10-Q 1 d25822_10-q.txt QUARTERLY REPORT ================================================================================ 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 March 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to ______ ------------------ Commission File Number 0-29048 ACCENT COLOR SCIENCES, INC. (Exact name of registrant as specified in its charter) Connecticut 06-1380314 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 Connecticut Boulevard, East Hartford, Connecticut 06108 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (860) 610-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares outstanding of the registrant's common stock as of April 30, 2001 was 27,163,007. ================================================================================ ACCENT COLOR SCIENCES, INC. FORM 10-Q For The Quarterly Period Ended March 31, 2001 INDEX Part I. Financial Information Item 1. Financial Statements............................................. 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... .................................. 9 Part II. Other Information Item 1. Legal Proceedings................................................ 12 Item 2. Changes in Securities and Use of Proceeds........................ 12 Item 3. Defaults Upon Senior Securities.................................. 12 Item 4. Submission of Matters to a Vote of Security Holders.............. 12 Item 5. Other Information................................................ 12 Item 6. Exhibits and Reports on Form 8-K................................. 12 Signatures ................................................................. 13 2 ACCENT COLOR SCIENCES, INC. CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements. 3 ACCENT COLOR SCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 4 ACCENT COLOR SCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 5 ACCENT COLOR SCIENCES, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

The accompanying notes are an integral part of these financial statements. 6 ACCENT COLOR SCIENCES, INC. NOTES TO 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 March 31, 2001 and the results of operations and cash flows for the three months ended March 31, 2001 and 2000. The December 31, 2000 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, 2000. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. 2. Summary of Significant Accounting Policies Significant accounting policies followed in the preparation of these financial statements are as follows: Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue is generally recognized upon product shipment. The Company has established warranty policies that, under specific conditions, enable customers to return products. The Company provides reserves for potential returns and allowances and warranty costs at the time of revenue recognition. As of March 31, 2001 and December 31, 2000, the Company has accrued warranty costs of $116,123 and $176,457, respectively. 3. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Inventories consist of the following: March 31, December 31, 2001 2000 ---- ---- (unaudited) Raw materials and components $378,623 $559,393 Work-in-process 6,941 10,000 Finished goods 68,249 113,289 -------- -------- $453,813 $682,682 ======== ======== 4. Modification of Debt Terms On August 2, 1999, the Company and IBM Corporation entered into an agreement to defer the interest payments owed by the Company to IBM arising out of the original Loan Agreement between the two companies dated July 21, 1998. This modification provided that the interest payments of approximately $63,000 due on the first day of each quarter during 1999 be deferred until December 31, 2000. During 2000 the Company paid its interest payments for each quarter as required by the original Loan Agreement. As of December 31, 2000 the Company was unable to repay the loan and the deferred interest from 1999, therefore IBM granted an extension until June 30, 2001. In lieu of interest payments, IBM has received discounts on their purchases of ink and spare parts (see Note 6). 7 ACCENT COLOR SCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 5. Mandatorily Redeemable Convertible Preferred Stock Mandatorily redeemable convertible preferred stock consists of Series B Convertible Preferred Stock ("Series B Stock" and Series C Convertible Preferred Stock (`Series C Stock"). As of March 31, 2001, there were 2,666,670 shares of common stock reserved for issuance pursuant to the conversion of the outstanding 958 shares of Series B Stock. On December 7, 1999, the Company completed an offering of 33,589 shares of Series C Stock. The shares of stock were sold at a purchase price of $100 per share. The Company's net proceeds from this issuance were $2,894,822. Additional issuance costs of $88,964 were incurred in the year 2000. The Series C Stock is convertible at any time into shares of the Company's common stock at a fixed conversion price of $0.40 per share. As of March 31, 2001, there were 15,115 shares of Series C Stock that have been converted to 3,778,750 shares of common stock. As of March 31, 2001, the Company has reserved 4,618,500 shares of common stock for issuance pursuant to the conversion of the remaining 18,474 shares of Series C Stock that are outstanding. Series C Stock holders are entitled to receive cumulative dividends at a rate of 8% per year of the initial purchase price of $100 per share but only upon the occurrence of a Liquidation Event, provided that any such dividend is coupled with an equivalent ratable dividend to the holders of the Series B Stock. A "Liquidation Event" is defined to include a merger (except a merger in which Accent Color is the surviving entity), consolidation, dissolution, winding up or sale of substantially all of the assets of the company, unless the holders of at least 75% of the Series B and Series C Stocks determine that any such event is not a Liquidation Event. A reconciliation of mandatorily redeemable convertible preferred stock outstanding is as follows:

