiations over the past weeks, concluding with our telephone conversation last Thursday, I should like to confirm the terms under which our respective companies will do business in future. I have done this by way of reference to the above agreement which covered the sale of ACS's TrueColor System Product to SET. In addition I have dealt with two other matters. Firstly, the agreement by which SET shall return the 41W system to you. Secondly, the agreement to modify forthwith the second agreement, also dated 27th August 1997, which covered the sale of SET's CES product to ACS ("SET Agreement"). 1. TERMS OF NEW BUSINESS Save where indicated below the obligations of ACS and SET shall be as set out in the ACS Contract and references are to clauses in that agreement. If there is any conflict between the terms as set out below and those contained in the ACS Contract the terms here take precedence. These Terms apply to the following ACS products: 1A (current design), and VE (both pre-production and production models). They also refer to five exhibits: I VE System Acceptance Test Plan II 1A Machine Change List III RMA Procedure IV QA Inspection Procedure V VE System Specification
1 2 Save for Exhibit IV, the Parties agree to use their best efforts to conclude their agreement of the Exhibits on or by 6th August 1999. If for any reason agreement cannot be reached by this date then SET reserves the right to cancel its purchase order for the [*] VE systems without liability to ACS. Following agreement of the Exhibits they shall be initialled and dated by the parties and incorporated into this Agreement. Exhibit IV shall be agreed by January 2000. II. PRODUCT DEVELOPMENT VE Product SET's performance and reliability requirements for the VE product and the schedule for acceptance testing is more fully described in the Acceptance Test Plan at Exhibit I (sent to you under separate cover). SET has purchased [*] pre-production VE systems for development and testing purposes. The parties agree that the three systems shall be deployed and supported as follows: - - VE System #1 To be located at ACS' premises in East Hartford and fully supported by ACS at ACS' expense. SET shall ship to East Hartford a 3057 printer with pre- and post-processing equipment (e.g. an unwinder and either a folding table or cutter, to be agreed between SET and ACS prior to shipment), together with SET's CES software (collectively known as the "SET Product") in accordance with the agreed timetable in Exhibit I. SET shall, via Xerox' PSSU, provide engineering support and all supplies and consumables, except paper, for the SET Product at its expense. ACS shall supply all paper. All of the equipment (SET Product and VE System #1) will remain the property of SET and shall be delivered up to SET upon request. If SET requests that the equipment be located off of ACS' premises then ACS shall provide support for VE System #1 but at its usual rates. - - VE System #2 Location to be in Europe and advised by SET. Without charge to SET, ACS shall install VE#2 and provide on-site support to SET until such time as there has been a satisfactory handover to SET, such period of support not to exceed five (5) working days. "Satisfactory handover" means that ACS has used its reasonable efforts to demonstrate to SET that VE#2 meets the specification more fully described in Exhibit V, and transferred sufficient documentation, knowledge and skills to SET as is necessary to enable SET personnel who are reasonably familiar with ACS's M2000 product to perform tests in accordance with Exhibit I. Following handover clause 9.2 of the ACS Contract shall apply. - -------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 3 - VE System #3 To be located at the premises of a customer of SET's in Europe: ACS to be advised of location. Without charge to SET or to the customer, ACS shall install VE#3 and provide on-site support until such time as there has been a satisfactory handover to SET. "Satisfactory handover" is as defined above save that an additional pre-condition is that the customer must formally sign off that it is satisfied with the installation of the VE system. Following handover clause 9.2 of the ACS Contract shall apply. SET agrees to waive the requirement for ACS to supply a declaration of conformity with EEC Directives, in accordance with section A of Exhibit I, prior to shipment of VE System #3 to the customer. Reviews: The parties shall perform periodic reviews of their progress against the agreed timetable as set out in Exhibit I using a combination of telephone calls to each other and face-to-face meetings, to be agreed by the parties. III. PURCHASE AND SALE OF PRODUCTS FOLLOWING DEVELOPMENT 1A (M2000HC) Product ACS shall provide to SET such support as described below to ensure the saleability before the end of 1999 of the [*] 1A systems already purchased by SET. Specifically, ACS shall i) close all items on the 1A Machine Change List (attached as Exhibit II) which are outstanding on the date of execution of this Variation; and ii) provide technical support by telephone in accordance with clause 9.2 of the ACS Contract. Items which are added to the 1A Machine Change List following execution of this Variation shall be addressed according to a timetable to be agreed by the parties. The parties acknowledge and confirm that the terms of the ACS Contract apply to SET's purchase of these systems, in particular ACS confirms that it shall continue after 1999 to support the systems and supply spares and consumables in accordance with the terms of the ACS Contract. VE Product - - Prices, Ordering, Payment: [*] - - Cancellation: Provided that ACS meets the