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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-21168
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-3253392
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
5 East 80th Street, New York, New York 10021
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(Address of principal executive offices)
(212) 717-6544
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)
Indicate by check 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
court. Yes No N/A
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,520,128
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
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Unaudited (Note 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 7,862,400 $ 3,929,800
Accounts receivable 92,400 92,300
Inventories 2,486,500 147,300
Prepaid expenses and other assets 262,200 81,800
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Total Current Assets 10,703,500 4,251,200
COLORMATE(Registered) UNITS -- 1,820,100
PROPERTY AND EQUIPMENT, NET 331,400 301,700
SOFTWARE DEVELOPMENT COSTS 627,300 546,000
PATENT COSTS 831,500 540,300
OTHER ASSETS 679,300 418,900
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$ 13,173,000 $ 7,878,200
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts payable to related party $ 300,000 $ 318,900
Accounts payable and accrued expenses:
Attorneys and accountants 1,040,700 673,000
Consultants 59,000 146,500
Trade 146,400 156,800
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Total Current Liabilities 1,546,100 1,295,200
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LONG TERM DEBT:
Accrued interest on senior convertible debentures 145,800 --
Senior convertible debentures 2,735,800 --
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2,881,600 --
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Class A, Par Value $.01 per share:
Authorized - 1,400,000 shares
Issued and outstanding - 1,380,000 shares
at par value and redemption value 13,800 13,800
Class B, Series 2 Convertible Preferred Stock, No Par Value:
Authorized - 10,000,000 shares
Issued and outstanding - 40,000 shares in 1999
$115 redemption value 2,731,000 --
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2,744,800 13,800
SHAREHOLDERS' EQUITY
Common Stock, par value $.001 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 15,520,128 (1999)
and 15,452,442 (1998) shares 15,500 15,400
Capital in excess of par value 33,729,500 28,327,000
Accumulated deficit (27,744,500) (21,773,200)
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Total Shareholders' Equity 6,000,500 6,569,200
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$ 13,173,000 $ 7,878,200
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</TABLE>
See accompanying notes to consolidated financial statements
2
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues:
Interest income $ 52,700 $ 103,900 $ 83,700 $ 224,800
Other 500 200 600 200
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53,200 104,100 84,300 225,000
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COSTS AND EXPENSES:
Medical regulatory expenses 239,700 435,900 473,300 957,100
Patent application costs 5,000 3,000 47,900 127,300
Research and development costs 261,400 134,400 429,300 233,200
Compensation costs relating to options granted
to consultants 248,000 127,000 488,000 418,000
Sales, marketing and trade show costs 660,000 177,500 1,201,900 177,500
General and administrative:
Compensation - Officers and employees 210,600 212,700 386,100 416,800
Consultants 72,800 58,000 151,000 122,000
Legal fees 304,200 220,000 552,100 328,200
Accounting fees 24,600 7,000 47,100 32,300
Rent and storage 74,500 71,600 148,400 120,100
Insurance 64,900 29,300 120,400 79,400
Travel and entertainment 9,800 23,100 16,500 55,100
Repairs and maintenance 29,300 4,800 55,700 25,500
Depreciation and amortization 31,300 48,600 57,900 74,500
Payroll taxes 19,000 14,400 33,000 34,900
Stock administrative fees 33,400 18,500 43,700 51,400
Employee benefit plan -- 14,000 1,700 107,200
Public relations 56,400 -- 101,000 --
Promotion, printing and advertising 19,700 162,600 24,200 227,700
Other 68,100 35,600 156,600 94,800
Interest and (non cash) financing costs 1,513,200 6,600 1,519,800 13,300
------------ ------------ ------------ ------------
3,945,900 1,804,600 6,055,600 3,696,300
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NET LOSS $ (3,892,700) $ (1,700,500) $ (5,971,300) $ (3,471,300)
============ ============ ============ ============
NET LOSS TO COMMON STOCKHOLDERS:
NET LOSS $ (3,892,700) $ (1,700,500) $ (5,971,300) $ (3,471,300)
DEEMED DIVIDEND FOR CLASS B, SERIES 2
CONVERTIBLE PREFERRED STOCK 1,275,000 -- 1,275,000 --
------------ ------------ ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $ (5,167,700) $ (1,700,500) $ (7,246,300) $ (3,471,300)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 15,499,299 14,856,053 15,483,039 14,564,760
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.33) $ (0.11) $ (0.47) $ (0.24)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
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Number Capital
of Shares Par in Excess of Accumulated
Outstanding Value Par Value Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 15,452,442 $ 15,400 $ 28,327,000 $(21,773,200)
Six Months Ended June 30, 1999:
Net Loss -- -- -- (5,971,300)
Exercise of Stock options and
warrants 67,686 100 343,100 --
Original issue discount on senior
convertible debentures (below
market conversion price) 3,575,000
Original issue discount on Class B,
Convertible preferred stock
(warrants and below market
conversion price) 2,271,400
Deemed dividend on Class B,
convertible preferred stock (1,275,000)
Compensation cost relating to
options granted to consultants -- -- 488,000 --
------------ ------------ ------------ ------------
Balances, June 30, 1999 15,520,128 $ 15,500 $ 33,729,500 $(27,744,500)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
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1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(5,971,300) $(3,471,300)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 57,900 74,500
Compensation cost relating to options granted to consultants 488,000 418,000
Non-cash interest and financing costs 1,310,800 --
Changes in operating assets and liabilities:
Accounts receivable (100) --
Inventories (719,100) (800)
Prepaid expenses and other assets (180,400) (12,700)
Other assets (60,400) 5,200
Accounts payable and accrued expenses 415,600 176,000
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Net cash flows from operating activities (4,659,000) (2,811,100)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs (81,300) (124,200)
Capitalized patent costs (291,200) (240,600)
Purchase of property and equipment (87,600) (45,500)
Purchase of ColorMate(Registered) Units and deposits theron -- (808,400)
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Net cash flows from investing activities (460,100) (1,218,700)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net
of related costs 343,200 2,664,600
Proceeds (payments) of amounts payable to related party (18,900) 13,100
Proceeds from senior convertible debentures 5,000,000 --
Net proceeds from the issuance of preferred stock and
warrants, net of costs 3,727,400 --
Payments of notes payable -- (2,900)
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Net cash flows from financing activities 9,051,700 2,674,800
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NET CHANGE IN CASH AND EQUIVALENTS 3,932,600 (1,355,000)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,929,800 9,225,400
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CASH AND EQUIVALENTS, END OF PERIOD $ 7,862,400 $ 7,870,400
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 32,000 $ 100
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation:
Nature of Report -- The consolidated balance sheet at the end of the preceding
fiscal year has been derived from the audited consolidated balance sheet
contained in the Company's Form 10-K for the fiscal year ended December 31, 1998
and is presented for comparative purposes. All other financial statements are
unaudited. In the opinion of management, all adjustments, which include only
normal recurring adjustments necessary to present fairly the financial position,
results of operations and changes in cash flows, for all periods presented have
been made. The results of operations for interim periods are not necessarily
indicative of the operating results for the full year.
Footnotes -- Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended December 31, 1998.
Estimates and Uncertainties - 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, as determined at a later date,
could differ from those estimates. Estimates relate primarily to inventory
valuation and recoverability of the Company's tangible and intangible assets.
Principles of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Note 2 -- Commitments and Contingencies:
Business Risks -- Since its formation in 1984, the Company has been principally
engaged in color science technology research and development and licensing
activities, seeking mass market applications for its proprietary technology and
instrumentation. The Company's business encompasses all of the risks inherent in
the establishment of a new business enterprise, including a limited operating
history with significant competition possessing substantially greater resources.
Current and future operations also depend upon the continued employment of
certain key executives, the ability to further commercialize its proprietary
technology and products and the Company's ability to obtain sufficient revenues
and/or outside financing.
Operating Difficulties -- Since 1989, the Company has incurred losses from
operations and net cash outflows from operations. The Company expects to license
its patents and proprietary technology, sell its equipment and market its
related services and products to ultimately overcome these difficulties.
On July 30, 1997, the Company was granted clearance by the FDA for commercial
marketing of the ColorMate(Registered) TLc BiliTest(Registered) System for the
non-invasive detection and monitoring of bilirubin infant jaundice in newborns
by health care professionals in hospitals, pediatricians' offices or by home
healthcare agencies. On June 7, 1999, the Company executed a renewable,
five-year agreement with Datex-Ohmeda, Inc. and its Ohmeda medical division
("DO") pursuant to which the Company appointed DO as the exclusive distributor
in the United States of the Company's ColorMate(Registered) TLc BiliTest
(Registered) System for noninvasive monitoring of bilirubin infant
jaundice in the hospital market, the non-consumer home healthcare market (in
which the test is administered solely by a healthcare professional), the
pediatrician office market and clinics within all such markets. The agreement
also applies to the Company's disposable calibration standard (TLc Lensette
(Trademark)) that is used to calibrate each measurement taken by the
ColorMate(Registered) TLc BiliTest(Registered) System and provides that the
Company will share in the sales revenues for both products. Terms of the
agreement include annual minimum market penetration performance standards and
purchasing and placement of quantities for both the ColorMate(Registered) TLc
BiliTest(Registered) System and the TLc Lensette(Trademark) calibration
standards. Sales under the agreement commenced in July 1999.
The Company anticipates incurring significant additional expenditures related to
manufacturing expenses, parts order, insurance, regulatory compliance and
staffing and marketing expenses for the sales division as production and
distribution continues over the next year. Management expects that taking into
account existing resources, including the financings in April 1999 and June 1999
and the second closing of the preferred stock financing in the amount of $4.0
million contemplated by the agreement executed in connection with the June 1999
preferred stock financing (see Note 4), revenues from future sales of the
ColorMate(Registered) units, and payments received under the distribution
agreement, the Company will have sufficient liquidity at least until July 2000.
6
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Legal Proceedings -- Three putative class actions were commenced against the
Company and certain of its officers and directors in the Southern District of
New York. The first two actions were commenced in June 1998 and are captioned
L.F. Monk v. Chromatics Color Sciences International, Inc., Darby S. Macfarlane,
Arthur Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CV 4111
(S.D.N.Y.) and Daniel R. Marquis v. Chromatics Color Sciences International,
Inc., Darby S. Macfarlane, Arthur Guiry and Leslie Foglesong, C.A. No. 98 CV
4335 (S.D.N.Y.). The third action was commenced in August 1998 and is captioned
Joseph Grunberg v. Chromatics Color Sciences International, Inc., Darby S.
Macfarlane, Arthur Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98
Civ. 5646 (S.D.N.Y.)
The complaints were consolidated pursuant to the Consolidation Order entered by
the Court in December 1998. A consolidated amended complaint in the matter now
captioned In re Chromatics Color Sciences International, Inc. Securities
Litigation, Consolidated Matter File No. 98 Civ. 4111 (SHS), was filed and
served in January 1999 (the "Action").