6. Subsequent Events The Company has reached a settlement agreement with IBM providing for the termination of the Loan Agreement, Promissory Note and Stock Purchase Warrant and Registration Rights Agreement as of May 10, 2001. To fully satisfy the loan, the Settlement Agreement requires the Company to pay IBM $450,000 by June 30, 2001. In addition, the Company will transfer specific inventory to IBM which will continue to be warehoused by the Company, the Company will give IBM direct access to vendors and, if necessary, act as an intermediary with vendors for IBM. Also, the Company granted to IBM an irrevocable, perpetual, worldwide, non-exclusive, non-transferable, fully paid up and royalty free license to make, have made on its behalf, use and sell the products and devices. The Product Purchase Agreement signed by the Company and IBM in April, 1996, as amended, is not affected by the settlement agreement. 8 ACCENT COLOR SCIENCES, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Quarter Ended March 31, 2001 compared to Quarter Ended March 31, 2000. Total Net Sales. Total net sales were $558,000 for the three months ended March 31, 2001 compared to $1,146,000 for the three months ended March 31, 2000. The Company did not ship any Truecolor printing systems during the quarter ended March 31, 2001 due to a lack of new orders for Truecolor Systems from its remaining OEM customer, IBM. IBM experienced disappointing sales results in 2000 and began 2001 with a substantial inventory of Truecolor Systems. Consequently, the Company has focused its energies during the past quarter on development projects and the sale of consumables and spare parts. Development revenue was 47% of total net sales while sales of consumables and spare parts represented 53% of total net sales. Backlog. The Company measures backlog based on purchase orders or commitments for consumables and spare parts that have not yet been shipped. As of March 31, 2001, the Company had a backlog for the year 2001 of approximately $149,000 as compared to over $10 million at March 31, 2000. The decline in backlog is attributable to the absence of new orders for Truecolor Systems offset only slightly by ongoing development projects. Development Projects. The Company was engaged in two development projects for the three months ended March 31, 2001 which generated revenue of $261,000. There was no comparable activity for the three months ended March 31, 2000. Consumables and Spare Parts Sales. Consumables and spare parts sales were $297,000 for the three months ended March 31, 2001 compared to $432,000 for the three months ended March 31, 2000. There have been no new printer installations in 2001, therefore the need for consumables has decreased by 31%. Costs of Production. Costs of production were $560,000 for the three months ended March 31, 2001 as compared to $1,254,000 for the three months ended March 31, 2000. This decrease of 55% was attributed to the cessation of printer production in 2001 due to the lack of orders for new printers as of March 31, 2001. Research and Development Expenses. Research and development expenses primarily consist of the cost of personnel and equipment needed to conduct the Company's research and development efforts, including manufacturing prototype systems. Research and development expenses were $244,000 for the three months ended March 31, 2001, a decrease of 64% as compared to $682,000 for the three months ended March 31, 2000. The decrease in research and development was primarily attributable to a reduction in payroll, the related decrease in costs due to a reduction in personnel and a reduction of outside design work. The Company focused its energies on development projects that were funded. Marketing, General and Administrative Expenses. Marketing, general and administrative expenses were $532,000 for the three months ended March 31, 2001 as compared to $735,000 for the three months ended March 31, 2000. This decrease of 28% was due to a reduction in payroll related costs. Interest Expense and Other (Income) Expense. Interest expense was $4,000 for the three months ended March 31, 2001 as compared to $97,000 for the three months ended March 31, 2000. Interest income was $12,000 for the three months ended March 31, 2001 as compared to $25,000 for the three months ended March 31, 2000. In 2001 the Company stopped paying interest on the loan to IBM thus causing a decrease of 96% in interest expense. In lieu of interest payments, IBM received discounts on their purchases of ink and spare parts. Interest income decreased by 52% primarily because the Company utilized its existing cash to fund operations as it worked to develop additional industrial printing opportunities. 