requirements and timetable set out in Exhibit I SET shall not cancel its order for [*] of the VE systems. - -------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 3 4 Save as set out above, SET may cancel any portion of the remainder of the 1999 Purchase Order, without cause, and with the following liability, if a written notice (facsimile is acceptable) of such cancellation is given by SET at least [*] days prior to the scheduled delivery date. [*] Upon receipt of notice of cancellation, ACS shall make every reasonable effort to cancel commitments for, resell or divert materials and work-in-progress. If requested by SET, ACS shall Deliver to Set the materials and work-in-progress paid for by SET as a result of the cancellation of the remainder of the 1999 Purchase Order or any portion thereof. ACS's failure to complete all aspects of the Acceptance Test Plan (Exhibit I) by the agreed deadline of 22nd March 2000 shall give to SET the right to cancel the 1999 Purchase Order in its entirety without liability provided that notice of cancellation is prompt and in writing. - - Delivery Schedule: ACS shall deliver the systems to SET at the rate of [*] systems per month, the first delivery to be in March 2000, unless instructed otherwise by SET in writing. - - Inspection: Within a reasonable period following its arrival at SET's premises, SET shall inspect each system according to a QA procedure to be agreed by the Parties by January 2000. The agreed procedure, which shall be based upon suggestions made by Jean Luc Laurent and Michel Lemoine, shall be documented by the parties and incorporated into this agreement as Exhibit IV. In the event that a system fails such QA procedure ACS may, at its discretion, either send an engineer from the United States to inspect the system or recall the system to the United States at its expense to investigate the cause of non-compliance. If upon investigation by ACS the system is found to be to the agreed specification then ACS' costs shall be shared between the parties equally. - - Support: Unless agreed otherwise, ACS shall install [*] VE systems and provide on-site support until such time as there has been a satisfactory handover to SET. "Satisfactory handover" shall be as defined above. ACS agrees to meet the "out of pocket" expenses of its personnel i.e. travel, accommodation and subsistence, up to a cumulative total of [*], beyond which SET agrees to reimburse ACS for all reasonable "out-of-pocket" expenses upon production of receipts. ACS shall provide on-site technical and marketing support as requested in writing by SET at ACS's usual rates. SET shall reimburse to ACS all reasonable expenses for travel upon production of receipts. If requested by SET in writing ACS shall perform sample generation support without charge on the following conditions: i) the SET Product and VE#1 system remain installed and operational in E Hartford and ii) development and support activities take priority and iii) SET pays for the ink. - -------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 4 5 ACS has the right to refuse to perform sample generation without charge if the request has above average resource/cost implications for ACS. - - Training: ACS shall, at its expense, provide formal "train the trainer" training for up to ten (10) SET and/or Xerox engineers at a location to be decided by SET. Class sizes are restricted to five (5) attendees. In the event that the training is at ACS' premises in the US, SET shall meet its attendees' expenses; else if it is in Europe then ACS will meet the expenses of its own personnel. ACS agrees to provide future training classes upon SET's request, the charges for which will be agreed beforehand (Chuck/Fred, please let me have your current charges). SET agrees to give ACS at least 30 days notice of its requirement for training. In addition the following shall apply to all ACS Products: 8.1 Express Warranties ACS warrants that its Products are Year 2000 compliant and thus shall be able to accurately process date data (including but not limited to, calculating, comparing and sequencing from, into and between the twentieth and twenty-first centuries, including leap year calculations. Abnormal Frequent Failures The parties agree to list those parts that have seen abnormal frequent failures by March 2000. The parties agree to follow the procedure known as the "RMA procedure" and more fully described in Michel Lemoine's note dated 2nd June 1999 (as updated) and extracted and attached as Exhibit III. 8.3 Mandatory Retrofits This clause is varied such that ACS shall bear the cost of installation. In addition, ACS to decide whether to implement the retrofit themselves or to compensate SET; if SET perform retrofit the parties will agree on SET's rates and on a cap to SET's total cost beforehand and SET's costs will be auditable by ACS. 19.1 Accent Color Indemnity This clause is varied such that the indemnity extends to infringements of any patent recognized in Germany, Italy and Spain. ACS shall so indemnify all VE systems delivered to SET from March 2000. 