Plaintiffs purport to bring the class action on behalf of all purchasers of the
common stock of the Company, between July 30, 1997 and June 9, 1998, seeking
damages for the alleged violation by defendants of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78j(b), and Rule 10b-5 promulgated
thereunder, 17 C.F.R. ss.240.10b-5, and pursuant to Section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78t(a), with respect to the
individual named defendants as "controlling persons." The complaint alleges that
the Company "embarked upon a scheme" to inflate the price of the Company's
Common Stock by making false and misleading statements concerning: (i) the new
and innovative nature of the Company's ColorMate(Registered)
TLc BiliTest(Registered) System; (ii) the market size and revenue potential of
the ColorMate(Registered) TLc BiliTest(Registered) System; and (iii) the
existence and status of negotiations with potential distributors of the
ColorMate(Registered) TLc BiliTest(Registered) System. The allegations of the
complaint arise principally from a "report" prepared by Manuel I. Asensio of
Asensio & Company, Inc. that was disseminated at the close of the putative class
period.
Defendants have moved to dismiss the complaint, which motion is fully briefed
and is now pending before Judge Stein. Defendants believe that the claims
asserted against them are without merit and intend to vigorously defend this
action. No assurance can be given that the resolution of the Action and/or
future actions will not have a material adverse effect on the Company's results
of operations and liquidity. The Company has directors and officers insurance
which may cover a portion of the liability asserted in the Action. The Company
is exploring its legal remedies in respect to what it believes to be false
allegations against the Company made by short sellers of its stock; the Company
expects to incur significant expenses in this regard.
Note 3 -- ColorMate(Registered) Units
ColorMate(Registered) Units -- In connection with a license with Avon Products,
Inc. ("Avon"), Avon paid approximately $4,600,000 to purchase color measurement
instruments and related equipment for its use during the term of the license
period. Due to missing and damaged units, Avon and the Company executed mutual
releases at the termination of the lease on June 24, 1991, with the principal
effect that the Company received 1,947 units of which 1,400 were useable and not
in need of significant repair. For accounting purposes, the $700,000 estimated
fair value of the nonproprietary equipment (based upon an independent appraisal
of the complete units with allowances for the lack of a verifiable used
equipment market, varying usage, the need for refurbishment and similar factors)
was recorded as an asset. The 1,700 useable units of nonproprietary equipment
were received in the form of (i) 1,400 complete units valued at $500 per unit
and (ii) 300 complete units in need of significant repair that were assigned
zero value. No valuation of the proprietary portion of the units or of the
additional 247 unusable units returned by Avon was performed.
Following the Food and Drug Administration ("FDA") marketing clearance in 1997,
the Company has decided to use certain components from the existing
ColorMate(Registered) units for use in the ColorMate(Registered)
TLc BiliTest(Registered) System. The costs will be expensed as incurred,
remaining components will not be valued and the cost currently assigned to the
existing ColorMate(Registered) units ($500 per unit) will be assigned to the
ColorMate(Registered) TLc BiliTest(Registered) System, as the current
replacement cost of these components exceeds the book value of the
ColorMate(Registered) units.
In connection with the Company's recent distribution agreement with
Datex-Ohmeda, Inc. (see Note 2), the ColorMate(Registered) units that were
previously classified as long -term assets were classified as inventory.
Note 4 - Private Placements:
On April 15, 1999 the Company issued an aggregate of $5,000,000 14% senior
convertible debentures due April 15, 2002 (the "Debentures") in a private
placement. Payments of interest on the outstanding principal amount of the
Debentures are due on the earlier of the maturity date or upon any conversion of
the Debentures into the Company's Common Stock. The accrued interest may be paid
either in cash, shares of the Company's Common Stock or a combination of Common
Stock and cash, at the option of the Company.
The outstanding principal amount of the Debentures (together with accrued
interest thereon) is not convertible until after the first anniversary of the
closing. At that time, the Debentures are convertible into shares of Common
Stock, at the option of the holder or holders thereof, at the conversion price
of $5.00. However, at any time prior to April 14, 2000, such portion of the
Debentures may be converted, at the option of the holder or holders thereof, as
shall result in the issuance, upon such conversion, of not more than an
aggregate of 200,000 shares of Common Stock. Subject to applicable securities
laws, the holder or holders of such shares, in the aggregate, may only sell not
more than an aggregate of 50,000 shares of such Common Stock issued upon such
conversion during
7
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any one month period ending prior to April 14, 2000. At any time after the 18
month anniversary of the closing, the Company may prepay the entire amount of
the Debentures or any portion thereof for a prepayment price equal to the
original principal amount of the Debentures plus all accrued and unpaid
interest. At any time after the 18 month anniversary of the closing and prior to
the Maturity Date, in the event the average closing bid price (as reported on
the Nasdaq SmallCap Market or such other principal market or exchange on which
the Common Stock is then traded) of the Company's Common Stock for any 10
consecutive trading days equals or exceeds $10.29, the Company can require
conversion of the outstanding principal amount (together with accrued interest)
of the Debentures into Common Stock at a conversion price of $5.00 per share.
The Company filed a Form 8-K on April 30, 1999 relating to the issuance of the
Debentures. The Debentures resulted in an original issue discount charge of
approximately $3.6 million which will be amortized over one year. Through June
30, 1999 the Company has amortized $1.3 million.
On June 15, 1999, the Company completed a private placement of 40,000 shares of
convertible preferred stock and warrants to purchase 220,690 shares of Common
Stock to a private investor for aggregate proceeds of $4 million. The shares of
convertible preferred stock issued on that date (the "Shares") are convertible
into shares of the Company's Common Stock at a price of $7.25 per share, subject
to adjustment for stock splits, combinations and similar recapitalizations
affecting the Company's Common Stock and to downward adjustment if the Company
issues or agrees to issue additional shares of the Company's Common Stock
(excluding options under the Company's option plan and certain other excluded
securities) at a price of less than $7.25 per share to the price at which the
Company issues or agrees to issue the lower-priced shares of the Company's
Common Stock or securities convertible or exchangeable for shares of the
Company's Common Stock. The Shares are redeemable in cash for an amount equal to
$115 per Share on the third anniversary of the date of initial issuance if not
sooner converted unless the Company elects in the Company's discretion to extend
the redemption date to the fifth anniversary of the date of initial issuance.
The Shares are subject to mandatory conversion into shares of the Company's
Common Stock at the Company's option at any time after December 15, 1999 if the
average closing bid price of the Company's Common Stock for ten consecutive
trading days equals or exceeds $10.88 per share. The Shares are not entitled to
any voting rights except as otherwise required by applicable law and are not
entitled to any dividend rights unless the Company elects to extend the
redemption date to the fifth anniversary of the date of initial issuance, in
which case dividends would accrue at the rate of 8% from and after the third
anniversary of the date of initial issuance which could be paid in shares of the
Company's Common Stock at the Company's option.
In addition to the Shares on June 15, 1999 the Company also issued an aggregate
of 220,690 warrants to purchase shares of the Company's Common Stock to a
private investor. An additional 50,000 warrants were issued to such investor as
compensation for services rendered in connection with the placement of the
Shares. The warrants issued on that date have a five-year term unless sooner
exercised. The warrants are exercisable for shares of the Company's Common Stock
at a price of $8.25 per share, subject to adjustment in the same circumstances
as the Shares described above and are subject to mandatory exercise into shares
of the Company's Common Stock at the Company's option at any time after December
15, 1999 if the average closing bid price of the Company's Common Stock measured
over twenty consecutive trading days equals or exceeds $16.50.
The Company also agreed to issue and sell an additional 40,000 shares of
convertible preferred stock and warrants to purchase 270,690 shares of the
Company's Common Stock to the same investor at a second closing.
The private placement has resulted in a deemed dividend charge of approximately
$3.0 million, resulting from a below market conversion price of preferred stock,
a redemption premium and warrants issued in connection with the private
placement, of this amount, approximately $1.2 million has been charged in June
1999 and $1.8 million will be charged over the redemption period.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The Company incurred net losses of $3,892,700 and $1,700,500 for the
three month periods ended June 30, 1999 and 1998, respectively and $5,971,300
and $3,471,300 for the six month periods ended June 30, 1999 and 1998
respectively. Revenues, consisting almost entirely of interest income, have not
been significant relative to the Company's expenses incurred in implementing its
business plan. Loss per share increased by $0.23 in the six month 1999 period
compared to the six month 1998 period, negatively impacted by a non-cash
dividend charge due to private placement financing costs of $1,275,000 and
positively impacted by the increase of 918,279 weighted average number of shares
outstanding attributed to the exercise of options and warrants.
The dollar increase in net loss in the three and sixth month 1999
periods as compared to the three and sixth month 1998 periods is primarily
attributable to the Company's continuing implementation of its long-range
business plan to seek commercial applications of its intellectual properties and
technologies in the medical field including an increase in costs regarding
sales, marketing and trade show costs, legal expenses incurred in respect of the
Company's securities financing, negotiations with potential distribution
partners, research and development, consulting and other related expenses
regarding regulatory compliance with respect to manufacturing and distribution
of its ColorMate System(Registered), and non-cash financing costs in connection
with certain private placements.
Although the Company anticipates that the future expenses regarding FDA
application costs and related patent application costs should be significantly
less than amounts incurred prior to receipt of the initial FDA marketing
clearance, the Company will
8
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continue to incur significant additional costs and expenses in connection with
FDA manufacturing and other regulations, state regulatory requirements and
foreign market clearances and other requirements. In addition, the Company
expects to incur significant expenses relating to manufacturing expenses,
products liability insurance, legal and regulatory compliance, including QSR/GMP
quality system substantial compliance, as well as research and development for
new potential applications and implementation of the next phase of its efforts
to successfully commercialize the medical application of its technology (see
"Liquidity and Capital Resources"). Further, the Company anticipates
significantly higher legal expenses in connection with its defense of certain
class action suits that have been brought against the Company and as the Company
explores all of its potential legal remedies.
In the first six months of 1999, the Company focused its resources on
implementation of its long-range business plan for medical applications of its
technologies and received no revenues from operations. Shipments of the
ColorMate(Registered) TLc BiliTest(Registered) Systems and TLc Lensette
(Trademark) calibration standards commenced in the first quarter of 1999 to
customers under a Limited Introductory Offer on a trial basis. Revenues will not
be recognized until completion of the trials and in accordance with the
distribution agreement the Company signed in June, 1999 with Datex-Ohmeda, Inc.
Shipments under the agreement have commenced and revenues from these prior
shipments will begin to be recognized in the third quarter.
Revenues for the quarter ended June 30, 1999, which consisted primarily
of interest income, were $53,200, a decrease of $50,900 or 48.9% from revenues
of $104,100 for the quarter ended June 30, 1998. Revenues for the six months
ended June 30, 1999, which consisted primarily of interest income, were $84,300,
a decrease of $140,700 or 62.5% from revenues of $225,000 for the six months
ended June 30, 1998. The primary reason for the decline in interest income
during the 1999 periods as compared to the corresponding 1998 periods is the
relative decrease in funds available for earning interest during most of the
1999 periods.
For the three months ended June 30, 1999 medical regulatory expenses
were $239,700, a decrease of $196,200 or 45.0% from medical regulatory expenses
of $435,900 for the three months ended June 30, 1998. Medical regulatory
expenses for the six months ended June 30, 1999 were $473,300, a decrease of
$483,800 or 50.6% from medical regulatory expenses of $957,100 for the six
months ended June 30, 1998. The primary reason for the decline in medical
regulatory expenses during the 1999 periods as compared to the corresponding
1998 periods is the completion of certain initial phases of manufacturing,
requiring extensive regulatory compliance, including ISO 9001 and the GSR/GMP
quality manufacturing system for FDA compliance.