9 ACCENT COLOR SCIENCES, INC. LIQUIDITY AND CAPITAL RESOURCES -------------------------------------------------------------------------------- During the latter part of 2000, the Company responded to the slow growth in the market for Truecolor Systems and indications that it would not receive orders for new Truecolor Systems in the foreseeable future during 2001 by concentrating its focus on opportunities in the field of industrial printing. The initial development contracts which the Company has succeeded in obtaining, such as its contract with Philip Morris, only slightly offset the loss of revenue associated with the cessation of any new orders for Truecolor Systems. The Company has reduced its personnel and production costs previously associated with the manufacture of Truecolor Systems but maintains a substantial engineering group for the development of industrial printing applications, the costs of which, to date, have been only partially covered by industrial printing development project revenues. The Company cannot sustain its operations without additional capital and has been actively seeking opportunities for additional capital or a strategic partnering relationship or the sale of part or all of its operations. The Company has worked extensively with its investment bankers and advisors and is in direct discussion with third parties who may have an interest in some or all of the Company's technology and operations. These discussions are on-going. However, while the Company believes that they have identified parties with an interest in a portion of its business, it has received no commitments or statements of intent regarding any additional funding, strategic relationship or sale. The Company believes that its settlement agreement with IBM (discussed in footnote 6 of the financial statements and a copy which is filed as an exhibit to this report) concerning its indebtedness to IBM has improved its ability to seek additional funding or structure an alternative arrangement but there can be no assurance that any additional capital or alternative arrangement will be obtained or concluded. The Company's need for funding is acute as it attempts to establish new lines of business in addition to its remaining activities associated with the installed base of Truecolor Systems. The Company is working diligently to secure funding or a transaction which will, under the circumstances, best serve the interests of the Company's creditors, customers, employees and shareholders. Operating activities consumed $163,000 in cash during the first quarter of 2001 as compared to $1,391,000 consumed by operations during the first quarter of 2000. This decrease in cash utilized was primarily attributed to a reduced level of business activity. Capital expenditures were $10,000 for the first quarter of 2001 as compared to $5,300 for the first quarter of 2000. Capital expenditures have been kept to a minimum. The Company has no significant capital expenditure commitments at March 31, 2001. As of March 31, 2001, the Company's primary source of liquidity was cash and cash equivalents totaling $935,000. Based on the current operating plan of the Company, the primary requirements for cash through the remainder of this second quarter of 2001 will be to fund operating losses and for debt repayment and supplier payments. The Company's currently anticipated levels of revenue and cash flow are subject to many uncertainties and cannot be assured. The amount of funds required by the Company will depend on many factors, including engineering and development requirements. The inability to obtain additional financing or to generate sufficient cash from operations will require the Company to reduce its activities, or otherwise to curtail or discontinue its operations. The Company's current funds and anticipated revenues during the second quarter of 2001 are not expected to be sufficient to support its business plan and sustain its current operations. The Company is committed under its loan settlement agreement with IBM to pay IBM $450,000 by June 30, 2001. Based on its current operating plan, the Company anticipates that additional financing or an alternative transaction will be required in order to finance and sustain its operations beyond the second quarter of 2001. 10 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 need to secure strategic relationships, additional capital and/or an alternative transaction such as a sale of a portion of its business in order to sustain operations; (ii) pursuant to our agreement with our secured lender (IBM) the need to satisfy the conditions set forth in the Settlement Agreement dated May 10, 2001 including a payment to IBM of $450,000 by June 30, 2001; (iii) the level of customer acceptance of the Company's products and the dependence of the Company on additional orders from current customers; (iv) the ability of the Company to raise capital sufficient to support its business plan; (v) the rights of customers of the Company to modify or cancel orders under the terms of related product purchase agreements; (vi) the dependence of the Company on third party suppliers for certain key technology elements; (vii) 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; (viii) the potential fluctuations in the Company's quarterly results of operations; and (ix) the ability of the Company to identify and procure additional industrial printing opportunities. Further information on factors that could cause actual results to differ from those anticipated is detailed in the Company's Annual Report for 2000 on Form 10-K as filed with the Securities and Exchange Commission. Any forward-looking information contained herein should be considered in light of these factors. 