2. RETURN OF 41W WITHOUT LIABILITY 5 6 With respect to the 41W system that SET has in its possession SET agrees to return this to ACS by the end of 1999 at SET's expense. ACS shall not charge SET for the system or hold SET liable in any way for any damage to the system or loss to ACS. Notwithstanding the foregoing, ACS shall charge SET for the costs of replacing any missing parts on the 41W. 3. VARIATION TO THE SECOND PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENT ("SET AGREEMENT") The parties agree to vary the above agreement dated 27th August 1997 between SET and ACS under which SET agreed to sell to ACS its CES Product without liability in the following manner: SET shall have the right to refuse to supply its CES product to ACS if in the opinion of either SET and/or Xerox ACS intends to supply CES to a competitor of SET and/or Xerox, save that SET shall lose this right if it has not purchased and received into Europe any ACS product, excluding spares or ink, in the 12 months preceding ACS's order for CES. For the avoidance of doubt, "Xerox" shall mean Xerox Corporation, Xerox Limited or any associate or subsidiary company of Xerox Corporation. Please execute both copies of this letter where indicated below acknowledging your agreement to the above. Yours sincerely Jerry Luckett Managing Director SET Electronique S.A. We, Accent Color Sciences Inc., hereby acknowledge and agree to the terms set out in this letter. Signed Name: Title: Date: Exhibit I VE System Acceptance Test Plan [*] Exhibit II 1A Machine Change List - -------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 6 7 [*] Exhibit III RMA Procedure Subject: EXHIBIT III - WARRANTY PARTS REPLACEMENT PROCEDURE FOR CONTRACT AMENDMENT Warranty, In-warranty parts replacement procedure, and Emergency Part Request procedure: - - WARRANTY - - Inspection clause: - Upon receipt, a new machine will undergo a QC acceptance inspection (see Exhibit IV) and then run 5000 feet in Belgium. At the conclusion of this inspection SET will send a QC report to ACS. The report will be discussed as part of the weekly call and both parties will agree on closure that the machine has passed inspection. - 40WH is only machine that has not passed SET inspection. - - Abnormally Frequent Failure clause: - Both parties will agree on a list of parts that have seen abnormally frequent failures. Any parts on this list will be considered under warranty until they are removed from the list. - Parts will be removed from the list based upon EC and field kit acceptance by SET. - Other parts may be added to the list based upon the abnormally frequent failures criteria set forth in the contract. - Any other part failures on a machine, after it has passed inspection, will be considered out of warranty. This includes early life failures of parts not on the abnormal failure list. - - IN-WARRANTY PARTS REPLACEMENT PROCEDURE 1. If a part has failed and is considered by SET to be in-warranty (see above), SET faxes an RMA request to ACS to return the failed part. RMA request includes: - SET request # (for reference until ACS sends an actual RMA #) - Part # to be returned (if printhead, the printhead serial #) - Description of problem - Printer serial # - Point of contact to clarify questions 2. ACS determines expected ship date (based upon request date & part availability) 3. ACS emails RMA with planned ship date "and SET reference number" to SET (address needed!). 4. If ACS Tech Support closes out an RMA because of direct action on their part, they will notify ACS Materials group to close out the RMA. 5. SET generates a separate purchase order for the full value of the part. Included on the purchase order is: - Full price of the part - Requested ship date based on ACS expected ship date - discrepancies will be escalated to ACS and SET management - Ship To information 6. ACS sends the part to SET - sent UPS Ground International - at ACS expense - referencing the PO (if SET requires expedited shipment, ACS will send the part UPS Red International - but at SET expense). 7. ACS issues an invoice to SET against the purchase order for the full value of the part at time of shipment. 8. Upon receipt of the replacement part, SET will return the failed part to ACS within 45 days; shipping charges are at ACS expense. a) If part failure is determined to be covered by warranty, ACS will issue full credit to SET for the value of the part, cancelling out the open invoice issued above. b) If part failure is determined by ACS to be out of warranty, ACS' invoice for the replacement part will remain and no credit will be issued. At SET's request, ACS can return the failed parts to SET, at SET expense. - - EMERGENCY PARTS PROCESS - -------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7 8 1. "When a part fails that is not in SET inventory - EMERGENCY PART REQUEST PROCESS - get part out within 24 to 48 hours - based upon availability. 2. SET generates a part request, by fax, with a PO# on it (viewed as an emergency PO - with normal price for the part on it) and sends to ACS. 3. ACS sends a confirmation to SET, by fax, with expected part availability. 4. ACS ships the part out. SET is responsible for all shipping and handling charges (It is understood that this is an expedited part request - emergency) 5. If it is an "EMERGENCY - EMERGENCY" - for example on the weekend - a call is made to 001-860-610-4040 and information will be left with the answering service of who and where ACS can call to get accurate information. The answering service will contact ACS, ACS will call SET to confirm the requirements. ACS will then take appropriate action. Exhibit IV QA Inspection Procedure Exhibit IV shall be agreed by January 2000 Exhibit V VE System Specification [*] - -------- [*]OMITTED INFORMATION SUBJECT TO PENDING CONFIDENTIAL TREATMENT REQUEST AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 8 EX-27 8 EX-27
5 3-MOS DEC-31-1999 SEP-30-1999 1,456,989 0 282,100 0 1,990,620 3,947,701 4,399,680 (3,082,991) 5,335,373 4,076,316 2,334,746 2,372,953 0 47,630,061 (51,588,818) 5,335,373 1,475,004 1,475,004 1,318,789 1,318,789 538,612 0 118,040 (1,128,010) 0 (1,128,010) 0 0 0 (1,128,010) (0.04) (0.04)
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