Research and development costs were $261,400 for the three months ended
June 30, 1999, an increase of $127,000 or 94.5% from research and development
costs of $134,400 for the three months ended June 30, 1998. For the six months
ended June 30, 1999 research and development costs were $429,300, an increase of
$196,100 or 84.1% from research and development costs of $233,200 for the six
months ended June 30, 1998. The primary reason for the increase in research and
development costs during the 1999 periods as compared to the corresponding 1998
periods is further R&D during the manufacturing of the Company's
ColorMate(Registered) TLc BiliTest(Registered) System and increased efforts to
further develop the LED mass manufacturing prototype in accordance with the
distribution agreement recently signed.
Compensation costs relating to options granted to consultants were
$248,000 for the three months ended June 30, 1999, an increase of $121,000 or
95.3% from compensation costs relating to options granted to consultants of
$127,000 for the three months ended June 30, 1998. For the six months ended June
30, 1999 compensation costs relating to options granted to consultants were
$488,000, an increase of $70,000 or 16.7% from compensation costs relating to
options granted to consultants of $418,000.
Sales, marketing and trade show costs were $660,000 for the three
months ended June 30, 1999, an increase of $482,500 or 271.8% from sales,
marketing and trade show costs of $177,500 for the three months ended June 30,
1998. For the six months ended June 30, 1999 sales, marketing and trade show
costs were $1,201,900, an increase of $1,024,400 or 577.1% from sales, marketing
and trade show costs of $177,500 for the six months ended June 30, 1998. The
primary reasons for the increase in sales, marketing and trade show costs during
the 1999 periods as compared to the corresponding 1998 periods were the
commercial introduction of the Company's ColorMate(Registered) TLc
BiliTest(Registered) System and the addition of the Company's sales force at its
medical division.
Legal fees were $304,200, an increase of $84,200 or 38.3% from legal
fees of $220,000 for the three months ended June 30, 1998. For the six months
ended June 30, 1999, legal fees were $552,100, an increase of $223,900 or 68.2%
from legal fees for the six months ended June 30, 1998. The primary reason for
the increase in legal fees during the 1999 period, as compared to the
corresponding 1998 period, was due to negotiations with its existing and
potential distribution partners and continued regulatory costs.
Interest and non-cash financing costs were $1,513,200 for the three
months ended June 30, 1999, an increase of $1,506,600 from interest and non-cash
financing costs of $6,600 for the three months ended June 30, 1998. For the six
months ended June 30, 1999, interest and non-cash financing costs were
$1,519,800, an increase of $1,506,500 from interest and non-cash financing costs
for the six months ended June 30, 1998. The primary reason for the increase in
interest and non-cash financing costs during the 1999 period as compared to the
1998 period was the securing of financing by the Company through senior
convertible debentures, which resulted in a non-cash original issue discount of
$1,310,800 for the period.
Liquidity and Capital Resources
At June 30, 1999 the Company had cash and cash equivalents of
$7,862,400, current assets of $10,703,500, working capital of $9,157,400, a
current ratio of 6.92 to 1.0 and stockholders equity of $6,000,500. Cash and
cash equivalents increased by
9
<PAGE>
$3,932,600 from December 31, 1998 as a result of the private placement
financings consummated by the Company during the second quarter of 1999.
Cash used by operating activities for the six months ended June 30,
1999 was $4,659,000, an increase of $1,847,900 from cash used by operating
activities of $2,811,100 for the six months ended June 30, 1998. The primary
reason for the increase in cash used by operating activities during the 1999
period as compared to the 1998 period was a $1,024,400 increase in sales,
marketing and trade show costs and a $718,300 increase in inventory associated
with the introduction of the Company's ColorMate(Registered) TLc
BiliTest(Registered) System.
The Company's primary source of liquidity during the six months ended
June 30, 1999 was the net proceeds from the private placements of convertible
debt and equity securities it consummated during the second quarter of 1999. As
a result of the Distribution Agreement the Company entered into with
Datex-Ohmeda, Inc. in June 1999 for the distribution of the Company's
ColorMate(Registered) TLc BiliTest(Registered) System, the Company anticipates
that it will begin to derive sales revenues from this product during the third
quarter of 1999 and in subsequent quarters. Management currently anticipates
that cash and cash equivalents, together with the anticipated revenues under the
Datex-Ohmeda Distribution Agreement and the financing in the amount of $4.0
million pursuant to the second closing contemplated by the agreement executed
in connection with the June 1999 preferred stock financing, will be adequate to
fund the Company's liquidity needs at least until July 2000, although there can
be no assurance of such result.
The total costs associated with the Company's Year 2000 compliance are
not expected to result in the Company's liquidity decreasing in any material
way. However, satisfactory remediation of Year 2000 issues is dependent upon
many factors, some of which are not completely within the Company's control. The
Company's current estimates of the impact of Year 2000 compliance on its
liquidity do not include costs that may result from the failure of third parties
with whom the Company has a material relationship to be Year 2000 compliant.
Should the Company's internal systems or systems of one or more significant
third parties fail to achieve Year 2000 compliance, the Company's liquidity
could be materially adversely affected.
Some of the information presented in or incorporated by reference in
this report constitutes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable assumptions, within the bounds of
its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Factors that
could cause actual results to differ from expectations include: (i) the
inability of the Company to secure additional financing, (ii) the failure of the
Company's manufacturing and distribution partners to perform their obligations,
(iii) government regulation and (iv) the loss of key personnel.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No disclosure is required under this Item 3.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Three putative class actions were commenced against the Company and
certain of its officers and directors in the Southern District of New York. The
first two actions were commenced in June 1998 and are captioned L.F. Monk v.
Chromatics Color Sciences International, Inc., Darby S. Macfarlane, Arthur
Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CV 4111 (S.D.N.Y.)
and Daniel R. Marquis v. Chromatics Color Sciences International, Inc., Darby S.
Macfarlane, Arthur Guiry and Leslie Foglesong, C.A. No. 98 CV 4335 (S.D.N.Y.).
The third action was commenced in August 1998 and is captioned Joseph Grunberg
v. Chromatics Color Sciences International, Inc., Darby S. Macfarlane, Arthur
Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CIV. 5646
(S.D.N.Y.).
The complaints were consolidated pursuant to the Consolidation Order
entered by the Court in December 1998. A consolidated amended complaint in the
matter now captioned In re Chromatics Color Sciences International, Inc.
Securities Litigation, Consolidated Matter File No. 98 Civ. 4111 (SHS), was
filed and served in January 1999 (the "Action").
Plaintiffs purport to bring the Action on behalf of all purchasers of
the common stock of the Company, between July 30, 1997 and June 9, 1998, seeking
damages for the alleged violation by defendants of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78j(b), and Rule 10b-5 promulgated
thereunder, 17 C.F.R. ss.240.10b-5, and pursuant to Section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78t(a), with respect to the
individual named defendants as "controlling persons." The complaint alleges that
the Company "embarked upon a scheme" to inflate the price of the Company's
Common Stock by making false and misleading statements concerning: (i) the new
and innovative nature of the Company's ColorMate(Registered)
TLc BiliTest(Registered) System; (ii) the
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<PAGE>
market size and revenue potential of the ColorMate(Registered)
TLc BiliTest(Registered) System; and (iii) the existence and status of
negotiations with potential distributors of the ColorMate(Registered)
OPTLc BiliTest(Registered) System. The allegations of the complaint arise
principally from a "report" prepared by Manuel I. Asensio of Asensio & Company,
Inc. that was disseminated at the close of the putative class period.
Defendants have moved to dismiss the Action which motion is fully
briefed and is now pending before Judge Stein. Defendants believe that the
claims asserted against them are without merit and intend to vigorously defend
the Action. No assurance can be given that the resolution of the Action and/or
future actions will not have a material adverse effect on the Company's
resultsof operations and liquidity. The Company has directors and officers
insurance which may cover a portion of the liability asserted in the Action. The
Company is exploring its legal remedies in respect to what it believes to be
false allegations against the Company made by short sellers of its stock; the
Company expects to incur significant expenses in this regard.
Item 2. Changes in Securities and Use of Proceeds.
On June 15, 1999, the Company completed a private placement of 40,000
shares of a newly authorized series of the Company's preferred stock, designated
as Class B Series 2 preferred stock, at a price of $100 per share and for an
aggregate total consideration of $4,000,000. The shares of Class B Series 2
preferred stock issued are convertible into shares of Common Stock at an initial
conversion price of $7.25 per share, subject to adjustment for stock splits,
combinations and similar recapitalizations affecting the Company's Common Stock
and in certain circumstances involving the issuance of shares of the Company's
Common Stock at prices below $7.25 per share. The holders of the Class B Series
2 preferred stock also received an aggregate of 270,690 five year warrants to
purchase shares of the Company's Common Stock. The warrants have an initial
exercise price of $8.25 per share, which may be subject to adjustment similar to
that of the Class B Series 2 preferred stock.
The Company also agreed to issue and sell an additional 40,000 shares
of a newly authorized series of the Company's Class B Series 2 preferred stock,
at a price of $100 per share and for an aggregate total consideration of
$4,000,000. The terms of the Class B Series 2 preferred stock to be sold in the
second closing would be identical to those described above except that the
conversion price would be equal to the lower of $7.25 per share or 90% of the
closing bid price of the common stock over the five consecutive trading days
ending on the date prior to the second closing date. The terms of the warrants
to be sold at the second closing would be identical to the warrant terms
described above except that the exercise price would be equal to the lower of
$8.25 per share or 100% of the average closing bid price of the Common Stock on
the second closing date. The Company may in its discretion elect not to proceed
with the second closing if the conversion price of the convertible preferred
stock to be sold would be less that $7.25 per share or if the exercise price of
the warrants to be sold would be less than $8.25 per share.
In connection with this private placement, which was exempt under
Section 4(2) of the Securities Act of 1933, as amended, the Company agreed to
register the shares of its common stock issuable upon the conversion of the
Class B Series 2 preferred stock and warrants for resale under the Securities
Act of 1933.
The issuance of the shares of the Class B Series 2 preferred stock will
modify the rights of the holders of the Common Stock of the Company in so far as
the Class B Series 2 preferred stock will have a liquidation preference equal to
the aggregate purchase price of $4,000,000.
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.
3.1 Restated Articles of Incorporation of the Company, as amended.
3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No. 33-54256), filed
on November 5, 1992, as amended).
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<PAGE>
4.1 Preferred Stock Purchase Agreement, dated as of June 11, 1999, by and
between Chromatics Color Sciences International, Inc. and LB I Group
Inc. (incorporated by reference to Exhibit 4.1 to the Company's Form
8-K filed on July 1, 1999).
4.2 Warrant Agreement, dated as of June 11, 1999, by and between Chromatics
Color Sciences International, Inc. and LB I Group Inc. (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K filed on July 1,
1999).