11 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 None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The financial statements as set forth under Item 1 of this report on Form 10-Q are incorporated herein by reference. 10.34 IBM Settlement Agreement as of May 10, 2001(filed herewith). (b) Reports filed on Form 8-K There were no reports on form 8-K filed during the quarter ended March 31, 2001. 12 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 May 14, 2001 By: /s/ Charles E. Buchheit ------------------- --------------------------------------- Charles E. Buchheit President and Chief Executive Officer By:/s/ Ronald C. Derby ---------------------------------------- Ronald C. Derby Chief Financial Officer (Principal Financial and Accounting Officer) 13 May 10, 2001 Settlement Agreement This Settlement Agreement is entered into this 20th day of April, 2001 by and between Accent Color Sciences, Inc., a Connecticut corporation having its principal place of business at 800 Connecticut Boulevard, East Hartford, Connecticut 06108 (hereafter, "ACS") and International Business Machine Corporation, a New York corporation, with its principal place of business at New Orchard Road, Armonk, New York 10504 ("IBM"). Recitals Whereas ACS is in the business of developing and selling a certain printing system (the "Truecolor System") to IBM; And Whereas the parties also entered into a Loan Agreement, Promissory Note, Stock Purchase Warrant and Registration Rights Agreement, all on or about July 21, 1998; And Whereas the parties now wish to terminate the Loan Agreement, Promissory Note and Stock Purchase Warrant and Registration Rights Agreement between them and enter into this Settlement Agreement, specifying their rights and obligations going forward; Now Therefore, in consideration of the covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 14 1. Definitions. 1.1 "Loan Agreement" shall mean the Loan Agreement, Promissory Note, Stock Purchase Warrant and Registration Rights Agreement between the parties, all executed on or about July 21, 1998. Loan Agreement shall also include any other agreements ancillary to the agreements listed above. 1.2 "Product Purchase Agreement" shall mean the Product Purchase Agreement entered into by the parties on or about April 11, 1996, as amended by the parties from time to time. 1.3 "Truecolor System" means the printing system manufactured by ACS, as set forth in greater detail in the Product Purchase Agreement. 2. Payment to IBM. No later than June 30, 2001, ACS shall pay to IBM Four Hundred and Fifty Thousand Dollars ($450,000). This payment shall be in full satisfaction of any and all amounts due to IBM under the Loan Agreement. All obligations of ACS under the Loan Agreement shall be deemed satisfied and paid in full upon payment of the $450,000. 3. Hold Inventory for Use by IBM. 3.1 ACS shall hold its entire inventory of components, parts and supplies intended for use in the Truecolor Systems for inspection by representatives of IBM, who shall specify therefrom the items (hereinafter referred to as "Inventory") to be listed on Exhibit A, which the parties shall sign and attach to this Agreement. Items not placed on Exhibit A shall not be deemed Inventory pursuant to this Agreement and may be disposed of by ACS. 3.2 For a period of three (3) years from the date of this Settlement, ACS shall hold the Inventory at ACS's facility in East Hartford, Connecticut at no charge to IBM. Title to the Inventory shall remain with ACS until the items are released by ACS pursuant to IBM's written instructions. Any items of Inventory released to IBM pursuant to such written instructions shall be provided to IBM at no cost, except that IBM shall be responsible for the cost of any reasonable packing and shipping charges. If at the end of the three year period any items of Inventory still remain in ACS's possession, ACS shall so notify IBM. If IBM decides to acquire any of the items remaining in Inventory, IBM shall provide ACS with written shipping instructions 15 and ACS shall ship to IBM the items of Inventory specified by IBM no later than thirty (30) days following ACS's receipt of IBM's shipping instructions. If, however, IBM does not provide written shipping instructions to ACS within thirty (30) days following IBM's receipt of the notice, then ACS may dispose of the Inventory as it wishes, with no further liability for the Inventory to IBM. 3.3 ACS shall not be liable to IBM for any damage or loss to the Inventory while the Inventory is in ACS's control and possession; provided, however, that ACS shall use reasonable care in holding the Inventory. 3.4 IBM shall reimburse ACS for any property taxes paid by ACS with respect to the Inventory, provided ACS shall present IBM with evidence of payment and the allocation of such taxes between the Inventory and other personal property of ACS in form and substance reasonably satisfactory to IBM. 16 4. IBM's Right to Purchase under ACS's Contracts with Suppliers. 