10.1 Agreement, dated as of June 7, 1999, between Chromatics Color Sciences
International, Inc. and Datex-Ohmeda, Inc. (incorporated by reference
to Exhibit 10.1 to the Company's Form 8-K filed on June 18, 1999).
27.1 Financial Data Schedule.
During the three month period ended June 30, 1999, the Company filed Current
Reports on Form 8-K on the following dates: April 30, 1999, June 18, 1999 and
July 1, 1999.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
Date: August 23, 1999 By: /s/ Darby S. Macfarlane
---------------------------
Darby S. Macfarlane
Chief Executive Officer
Date: August 23, 1999 By: /s/ Leslie Foglesong
------------------------
Leslie Foglesong
Treasurer and Chief Financial
and Principal Accounting Officer
13
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
CHROMATICS INTERNATIONAL, INC.
------------------------
Under Section 807 of the
Business Corporation Law
------------------------
We, the undersigned, Darby S. Macfarlane, President, and Leslie
Foglesong, Secretary, of Chromatics International, Inc., a corporation organized
and existing under the Business Corporation Law of the State of New York, do
hereby certify as follows:
1. The name of the corporation is Chromatics International, Inc.
2. The certificate of incorporation of the corporation was filed by the
Department of State on March 30, 1984.
3. The text of the certificate of incorporation of the corporation is
hereby changed and restated in order to (i) change the county in which the
office of the corporation is located, (ii) change the address to which the
Secretary of State shall mail a copy of process against the corporation served
upon him and (iii) restate the text of the certificate of incorporation of the
corporation to read in its entirety as follows:
"FIRST: The name of the corporation is Chromatics International, Inc.
(the "Corporation").
<PAGE>
SECOND: The purposes for which the corporation is to be formed are as
follows:
(a) To engage in the research and development, marketing,
distribution, purchase, sale (at wholesale or retail), export, license, design,
manufacture, and/or rental or any computer, machine, technology, device, scheme,
method, and/or products and goods (soft or hard) of every nature and kind either
alone and/or relating to or in conjunction with the detection and analysis of
the correct or appropriate color compatible beauty and other items for a
person's skin pigment, such items to include but not be limited to hair tint,
cosmetics and makeup of every nature and kind, furniture, fashion and wearing
apparel, art jewelry, home and interior design, and environmental items of all
kinds and nature.
(b) To act as consultants of every nature and kind in all
areas of the beauty, make-up, fashion and apparel industries, and any and all
other industries whatsoever and regardless of whether such services are rendered
directly to businesses and/or the general public.
(c) To undertake to assume the whole or any part of the
obligations or liabilities of any person, firm, association or corporation,
provided such acquisition is related to the purposes granted herein.
(d) To carry on, assist, and to participate with others, in
the organization, financing (including lending and advancing money), liquidation
or organization of firms, associations or corporations engaged in any similar
lawful business enterprise, and to lend and advance money and to give credit to
individuals, partnerships, corporations, joint stock associations, and trustees,
either with or without security, provided, however, nothing herein contained
shall be taken to authorize such corporation to engage in the business of
banking or to deal in commercial paper in the exercise of the functions of
banking.
2
<PAGE>
(e) Directly or through ownership of stock in any corporation,
to purchase or otherwise acquire, hold, manufacture, sell, exchange, mortgage,
pledge, hypothecate, underwrite, deal in and dispose of stocks, bonds, notes,
debentures, or other evidence of indebtedness and obligations and securities of
any corporation, company, association, partnership, syndicate, entity, or
person, domestic or foreign, or of any other domestic or foreign state,
government, or governmental authority or of any political or administrative
subdivision or department thereof, and certificates or receipts of any kind
representing or evidencing any interest in any such stocks, bonds, notes,
debentures, evidences of indebtedness, obligations, or securities to issue its
own shares of stock, bonds, notes, debentures, evidences of indebtedness,
obligations, securities, certificates, or receipts purchased or acquired by it,
and, while the owner or holder of any such stocks, bonds, debentures, evidences
of indebtedness, obligations, securities, certificates or receipts, to exercise
all the rights of ownership permitted by law; to aid by loan, subsidy, guaranty,
or otherwise, those issuing, creating, or responsible for any such stocks,
bonds, notes, debentures, evidences of indebtedness, obligations, securities,
certificates or receipts.
(f) To purchase or otherwise acquire, hold, exchange, pledge,
hypothecate, sell, deal in, and dispose of mortgages covering any property, tax
liens, and transfer of tax liens in real estate.
(g) To transact a general real estate agency and brokerage
business, buying, selling and dealing in real estate and real property and any
interest therein; on commission, or otherwise and renting and managing real
estate; and to act as agent; or attorney-in-fact for any persons or corporations
in buying, selling, holding and dealing in real estate; and
3
<PAGE>
any and all personal property collateral thereto and in such supervising,
managing, managing, and protecting of such property and any interest therein
and claims affecting same.
(h) To buy, sell or otherwise deal in as principal, factor,
agent or broker, and upon commission or otherwise, all forms and kinds of
securities, shares of stocks, bonds, debentures, warehouse receipts, promissory
notes, open accounts, certificates of indebtedness, evidence of indebtedness of
every kind, nature or character, commercial paper, mortgages, chattel mortgages
and other similar instruments and rights, whether secured or unsecured;
including bills and other accounts receivable, choses in action, leases,
contracts of conditional sale, and any and all kinds of negotiable or
non-negotiable paper (secured as well as unsecured), evidencing or connected
with the purchase, sale or exchange of any and all kinds of personal property.
(i) To apply for purchase, or in any manner acquire to hold,
own and operate, to sell or in any manner dispose of; to grant or license
letters patent, copyrights, chemical formulas, rights of representation,
licenses and privileges of any sort, an in any manner deal with, any and all
such rights, interests, inventions, improvements and processes used in
connection with or secured under such copyrights or under letters patent of the
United States or other countries or otherwise, and to work, operate and develop
the same.
(j) In general, to carry on any business connected with the
foregoing, or incidental, appurtenant to or growing out of any of the foregoing,
or in any way necessary, suitable or proper for the accomplishment of the
aforesaid objects, purposes and powers, and to have and exercise all the powers
conferred by the laws of New York upon corporations formed under the Business
Corporation Law of the State of New York.
4
<PAGE>
(k) The objects and purposes specified in the foregoing
clauses shall, except where otherwise expressed, be in no wise limited to or
restricted by reference to, or inference from, the terms of any other clause in
this Certificate of Incorporation, but the objects and purposes specified in
each of the foregoing clauses of this Article shall be regarded as independent
objects and purposes.
THIRD: The office of the Corporation is to be located in Westchester
County, New York.
FOURTH: A. Authorization. The Corporation shall have authority to issue
10,000,000 shares of common stock, (the "Common Stock"), par value $0.001 per
share, and 1,400,000 shares of preferred stock (the "Preferred Stock"), par
value $0.01 per share, which shares shall be designated as Class A Preferred
Stock;
The relative rights, preferences and limitations of the shares of
Common Stock and the Class A Preferred Stock shall be as hereinafter provided in
this Article FOURTH.
B. Common Stock
------------
(1) Dividends. Subject to the prior rights of the holders of the Class
A Preferred Stock, the holders of Common Stock shall be entitled to receive such
dividends as from time to time may be lawfully declared by the Board of
Directors of the Corporation from any surplus of the Corporation.
5
<PAGE>
(2) Voting Rights. The holders of Common Stock shall be
entitled to all of the voting rights and privileges pertaining to Common Stock,
without any limitations, prohibitions, restrictions or qualifications, and each
share of Common Stock shall be entitled to one vote on any matter submitted to
the vote of, or for the consent by, the shareholders of the Corporation.
(3) Liquidation. In the event of the voluntary or involuntary
liquidation or winding up of the Corporation, after satisfying claims of
creditors, secured and unsecured, and after distribution in full of the
preferential amounts, if any, to be distributed to the holders of the Preferred
Stock, the holders of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation of whatever kind lawfully available for
distribution to shareholders, ratably in proportion to the number of shares of
Common Stock held by them. Neither the sale, lease or exchange (for cash, shares
of stock, securities, or other consideration) of all or substantially all of the
property and assets of the Corporation, nor the merger or consolidation of the
Corporation into or with any other corporation, nor the merger of any other
corporation into the Corporation, shall be deemed to be a dissolution,
liquidation or winding up of the Corporation.
C. Class A Preferred Stock
-----------------------
(1) Dividends. The holders of the outstanding shares of Class A
Preferred Stock shall be entitled to receive, pari passu, when and as declared
by the Board of Directors, out of any assets at the time legally available
therefor, dividends in cash at the rate of $.001 per annum (as adjusted for any
reorganizations or stock splits, distributions or dividends with respect
6
<PAGE>
to such shares) before any dividend is paid on shares of Common Stock. Such
dividend may be paid quarterly (in installments of $.00025 per share) or
otherwise as the Board of Directors may from time to time determine. The
Corporation shall make no distributions to the holders of common stock in any
fiscal year unless and until such dividends shall have been paid to or declared
and set apart upon the Class A Preferred Stock at the rate per annum set forth
above for each quarter of such fiscal year, including the quarter in which such
dividends upon the Common Stock are declared, provided, however, that the
Corporation shall be entitled to repurchase or redeem shares of Common Stock
pursuant hereto, and/or pursuant to its agreements with the holders thereof
without paying or declaring dividends upon the Class A Preferred Stock. The
right to such dividends on the Class A Preferred Stock shall not be cumulative
and no rights shall accrue to holders of the Class A Preferred Stock by reason
of the fact that dividends on said shares are not declared in any prior year,
nor shall any undeclared or unpaid dividends bear or accrue interest.
(2) Voting Rights. Subject to the provisions of Section C(6) of this
Article FOURTH, the holders of record of Class A Preferred Stock shall be
entitled to one vote per share at all meetings of shareholders of the
Corporation and said voting rights shall be equal in all respects to the voting
rights of the Corporation's Common Stock. The holders of record of the shares of
the Class A Preferred Stock shall vote such shares together with the holders of
the Corporation's Common Stock and not as a separate class.
(3) Liquidation. (a) In the event of the voluntary or involuntary
liquidation or winding up of the Corporation, after satisfying claims of
creditors, secured and unsecured, the holders of the Class A Preferred Stock
shall be entitled to receive out of the assets of the
7
<PAGE>
Corporation available for distribution to shareholders, before any payment shall
be made on the Common Stock or any other capital stock of the Corporation, the
amount of $0.01 per share. Neither the sale, lease or exchange (for cash, shares
of stock, securities, or other consideration) of all or substantially all of the
property and assets of the Corporation, nor the merger or consolidation of the
Corporation into or with any other corporation, nor the merger of any other
corporation into the Corporation, shall be deemed to be a dissolution,
liquidation or winding up of the Corporation.
(b) In the event that the assets of the Corporation available for
distribution to the Holders of the Class A Preferred Stock upon any liquidation
or winding up of the Corporation shall be insufficient to pay in full all
amounts to which such holders are entitled, pursuant to paragraph (a) of this
subsection (3), such distribution shall be made ratably, in proportion to the
full distributable amounts to which holders of Class A Preferred Stock are
respectively entitled upon such liquidation or winding up.
(4) Conversion Right.(a) Subject to Section C (5) of the
Article FOURTH, upon the first to occur of (i) the Corporation's combined
pre-tax net operating income (before interest expense), as reflected on the
Corporations audited financial statements (but excluding, in each case, any
extraordinary item and any revenues or earnings generated by businesses acquired
by the Corporation by merger, consolidation, asset or stock acquisition or
similar transaction in each case after the date (the "Commencement Date") of the
filing of the Certificate of Amendment to the Certificate of Incorporation of
the Corporation of which this provision is a part) for any two consecutive
calendar years during the period commencing on the Commencement Date and ending
on December 31, 1996 exceeding $20,000,000 or (ii) the
8
<PAGE>
closing bid quotation of the Common Stock on the National Association of
securities dealers Automated Quotation System ("NASDAQ") (of the last sale
price, if the Common Stock is principally traded on a national securities
exchange or the NASDAQ national market System) being at least 546.67 on 30
consecutive trading days at any time during the period commencing on the
Commencement Date and ending on December 31, 1996 (each such event referred to
in the preceding subclauses (i) and (ii) being hereinafter referred to as an
"Event" and each such date being hereinafter referred to as the "Event Date"),
each share of Class A Preferred Stock outstanding immediately prior to the Event
date shall be, at the option of the holders thereof upon written notice (the
"Election Notice"), duly given to the Corporation within 30 days (the "Election
Notice Period") of such holders receiving written notice from the Corporation
(which notice shall be sent by certified mail, return receipt requested, to the
address of such holder as it shall appear on the stock register of the
Corporation) of the occurrence of the Event, convertible into 0.21739 shares of
Common Stock, subject to the provisions for adjustment hereinafter set forth.
Until such time as the certificates representing the Class A Preferred Stock to
the converted pursuant to any such Election Notice shall have been surrendered
and certificates evidencing the Common Stock to be issued shall have bene issued
in accordance with the provisions of paragraph (c) of this subsection (4), the
certificates representing the Class A Preferred Stock shall represent the shares
of Common Stock issuable upon the conversion of such Class A Preferred Stock and
the holders thereof shall be entitled to all the rights and privileges of the
holders of the Common Stock. The Corporation shall give prompt written notice to
the holders of the Class A Preferred Stock of the occurrence of an Event (which
in any event shall be given not later than five days after the occurrence of
such Event).
9
<PAGE>
(b)) The number of shares of Common Stock into which each share of
Class A Preferred Stock is convertible shall be subject to the adjustment from
time to time as follows:
(i) In the event the Corporation shall at any time or
from time to time on or prior to the Event Date (A)
declare a dividend or make a distribution on the
outstanding shares of Common Stock in shares of
Common Stock, (B) subdivide or reclassify the
outstanding shares of Common Stock into a greater
number of shares, or (C) combine or reclassify the
outstanding shares of Common Stock into a smaller
number of shares, then, and in each such case, the
number of shares of Common Stock into which each
share of Class A Preferred Stock is convertible shall
be adjusted so that the holder of each such share of
Class A Preferred Stock shall be entitled to receive,
upon the conversion thereof, the number of shares of
Common Stock which the holder of such share of Class
A Preferred Stock would have been entitled to receive
after the happening of any of the events described
above had such share been converted immediately prior
to the happening of such event or the record date
therefor, whichever is earlier. An adjustment made
pursuant to this clause (i) shall become effective
(1) in the case of any such dividend or distribution,
immediately after the close of business on the record
date for the determination of holders of shares
entitled to receive such dividend or distribution, or
(2) in the case of any such subdivision,
reclassification or combination, at the close of
business on the day upon which such corporate action
becomes effective.
10
<PAGE>
(ii) In the event of any merger, consolidation or
other business combination in which the Corporation
is not the surviving corporaiton or in the event of
the sale or disposition of all or substantially all
of the assets of the Corporaiton, the successor or
purchasing corporation, as the case may be, shall
deliver to each holder of shares of Class A Preferred
Stock an undertaking that such holder shall have the
right upon conversion to receive the kind and amount
of securities, cash and property which such holder
would have owned or been entitled to receive upon the
happening of such merger, consolidation, business
combination or sale had such shares been converted
immediately prior to the happening of such event.
Such undertaking shall provide for adjustments, which
shall bed as nearly equivalent as may be practicable
to the adjustments provided for in Section C(4)
hereof. The provisions of this clause (ii) shall
similarly apply to successive mergers,
consolidations, business combinations and sales or
transfers.
(iii) Whenever the number of shares of Common Stock
into which each share of Class A Preferred Stock is
convertible is adjusted as provided in Section
C(4)(b) of this Article FOURTH or whenever a merger,
consolidation or other business combination giving
rise to certain rights on the part of the holders of
the Class A Preferred Stock as provided in Section
C(4)(b)(ii) of this Article FOURTH, occurs, the
Corporation shall promptly mail by certified mail,
return receipt requested, to the holders of
11
<PAGE>
record of the outstanding shares of Class A Preferred
Stock at their respective addresses as the same
appear on the stock register of the Corporation a
notice either stating that the number of shares of
Common Stock into which the shares of Class A
Preferred Stock are convertible has been adjusted and
setting forth the new number of shares of Common
Stock into which each share of Class A Preferred
Stock is convertible as a result of such adjustment,
a brief statement of the facts requiring such
adjustment and the computation thereof, and when such
adjustment became effective, or setting forth a brief
statement of the kind and amount of securities, cash
and/or property to be received by such holder for
each issued and outstanding share of Class A
Preferred Stock.
(c) If the conditions set forth in paragraph (a) of Section C(4) hereof
are met, within 10 days of delivering the Election Notice to the Corporation or
as soon thereafter as practicable, the holders of the shares of Class A
Preferred Stock electing to have such stock converted as provided herein shall
deliver to the Corporation, at its then principal executive offices,
certificates evidencing the shares of Class A Preferred Sock to be so converted,
accompanied by appropriate endorsements, and transfer documents satisfactory to
the Corporation. Upon surrender of such certificates and cancellation of the
shares evidenced thereby the Corporaiton shall issue certificates evidencing
Common Stock, registered in the name of the person specified by such holder,
representing such number of shares of Common Stock issuable upon conversion of
the shares of Class A Preferred Stock. The Corporaiton shall be liable for any
documentary stamp, transfer or similar tax applicable to such conversion.
12
<PAGE>
(d) Notwithstanding any provision to the contrary, the Corporation
shall not be required to issue a fractional share of Common Stock upon the
conversion of any shares of Class A Preferred Stock, but in lieu thereof shall
make a cash adjustment with respect thereto in an amount equal to the fair
market value, calculated in the sole judgment of the Board of Directors, of such
fractional share.
(5) Redemption. (a) The Corporation shall (i) not later than
10 days after the expiration of the Election Notice Period, if applicable, or
(ii) not later than 10 days after a determination (the "Determination") by the
Board of Directors of the Corporaiton that an Event has not occurred within the
relevant periods specified in Section C(4) of this Article FOURTH, if
applicable, call for redemption (a) each share of Class A Preferred Stock that
is not the subject of an Election Notice, or (B) all shares of Class A Preferred
Stock, if the Board of Directors shall have made the Determination, as
applicable, at a price per share of $0.01 per share, plus any declared but
unpaid dividends on such shares of Class A Preferred Stock; provided, however,
that the Board of Directors shall make a Determination on or prior to the 120th
day after December 31, 1996. (Such tenth day after expiration of the Election
Notice Period and such tenth day after a Determination, as applicable, being
hereinafter referred to as the "Redemption Date.") Within 10 days of the
Redemption Date or as soon thereafter as practicable, the holders of the shares
of Class A Preferred Stock to be redeemed shall deliver to the Corporation, at
its then principal executive offices, certificates evidencing the shares of
Class A Preferred Stock to be so redeemed. Upon surrender of such certificates,
the Corporation shall make payment of the redemption price to the holders of
record of the shares of Class A Preferred Stock in cash or by
13
<PAGE>
certified check at their respective addresses as the same appear on the stock
register of the Corporation.
(b) If, in the judgment of the Board of Directors any redemption
pursuant to this Section C.(5) would not be permitted pursuant to Section 513(a)
of the Business Corporaiton Law of the State of New York, the Corporaiton shall
redeem only that portion, if any, of the securities which it would be so
permitted to redeem at such time ratably, in proportion to the number of shares
of Class A Preferred Stock owned by the holders of the securities which would
otherwise be redeemed at such time.
(6) Rights After Redemption Date. From and after the
Redemption Date, all rights of the holders of the Class A Preferred Stock shall
cease and terminate, except for (i) rights pursuant to paragraph (a) of Section
C(5) of this Article FOURTH and (ii) dividend and liquidation rights of any
shares of Class A Preferred Stock which are not redeemed as contemplated by
paragraph (b) of Section C(5) of this Article FOURTH.
D. Preemptive Rights. None of the holders of any class of the Common Stock
or Preferred Stock of the Corporation shall have any preemptive rights otherwise
provided for under Section 622 of the Business Corporation Law of the State of
New York.
FIFTH: The Secretary of State is designated as the agent of
the Corporaiton upon whom service of process against the Corporation
may be served. The post office address within the state of New York to
which the Secretary of State shall mail a copy of any process against
the Corporation served on him is:
14
<PAGE>
Chromatics International, Inc.
10 Old Jackson Avenue #28 (or 2B??)
Hastings-on-Hudson, New York 10706
Attention: Darby S. Macfarlane, President
SIXTH: No director of the Corporaiton shall be personally
liable to the Corporation or its shareholders for damages for any
breach of his duty as a director; provided, however, that nothing in
this Article SIXTH shall eliminate or limit the liability of any
director if a judgment or other final adjudication adverse to him
establishes (i) that his acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or (ii)
that he personally gained in fact a financial profit or other advantage
to which he was not legally entitled or (iii) that his acts violated
Section 719 of the Business Corporation Law of the State of New York.
4. The restatement of the certificate of incorporation herein
certified was authorized by the Board of Directors of the corporation.
IN WITNESS WHEREOF, the undersigned have signed this restated
certificate of incorporation and affirm under the penalties of perjury that the
statements made herein are true this 26th day of October, 1992.
/s/
----------------------------------
Darby S. Macfarlane, President
15
<PAGE>
/s/
----------------------------------
Leslie Foglesong
Secretary
16
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
CHROMATICS INTERNATIONAL, INC.
Under Section 807 of the Business Corporation Law
Rosenman & Colin
575 Madison Avenue
New York, New York 10022
17
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS INTERNATIONAL, INC.
Under Section 805 of the
Business Corporation Law
The undersigned, being duly elected President and Secretary,
respectively, of Chromatics International, Inc. (the "Corporation"), a
corporation organized and existing under the Business Corporation Law of the
State of New York do hereby certify as follows:
5. The name of the Corporation is CHROMATICS INTERNATIONAL, INC.
6. The Certificate of Incorporation of the Corporation was filed by the
Department of State on March 30, 1984. The Company's Amended and Restated
Certificate of Incorporation was filed by the Department of State on October 29,
1992. The Corporation was formed under the name Chromatics International, Inc.
7. The purpose of this Amendment to the Certificate of Incorporation of
the corporation is to change the name of the Corporation.