4.1 ACS represents that the only formal written vendor contract it has in place relating to Truecolor Systems is a contract entered into between ACS and Spectra Inc. ("Spectra") dated January 8, 1996 (hereafter referred to as the "Spectra Agreement") 4.2 ACS agrees to take one or more of the following actions with respect to the Spectra Agreement at the election of IBM from time to time: = a. ACS will use its reasonable best efforts to authorize IBM to purchase products pursuant to the Spectra Agreement the Spectra Agreement directly from Spectra, subject to any necessary approval of Spectra to such arrangement; b. ACS shall serve as a middleman and process orders under the Spectra Agreement as IBM shall require from time to time, in which event IBM shall reimburse ACS for the cost of any products so purchased from Spectra through ACS as incurred and for ACS's reasonable costs of shipping any such products to IBM; and c. ACS will assign its rights under the Spectra Agreement to IBM, subject to any necessary approval of Spectra, and take all actions reasonably required of it by IBM to permit IBM to deal directly with Spectra with respect to products associated with Truecolor Systems on terms specified in the Spectra Agreement or as otherwise negotiated by IBM directly with Spectra. 4.3 ACS will honor the open purchase orders listed in Exhibit B, and will continue to process purchase orders received from IBM until IBM can make arrangements to purchase components, parts and supplies directly from ACS's suppliers. 5. Additional Orders for Truecolor Systems. 17 5.1 The parties acknowledge that as of the date of this Settlement Agreement, there are no pending orders from IBM for Truecolor Systems. In the event that IBM desires additional Truecolor Systems, however, IBM shall order them from ACS. 6. Non-exclusive License of Intellectual Property to IBM. 6.1 Patents. Subject to the terms of this Agreement, ACS hereby grants to IBM and IBM accepts: a. An irrevocable, perpetual, worldwide, non-exclusive, non-transferable, fully paid up and royalty free license to make, have made on its behalf, use and sell the products and devices and/or utilize the design, concepts and applications reflected in the following patents: 1. # 5,602,624 (allowed 2/11/97). 2. # 5,729,817 (allowed 3/17/98) 3. # 5, 793,397 (allowed 8/11/98) 4. # 6,072,587 (allowed 6/6/00) 5. # 6,196,662 (allowed 3/6/01) b. An irrevocable, perpetual, worldwide, non-exclusive, non-transferable, fully paid up and royalty free license to make, have made on its behalf, use and sell the products and devices and/or utilize the design, concepts and applications reflected in the patents resulting from any ACS patent applications pending as of the date of this Settlement or filed within one hundred twenty (120) days following the date of this Settlement. c. IBM shall have the right to sublicense the patents referenced in this Section 6.1 to third parties for the sole purpose of using those third parties to provide products to IBM and to others (but only if providing products to others is reasonably necessary in order for the third parties to provide products to IBM). IBM shall provide to ACS in writing on January 2nd of each year the names and addresses of all sublicensees, and a copy of the sublicense agreement. 6.2 IBM shall have the right to sue a third party for patent infringement in IBM's name. 18 6.3 Other Intellectual Property. a. Subject to the terms of this Agreement, ACS hereby grants to IBM an irrevocable, perpetual, worldwide, non-exclusive, non-transferable, fully paid up and royalty free license to use the intellectual property listed on Exhibit C. b. In addition, IBM shall have the right to sublicense the intellectual property listed in Exhibit C, or any of it, to third parties for the sole purpose of using those third parties to provide products to IBM and to others (but only if providing products to others is reasonably necessary in order for the third parties to provide products to IBM). IBM shall provide to ACS in writing on January 2nd of each year the names and addresses of all sublicensees, and a copy of the sublicense agreement. 7. Mutual Releases. 7.1 Release by ACS. ACS, for and in consideration of this Settlement Agreement and the sum of One Dollar ($1.00), the receipt of which is hereby acknowledged, has remised, released and forever discharged, and by these presents does for itself and its successors, remise, release and forever discharge IBM, its employees, officers, directors and agents (hereinafter, collectively "IBM") and its successors of and from all, and all manner of action and actions, cause and causes of actions, suits, debts, dues, sums of money, accounts, bonds, bills, specialties, covenants, contracts, agreements, promises, trespasses, damages, judgements, executions, claims and demands whatsoever, in law and equity which against IBM ACS ever had, now has, or which it or its successors can, shall or may have for, upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to the day of the date of these presents; provided, however, that ACS does not release IBM of the following obligations: a. Any obligations of IBM created by this Settlement Agreement; b. Any obligations of IBM contained in the Product Purchase Agreement; c. Reimbursement by IBM for ACS's costs of personnel dedicated to IBM matters in the agreed amount of Thirty Five Thousand Dollars ($35,000) for March 2001 and Thirty Five Thousand ($35,000) for April 2001; and 19 d. Any amounts due to ACS under open or fulfilled purchase orders for inks, parts and supplies. 