8. To accomplish the foregoing, Article FIRST of the Certificate of
Incorporation of the Corporation is hereby amended to read in its entirety as
follows:
"FIRST: The name of the Corporation is Chromatics Color
Sciences International, Inc."
<PAGE>
9. The foregoing amendment to the Certificate of Incorporation of the
Corporation has been duly authorized by the unanimous written consent of the
Board of Directors of the Corporation, followed by the affirmative vote of a
majority of the outstanding share of common stock of the Corporation entitled to
vote thereon.
IN WITNESS WHEREOF, the undersigned have signed this Certificate and
affirm under the penalties of perjury that the statements made herein are true,
this 14th day of December, 1992.
/s/
----------------------------------
Darby Simpson MacFarlane
President
/s/
----------------------------------
Leslie Foglesong
Secretary
19
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS INTERNATIONAL, INC.
Under Section 805 of the Business Corporation Law
Rosenman & Colin
575 Madison Avenue
New York, New York 10022
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS INTERNATIONAL, INC.
Under Section 805 of the
Business Corporation Law
The undersigned, being duly elected President and Secretary,
respectively, of Chromatics International, Inc. (the "Corporation"), a
corporation organized and existing under the Business Corporation Law of the
State of New York do hereby certify as follows:
1. The name of the Corporation is CHROMATICS INTERNATIONAL, INC.
2. The Certificate of Incorporation of the Corporation was filed by the
Department of State on March 30, 1984. The Company's Amended and Restated
Certificate of Incorporation was filed by the Department of State on October 29,
1992. The Corporation was formed under the name Chromatics International, Inc.
3. The purpose of this Amendment to the Certificate of Incorporation of
the corporation is to change the name of the Corporation.
4. To accomplish the foregoing, Article FIRST of the Certificate of
Incorporation of the Corporation is hereby amended to read in its entirety as
follows:
"FIRST: The name of the Corporation is Chromatics Color
Sciences International, Inc."
<PAGE>
5. The foregoing amendment to the Certificate of Incorporation of the
Corporation has been duly authorized by the unanimous written consent of the
Board of Directors of the Corporation, followed by the affirmative vote of a
majority of the outstanding share of common stock of the Corporation entitled to
vote thereon.
IN WITNESS WHEREOF, the undersigned have signed this Certificate and
affirm under the penalties of perjury that the statements made herein are true,
this 14th day of December, 1992.
/s/
----------------------------------
Darby Simpson MacFarlane
President
/s/
----------------------------------
Leslie Foglesong
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS INTERNATIONAL, INC.
Under Section 805 of the Business Corporation
Rosenman & Colin
575 Madison Avenue
New York, New York 10022
Attn: Sherri C. Shapiro
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Under Section 805 of the
Business Corporation Law
We, the undersigned, Darby S. Macfarlane, President, and Leslie
Foglesong, Secretary, of Chromatics Color Sciences International, Inc., a
corporation organized and existing under the Business Corporation Law in the
State of New York, do hereby certify as follows:
6. The name of the Corporation is Chromatics Color Sciences
International, Inc.
7. The Certificate of Incorporation of the Corporation was filed by the
Department of State on March 30, 1984. The Company's Amended and Restated
Certificate of Incorporation was filed by the Department of State on October 20,
1992. The Company's Certificate of Amendment to the Certificate of Incorporation
was filed by the Department of State on December 16, 1992. The Corporation was
formed under the name Chromatics International, Inc.
8. The purpose of this Amendment to the Certificate of Incorporation is
to (i) increase the number of authorized shares of Common Stock of the Company
from 10,000,000 shares to 25,000,000 shares and (ii) to extend for one year from
December 31, 1996 to December 31, 1997 the expiration date of the period during
which the Corporation's outstanding Class A Convertible Preferred Stock, par
value $.01 per share (the "Preferred Stock") can become convertible into Common
Stock upon the Corporation's achieving certain stock performance or earnings
goals and to likewise extend the date by which the Corporation is to call the
Preferred Stock for redemption if such goals are not met:
9. To accomplish the foregoing, Article FOURTH of the Certificate of
Incorporation is hereby amended as follows:
(a) Paragraph A of Article FOURTH is hereby amended to read in
its entirety as follows:
"FOURTH: A. Authorization. The Corporation shall have the
authority to issue 25,000,000 shares of common stock (the "Common
Stock"), par value $0.001 per share, and 1,400,000 shares of preferred
stock (the "Preferred Stock"), par value $0.01 per share, which shares
shall be designated as Class A Preferred Stock.
<PAGE>
The relative rights, preferences and limitations of the shares
of Common Stock and Class A Preferred Stock shall be as hereinafter
provided in Article FOURTH."
(b) Paragraph C(4)(a) of Article FOURTH is hereby amended to
read in its entirety as follows:
"(a) Subject to Section C. (5) of this Article FOURTH, upon
the first to occur of (i) the Corporation's combined pre-tax net
operating income (before interest expense), as reflected on the
Corporation's audited financial statements (but excluding, in each
case, any extraordinary items and any revenues or earnings generated by
businesses acquired by the Corporation by merger, consolidation, asset
or stock acquisition or similar transaction, in each case after the
date (the "Commencement Date") of the filing of the Certificate of
Amendment to the Certificate of Incorporation of the Corporation of
which this provision is a part) for any two consecutive Commencement
Date and ending on December 31, 1997 exceeding $20,000,000 or (ii) the
closing bid quotation of the Common Stock of the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") (or the
last sales price, if the Common Stock is principally traded on a
national securities exchange or the NASDAQ National Market System)
being at least $46.67 on 30 consecutive trading days at any time during
the period commencing on the Commencement Date and ending on December
31, 1997 (each such event referred to in the preceding subclauses (i)
and (ii) being hereinafter referred to as an "Event" and each such date
being hereinafter referred to as the "Event Date"), each share of Class
A Preferred Stock outstanding immediately prior to the Event Date shall
be, at the option of the holders thereof upon written notice (the
"Election Notice") duly given to the Corporation within 30 days (the
"Election Notice Period") of such holders receiving written notice from
the Corporation (which notice shall be sent by certified mail, return
receipt requested, to the address of such holder as it shall appear on
the stock register of the Corporation) of the occurrence of the Event,
convertible into .6521739 shares of Common Stock, subject to the
provisions for adjustment hereinafter set forth. Until such time as the
certificates representing the Class A Preferred Stock to be converted
pursuant to any such Election Notice shall have been surrendered and
certificates evidencing the Common Stock to be issued shall have been
issued in accordance with the provisions of paragraph (c) of this
subsection (4), the certificates representing the Class A Preferred
Stock shall represent the shares of Common
<PAGE>
Stock issuable upon the conversion of such Class A Preferred Stock and
the holders thereof shall be entitled to all the rights and privileges
of the holders of the Common Stock. The Corporation shall give prompt
written notice to the holders of the Class A Preferred Stock of the
Occurrence of an Event (which in any event shall be given not later
than five days after the occurrence of such Event)."
(c) The First sentence of Paragraph C(5)(a) of Article Fourth
is hereby amended to read as follows:
"(a) The Corporation shall (i) not later than 10 days after
the expiration of the Election Notice Period without the Corporation
having received an Election Notice, if applicable, or (ii) not later
than 10 days after a determination (the "Determination") by the Board
of Directors of the Corporation that an Event has not occurred within
the relevant periods specified in Section C. (4) of this Article
FOURTH, if applicable, call for redemption (A) each share of Class A
Preferred Stock that is not the subject of an Election Notice, or (B)
all shares of Class A Preferred Stock, if the Board of Directors shall
have made the Determination, as applicable, at a price per share of
$.01 per share, plus any declared but unpaid dividends on such shares
of Class A Preferred Stock, provided, however, that the Board of
Directors shall make a Determination on or prior to the 120th day after
December 31, 1997."
10. The foregoing amendment to the Certificate of Incorporation of the
Corporation has been duly authorized by the unanimous consent of the Board of
Directors of the Corporation, followed by the affirmative vote of a majority of
the outstanding shares of Common Stock of the Corporation entitled to vote
thereon.
IN WITNESS WHEREOF, the undersigned have signed this Certificate and
affirm under the penalties of perjury that the statements made herein are true,
this 8th day of June, 1995.
/s/
----------------------------------
Darby Simpson Macfarlane
President
/s/
----------------------------------
<PAGE>
Leslie Foglesong
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
TO THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
(Under Section 805 of the Business Corporation Law)
Rosenman & Colin
575 Madison Avenue
New York, New York 10022
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
We, the undersigned, Darby Simpson Macfarlane, Chief Executive Officer,
and Leslie Foglesong, Secretary of Chromatics Color Sciences International, Inc.
(the "Corporation"), a corporation organized and existing under the Business
Corporation Law of the State of New York, do hereby, certify as follows:
11. The name of the Corporation is CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
12. The Certificate of Incorporation of the Corporation was filed by
the Department of State on March 30, 1984. The Corporation was formed under the
name Chromatics International, Inc.
13. The Certificate of Incorporation of the Corporation, as heretofore
amended, is hereby further amended to: (i) increase the number of authorized
shares of Common Stock of the Company from 25,000,000 shares, par value $.001,
to 50,000,000 shares, par value $.001, and (ii) increase the number of
authorized shares of preferred stock from 1,400,000 shares of Class A Preferred
Stock, par value $.01 per share, to a total of 11,400,000 shares of preferred
stock, 1,400,000 of which shall continue to be the existing Class A Preferred
Stock, par value
<PAGE>
$.01 per share, and the balance of which shall be designated 10,00,000 shares of
Class B Preferred Stock, no par value.
14. To accomplish the foregoing:
(1) Article FOURTH paragraph A of the Certificate of
Incorporation of the Corproation, relating to the authorized shares of
the Corporation, is hereby amended to read in its entirety as follows:
"FOURTH: A. Authorization. The Corporation
shall have the authority to issue 50,000,000 shares
of common stock (the "Common Stock"), par value
$0.001 per share, and 11,400,000 shares of preferred
stock (the "Preferred Stock"), 1,400,000 shares
shall be designated as Class A Preferred Stock,
having a par value of $0.01 per share and 10,000,000
shares of preferred stock shall be designated as
Class B Preferred Stock, having no par value.
The relative rights, preferences and
limitations of the shares of Common Stock, Class A
Preferred Stock and Class B Preferred Stock, shall
be as hereinafter provided in Article FOURTH."
and (ii) that Article FOURTH paragraph D is now designated Article FOURTH
paragraph E, and that a new Article FOURTH paragraphs to be added to the
Certificate of Incorporation to read in its entirety as follows:
D. Class B Preferred Stock:
The Board of Directors of the Corporation
is authorized, subject to the limitations prescribed
by law, to provide for the issuance of the Class B
preferred Stock in series, to establish the number
of shares to be included in each series and to fix
the designation and the relative rights, preferences
and limitations of the Class B Preferred Stock of
each
30
<PAGE>
series. The authority of the Board of Directors with
respect to each series shall include, but shall not
be limited to, determination of the following:
(i) The number of shares of Class B
Preferred Stock constituting that series
and the distinctive designation of that
series.
(ii) The dividend rate on the Class B
preferred Stock of that series and whether
dividends shall be cumulative and, if so,
from which date or dates.
(iii) Whether the Class B preferred Stock
of that series shall have voting rights, in
addition to the voting rights provided by
law and, if so, the terms of such voting
rights.
(iv) Whether the Class B Preferred Stock of
that series shall have conversion
privileges and, if so, the terms and
conditions of such conversion, including,
without limiting the generality thereof,
provisions for adjustment of the conversion
rate in such events as the Board of
Directors shall determine.
(v) Whether the Class B Preferred Stock of
that series shall be redeemable and, if so,
the terms and conditions of such
redemption, including, without limiting the
generality thereof, the date or dates upon
or after which such Class B Preferred Stock
shall be redeemable and the amount per
share payable in the event of redemption,
which amount may vary under different
31
<PAGE>
conditions and at different redemption
dates.
(vi) The rights of the Class B Preferred
Stock of that series in the event of the
voluntary or involuntary liquidation,
dissolution or winding up of the
Corporation.
15. The foregoing amendments to the Certificate of
Incorporation of the Corporation have been duly authorized by unanimous consent
of the Board of Directors of the Corporation, followed by the vote of the
holders of at least a majority of all of the outstanding shares of the
Corporation entitled to vote on said amendments to the Certificate of
Incorporation.
IN WITNESS WHEREOF, the undersigned have signed this
Certificate and affirm under the penalties or perjury that the statements made
herein are true this 3rd day of June, 1996.
/s/
----------------------------------
Darby Simpson Macfarlane
Chief Executive Officer
/s/
----------------------------------
Leslie Foglesong
Secretary
32
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATION OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
We, the undersigned, Darby S. Macfarlane, Chief Executive
Officer, and Leslie Foglesong, Secretary, of Chromatics Color Sciences
International, Inc. (the "Corporation"), a corporation organized and
existing under the Business Corporation law of the State of New York,
do hereby certify as follows:
16. The name of the Corporation is CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
17. The Certificate of Incorporation of the Corporation was
filed by the Department of State on March 30, 19984. The Corporation
was formed under the name Chromatics International, Inc.
18. The Certificate of Incorporation of the Corporation, as
heretofore amended, is hereby further amended to extend for one year
from December 31, 1997 to December 31, 1998 the expiration date of the
period during which the Corporation's outstanding Class A Convertible
Preferred Stock, par value $0.01 per share (the "Preferred Stock") can
become convertible into Common Stock upon the Corporation's achieving
certain stock
33
<PAGE>
performance or earnings goals and to likewise extend the date by which
the Corporation is to call the Preferred Stock for redemption if such
goals are not met.
19. To accomplish the foregoing,
(a) Paragraph c(4)(a) of Article FOURTH of the
Certificate of Incorporation of the Corporation, relating to the
authorized shares of the Corporation, is hereby amended to read in its
entirety as follows:
"(a) Subject to Section C(5) of this article FOURTH,
upon the first to occur of (i) the Corporation's
combined pre-tax net operating income (before
interest expense), as reflected on the Corporation's
audited financial statements (but excluding, in each
case, any extraordinary items and any revenues or
earnings generated by business acquired by the
Corporation by merger, consolidation, asset-or stock
acquisition or similar transaction, in each case
after the date (the "Commencement Date") of the
filing of the Certificate of Amendment to the
Certificate of Incorporation of the Corporation of
which this provision is a part) for any two
consecutive calendar years during the period
commencing on the Commencement Date and ending on
December 31, 1998 exceeding $20,000,000 or (ii) the
closing bid quotation of the Common Stock on the
National Association of Securities Dealers Automated
Quotation System ("NASDAQ") (or the last sales
price, if the Common Stock is principally traded on
a national securities exchange or the NASDAQ
national Market System) being at least $46.67 on 30
consecutive trading days' at any time during the
period commencing on the Commencement Date and
ending on December 31, 1998 (each such event
referred to in the preceding subclauses (i) and (ii)
being hereinafter referred to as an "Event" and each
such date being hereinafter referred to as the
"Event Date"), each share of Class A Preferred Stock
outstanding immediately prior to the Event Date
34
<PAGE>
shall be, at the option of the holders thereof upon
written notice (the "Election Notice") duly given to
the Corporation within 30 days (the "Election Notice
Period") of such holders receiving written notice
from the Corporation (which notice shall be sent by
certified mail, return receipt requested, to the
address of such holder as it shall appear on the
stock register of the Corporation) of the occurrence
of the Event, convertible into 6521739 shares of
Common Stock, subject to the provisions for
adjustment hereinafter set forth. Until such time as
the certificates representing the Class A Preferred
Stock to be converted pursuant to any such Election
Notice shall have been surrendered and certificates
evidencing the Common Stock to be issued shall have
been issued in accordance with the provisions of
paragraph (c) of this subsection (4), the
certificates representing the Class A Preferred
Stock shall represent the shares of Common Stock
issuable upon the conversion of such Class A
Preferred Stock and the holders thereof shall be
entitled to all the rights and privileges of the
holders of the Common Stock. The Corporation shall
give prompt written notice to the holders of the
Class A Preferred Stock of the occurrence of an
Event (which in any event shall be given not later
than five days after the occurrence of such Event)."
(ii) The first sentence of Paragraph C(5)(a) of
Article Fourth is hereby amended to read as follows:
"(a) The Corporation shall (i) not later than 10
days after the expiration of the Election Notice
Period without the Corporation having received an
Election Notice, if applicable, or (ii) not later
than 10 days after a determination (the
"Determination") by the Board of Directors of the
Corporation that an Event has not occurred within
the relevant periods specified in Section C(4) of
this Article FOURTH, if applicable, call for
redemption (A) each share of Class A Preferred Stock
that is not the subject of an Election Notice, or
(B) all shares of Class A Preferred Stock, if the
board of Directors shall have
35
<PAGE>
made the Determination, as applicable, at a price
per share of $.01 per share, plus any declared but
unpaid dividends on such shares of Class A Preferred
Stock provided, however, that the Board of Directors
shall make a Determination on or prior to the 120th
day after December 31, 1998.@
20. The foregoing amendment to the Certificate of Incorporation of the
Corproation has been duly authorized by unanimous consent of the Board of
Directors of the Corporation, followed by the vote of the holders of at least a
majority of all of the outstanding shares of the Corporation entitled to vote on
said amendments to the Certificate of Incorporation.
IN WITNESS WHEREOF, the undersigned have signed this Certificate and
affirm under the penalties of perjury that the statements made herein are true
this 6th day of January, 1998.
/s/
----------------------------------
Darby S. Macfarlane
Chairman of the Board
/s/
----------------------------------
Leslie Foglesong
Secretary
36
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
UNDER SECTION 805 OF THE
BUSINESS CORPORATION LAW
* * * * * *
Rosenman & Colin
575 Madison Avenue
New York, NY 10022-2585
37
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
----------------
Under Section 805 of the
Business Corporation Law
----------------
We, the undersigned, Darby S. Macfarlane, Chief Executive Officer, and
Leslie Foglesong, Secretary, of Chromatics Color Sciences International, Inc.
(the "Corporation"), a corporation organized and existing under the Business
Corporation Law of the State of New York, do hereby certify as follows:
21. The name of the Corporation is CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
22. The Certificate of Incorporation of the Corporation was filed by
the Department of State on March 30, 1984. The Corporation was formed under the
name Chromatics International, Inc.
23. The Certificate of Incorporation of the Corporation, as heretofore
amended, is hereby further amended (i) to effect a three-for-two split of the
issued and
38
<PAGE>
outstanding shares of the Corporation's Common Stock, (ii) to extend for two
years from December 31, 1998 to December 31, 2000 the expiration date of the
period during which the Corporation's outstanding Class A Convertible Preferred
Stock can become convertible into Common Stock upon the Corporation's achieving
certain stock performance or earnings goal, (iii) to likewise extend the date by
which the Corporation is to call the Class A Convertible Preferred Stock for
redemption if such goals are not met, (iv) to revise the market price conversion
feature of the Class A Convertible Preferred Stock to provide for adjustment
upon the occurrence of certain events involving the Common Stock, including
stock splits, reclassifications and the payment of stock dividends, and (v) to
delete the exclusion of extraordinary items and revenues generated by businesses
acquired by the Corporation from the calculation of the earnings goal that needs
to be satisfied to trigger the conversion feature of the Class A Convertible
Preferred stock.
24. On February 13, 1998, there were approximately 9,289,944 shares of
Common Stock, par value $0.001, issued and outstanding. As a result of the split
contemplated by this Certificate of Amendment, there will be approximately
13,934,916 shares of Common Stock, par value $0.001, issued and outstanding and
36,064,085 shares of unissued Common Stock par value $0.001. The terms with
respect to the Class A Preferred Stock change only to the extent that one of the
Events (as defined in Article 5 herein) occurs; otherwise, the number par value
and class of the Class A Preferred Stock remain unchanged.
25. To accomplish the foregoing,
(a) Paragraph A of Article FOURTH of the Certificate of Incorporation
of the Corporation is hereby amended to read in its entirety as follows:
39
<PAGE>
"A. Authorization. The Corporation shall have the
authority to issue (i) 50,000,000 shares of common stock (the
"Common Stock"), par value $0.001 per share, and (ii)
11,400,000 shares of preferred stock (the "Preferred Stock"),
of which 1,400,000 shares shall be designated as Class A
Preferred Stock, having a par value of $0.01 per share, and
10,000,000 shares shall be designated as Class B Preferred
Stock having no par value.
Each share of common Stock issued and outstanding
immediately prior to the effective date of the filing of the
Certificate of Amendment of the Corporation's Certificate of
Incorporation is hereby reclassified and changed into one and
one-half fully paid and nonassessable shares of Common Stock,
$0.001 par value, of the Corporation, and each holder of
record of a certificate for one or more shares of Common Stock
as of the close of business on the effective date of the
filing of this amendment to the Corporation's Certificate of
Incorporation shall be entitled to receive, as soon as
practicable, upon surrender of such certificate, a certificate
or certificates representing one and one-half shares of Common
Stock for each share of Common Stock represented by the
certificate of such holder, and any fractional shares
resulting will be rounded up to the next whole share. Until
such time as the certificates representing the Common Stock to
be split pursuant hereto shall have been surrendered, the
certificates representing the Common Stock shall represent the
shares of Common Stock issuable upon the stock split of such
Common Stock.
The relative rights, preferences and limitations of
the shares of Common Stock Class A Preferred Stock and Class B
Preferred Stock shall be as hereinafter provided in Article
FOURTH."