7.2 Release by IBM. IBM, for and in consideration of this Settlement Agreement and the sum of One Dollar ($1.00), the receipt of which is hereby acknowledged, has remised, released and forever discharged, and by these presents does for itself and its successors, remise, release and forever discharge ACS, its employees, officers, directors and agents (hereinafter, collectively "ACS") and its successors of and from all, and all manner of action and actions, cause and causes of actions, suits, debts, dues, sums of money, accounts, bonds, bills, specialties, covenants, contracts, agreements, promises, trespasses, damages, judgements, executions, claims and demands whatsoever, in law and equity which against ACS IBM ever had, now has, or which it or its successors can, shall or may have for, upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to the day of the date of these presents; provided, however, that IBM does not release ACS of the following obligations: a. Any obligations of ACS created by this Settlement Agreement; and b. Any obligations of ACS contained in the Product Purchase Agreement. 8. Miscellaneous. 8.1 Notices. Any notice, demand or request required or permitted to be given under this Agreement shall be either hand-delivered or deposited, postage prepaid, in the U.S. mail, certified or registered mail, addressed as follows: If to ACS: Accent Color Sciences, Inc. 800 Connecticut Boulevard East Hartford, Connecticut 06108 Attention: Charles E. Buchheit 20 If to IBM: International Business Machine Corporation 6300 Diagonal Highway Boulder, Colorado 80301 Attention: Gary Lorgan Changes to the foregoing individuals or addresses may be made by notice similarly given. 8.2 Choice of Law and Venue. This Agreement shall be governed by the laws of the State of Connecticut, without regard to its choice of law provisions 8.3 Entire Agreement. This Agreement is the entire agreement between IBM and ACS with respect to the matters set forth above. All other understandings (including but not limited to Loan Agreement), arrangements, promises or representations are replaced by this Agreement and may not be relied upon by either party. This Agreement may only be modified by a written amendment signed by both parties. 8.4 Force Majeur. Neither party shall be liable for delay in performance hereunder due to forces beyond its control, including but not limited to acts of God, fires, strikes or other labor disputes, acts of war or intervention by any governmental authority, and each party shall take steps to minimize any such delay. 8.5 Termination for Breach. This Agreement may be terminated by either party on thirty (30) days written notice in the event of a material breach by the other party; provided, however, that if the breaching party cures the breach within the 30-day period, the Agreement shall remain in full force and effect. 8.6 Contract Interpretation. Both parties have had an opportunity to review this Agreement with their respective legal counsel and have negotiated the terms of this Agreement to their satisfaction. In interpreting the meaning of any provision of this Agreement, the parties request that the tribunal 21 8.7 No Waiver. The waiver of any breach of this Agreement by the non-breaching party shall not constitute a waiver of any other breach or of any future breach of the same obligation. 8.8 Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective successors and assigns. To signify their acceptance of the terms and conditions set forth above, the parties have caused their authorized representatives to execute this Agreement as follows: International Business Machine Corporation Accent Color Sciences, Inc. By: /s/ Gary P. Lorgan By: /s/ Charles E. Buchheit ----------------------------------- ----------------------------- Gary P. Lorgan Charles E. Buchheit Title: Director, Business Alliances Title: President and CEO and Procurement Date: May 10, 2001 Date: May 11, 2001 ------------ ------------ 22 Exhibit A Inks ------------------------------------------------------------------------------- IBM Part No. ACS Part No. Color Quantity ------------------------------------------------------------------------------- 1402850 ACS2569 Green 569U 5 ------------------------------------------------------------------------------- 1402851 ACS2003 Magenta 5 ------------------------------------------------------------------------------- 1402853 ACS2354 Green 354U 1 ------------------------------------------------------------------------------- 1402854 ACS2005 Warm Red 4 ------------------------------------------------------------------------------- 1402855 ACS2010 Violet 3 ------------------------------------------------------------------------------- 1402858 ACS2021 Orange 21 1 ------------------------------------------------------------------------------- 1402871 ACS2609 Maroon 871 2 -------------------------------------------------------------------------------

38 Exhibit B Open Purchase Orders as of Agreement Date

40 Exhibit C List of Other Intellectual Property The items listed in Section II - Access to Technical Information and Intellectual Property in the Amendment to the April 1996 Agreement dated April 23, 1996. 41

ACCENT COLOR SCIENCES INC 10-Q