(b) Paragraph C(4)(a) of Article FOURTH of the Certificate of
Incorporation of the Corporation is hereby to read in its entirety as follows:
"(a) Subject to Section 5(5) of this Article FOURTH, upon the
first to occur after the date (the "Commencement Date") of the
filing of the Certificate of Amendment to the Certificate of
Incorporation of the Corporation of which this provision is a
part of (i) the Corporation's combined pre-tax net operating
income (before interest expense), as reflected on the
Corporation's audited financial statements for any two
consecutive calendar years during
40
<PAGE>
the period commencing on the Commencement Date and ending on
December 31, 2000 exceeding $20,000,000 or (ii) the closing
bid quotation of the Common Stock on the National Association
of Securities Dealers ("NASDAQ") (or the last sales price, if
the Common Stock is principally traded on a national
securities exchange or the NASDAQ National Market system)
being at least $46.67, subject to the provisions for
adjustment hereinafter set forth (the "Trigger Price"), on 36
consecutive trading days at any time during the period
commencing on the Commencement Date and Ending on December 31,
2000 (each such event referred to in the preceding subclauses
(i) and (ii) being hereinafter referred to as an "Event" and
each such date being hereinafter referred to as the "Event
Date"), each share of Class A Convertible Preferred Stock
outstanding immediately prior to the Event Date shall be at
the option of the holders thereof upon written notice (the
"Election Notice") duly given to the Corporation within 10
days (the "Election Notice Period") of such holders receiving
written notice from the Corporation (which notice shall be
sent by certified mail, return receipt requested to the
address of such holder as it shall appear on the stock
register of the Corporation) of the occurrence of the Event,
convertible into .6521739 shares of Common Stock, subject tot
he provisions for adjustment hereinafter set forth. In the
event the Corporation shall at any time or from time to time
on or prior to the Event date (A) declare a dividend or make a
distribution of the outstanding shares of Common Stock in
shares of Common Stock, (B) subdivide or reclassify the
outstanding shares of Common Stock into a greater number of
shares, by stock split or otherwise, or (C) combine or
reclassify the outstanding shares of Common Stock into a
smaller number of shares, by reverse stock split or otherwise,
then, in each case, the Trigger Price in effect at the time of
the record date for such dividend or of the effective date of
such subdivision, combination, or reclassification, shall be
adjusted so that it shall equal the price determined by
multiplying the Trigger Price by a fraction, the numerator of
which shall be the number of shares of Common Stock
outstanding immediately prior to such action, and the
denominator of which shall be the number of shares of Common
Stock outstanding after giving effect to such action. Such
adjustments shall be made successively whenever any event
listed in clause (A), (B) or (C) above shall occur. After
delivery of an Election Notice and until such time as the
certificates representing the Class A Convertible Preferred
Stock to be converted pursuant to such Election Notice shall
have been issued in accordance with
41
<PAGE>
the provisions of paragraph (c) of this subsection (4), the
certificates representing the Class A Convertible Preferred
Stock shall represent the shares of Common Stock issuable upon
the conversion of such Class A Convertible Preferred Stock and
the holders thereof shall be entitled to all the rights and
privileges of the holders of the Common Stock. The Corporation
shall give prompt written notice to the holders of the Class A
Convertible Preferred Stock of the occurrence of an Event
(which in any event shall be given not later than five days
after the occurrence of such Event)."
(c) The first sentence of Paragraph C(5)(a) of
Article FOURTH of the Certificate of Incorporation of the Corporation is hereby
amended to read as follows:
"(a) The corporation shall (i) not later than 10 days after
the expiration of the Election Notice Period without the
Corporation having received an Election Notice, if applicable,
or (ii) not later than 10 days after a determination (the
"Determination") by the Board of Directors of the Corporation
that an Event has not occurred within the relevant periods
specified in Section C(4) of this Article FOURTH, if
applicable, call for redemption (A) each share of Class A
Preferred Stock that is not the subject of an Election Notice,
or (B) all shares of Class A Preferred Stock, if the Board of
Directors shall have made the Determination, as applicable, as
a price per share of $.01 per share, plus any declared but
unpaid dividends on such shares of Class A Preferred Stock,
provided, however, that the Board of Directors shall make a
Determination on or prior to the 120th day after December 31,
2000."
26. The foregoing amendments to the Certificate of
Incorporation of the Corporation have been duly authorized by unanimous consent
of the Board of Directors of the Corporation, followed by the vote of the
holders of at least a majority of all of the outstanding shares of the
Corporation ended to vote as said amendments to the Certificate of
Incorporation.
42
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this
Certificate and affirm under the penalties of perjury that the statements made
herein are true this _____ day of February, 1998.
/s/
----------------------------------
Darby S. Macfarlane,
Chairman of the Board
/s/
----------------------------------
Leslie Foglesong,
Secretary
43
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
----------
Under Section 805 of the
Business Corporation Law
----------
We, the undersigned, Darby S. Macfarlane, Chief Executive Officer, and
Leslie Foglesong, Secretary, of Chromatics Color Sciences International, Inc.
(the "Corporation"), a corporation organized and existing under the Business
Corporation Law of the State of New York, do hereby certify as follows:
27. The name of the Corporation is CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
28. The Certificate of Incorporation of the Corporation was filed by
the Department of State on March 30, 1984. The Corporation was formed under the
name Chromatics International, Inc.
29. The Certificate of Incorporation of the Corporation, as heretofore
amended, is hereby further amended to fix the relative rights, preferences and
limitations with respect tot he Class B Preferred Stock, of the Corporation.
30. To accomplish the foregoing.
44
<PAGE>
(i) Paragraph D of Article FOURTH of the Certificate of Incorporation
of the Corporation is amended to read in its entirety as follows:
"D. Class B. Preferred Stock
------------------------
1. The Board of Directors of the Corporation is authorized,
subject to the limitations prescribed by law, to provide for
the issuance of the Class B Preferred Stock in series, to
establish the number of shares to be included in each series
and to fix the designation and the relative rights,
preferences and limitations of the Class B Preferred Stock of
each series. The authority of the Board of Directors with
respect to each series shall include, but not be limited to,
determination of the following:
(1) The number of shares of Class B Preferred Stock
constituting that series and the distinctive designation of
that series.
(2) The dividend rate on the Class B Preferred Stock
of that series and whether dividends shall be cumulative and,
if so, form which date or dates.
(3) Whether the Class B Preferred Stock of that
series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting
rights.
(4) Whether the Class B Preferred Stock of that
series shall have conversion privileges, and, if so, the terms
and conditions of such conversion, including, without limiting
the generality thereof, provisions for adjustment of the
conversion rate in such events as the Board of Directors shall
determine.
(5) Whether the Class B Preferred Stock of that
series shall be redeemable and, if so, the terms and
conditions of such redemption, including, without limiting the
generality thereof, the date or dates upon or after which such
Class B Preferred Stock shall be redeemable and the amount per
share payable in the event of redemption, which amount may
vary under different conditions and at different redemption
dates.
(6) The rights of the Class B Preferred Stock of that
series in the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
2. Class B Series 1 Preferred Stock:
(1) The Corporation has authorized the creation of a
series of Class B Preferred Stock, consisting of 500,000
shares of Class B Preferred Stock, to be
45
<PAGE>
designated "Class B Series 1 Preferred Stock." Such number of
shares may be increased or decreased by resolution of the
Board of Directors; provided, that no decrease shall reduce
the number of shares of Class B Series 1 Preferred Stock to a
number less than that of the shares then outstanding plus the
number of shares issuable upon exercise of outstanding rights,
options or warrants or upon conversion of outstanding
securities issued by the Corporation. The Class B Series 1
Preferred Stock shall have a par value of $0.001 per share.
(2) (a) Subject to the prior and superior rights
of the holders of any shares of any series of Preferred Stock
ranking prior and superior to the Class B Series 1 Preferred
Stock with respect to dividends, the holders of shares of
Class B Series 1 Preferred Stock in preference to the holders
of shares of Common Stock, of the corporation and any other
junior stock, shall be entitled to receive when, as and if
declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash
on the first day of January, April, July and October in each
year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly
Dividend payment Date after the first issuance of a share or
fraction of a share of Class B Series 1 Preferred Stock in an
amount per share (rounded to the nearest cent) equal to,
subject to the provision for adjustment hereinafter set forth,
100 times the aggregate per share amounts of all cash
dividends and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on
the Common Stock since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share
or fraction of a share of Class B Series 1 Preferred Stock. In
the event the Corporation shall at any time after January 11,
1999 (the "Rights Declaration Date") (i) declare any dividend
on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then
in each such case the amount to which holders of shares of
Class B Series 1 Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend
or distribution on the Class B Series 1 Preferred Stock as
provided in paragraph (a) above immediately after it declares
a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock).
46
<PAGE>
(c) Dividends shall begin to accrue and be
cumulative on outstanding shares of Class B Series 1 Preferred
Stock from the Quarterly Dividend Payment Date next preceding
the date of issue of such shares of Class B Series 1 Preferred
Stock unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue form
the date of issue of such shares, or unless the date of issue
is a Quarterly Dividend Payment Date or a date after the
record date for the determination of holders of shares of
Class B Series 1 Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend payment
Date in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend payment
Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Class B Series 1 Preferred
Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall
be allocated pro rata on a share by share basis among all such
shares at the time outstanding. The Board of Directors may fix
a record date for the determination of holders of shares of
Class B Series 1 Preferred Stock entitled to receive payment
of a dividend or distribution declared thereon, which record
date shall be no more than 60 days prior to the date fixed for
the payment thereof.
(3) The Holders of Class B Series 1 Preferred Stock
shall have the following voting rights:
(a) Subject to the provision for adjustment
hereinafter set forth, each share of Class B Series 1
Preferred Stock shall entitle the holder thereof to 100 votes
on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of common Stock, (ii) subdivide
the outstanding Common Stock or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of
shares of Class B Series 1 Preferred Stock were entitled
immediately prior to such event shall be adjusted by
multiplying such numbers by a fraction the numerator of which
is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein or
by law, the holders of shares of Class B Series 1 Preferred
Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(c) (i) if at any time dividends on any
Class B Series 1 Preferred Stock shall be in arrears in an
amount equal to six (6) quarterly dividends
47
<PAGE>
thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which
shall extend until such time when all accrued and unpaid
dividends for all previous quarterly dividend periods and for
the current quarterly dividend period on all shares of Class B
Series 1 Preferred stock then outstanding shall have been
declared and paid or set apart for payment. During each
default period, all holders of preferred Stock (including
holders of the Class B Series 1 Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly
dividends thereon, voting as a class, irrespective of series,
shall have the right to elect two (2) Directors.
(ii)During any default period, such
voting rights of the holders of Class B Series 1 Preferred
Stock may be exercised initially at a special meeting called
pursuant to subparagraph (iii) of this Paragraph D.2.3(c) or
any annual meeting of shareholders, and thereafter any annual
meetings of shareholders, provided that neither such voting
rights nor the right of the holders of any other series of
Preferred Stock, if any, to increase, in certain cases, the
authorized number of Directors shall be exercised, unless the
holders of one-third (1/3) in number of shares of Preferred
Stock outstanding shall be present in person or by proxy. The
absence of a quorum of the holders of Common Stock shall not
affect the exercise by the holders of the Preferred Stock of
such voting right. At any meeting at which the holders of
Preferred Stock shall exercise such voting right initially
during an existing default period, they shall have the right,
voting as a class, to elect Directors to fill such vacancies,
if any, in the Board of Directors as they may exist up to two
(2) Directors or, if such right is exercised at an meeting, to
elect two (2) Directors. If the number which may be an elected
at any special meeting does not amount to the required number,
the holders of the Preferred Stock shall have the right to
make such increase in the number of Directors as shall be
necessary to permit the election by them of the required
number. After the holders of the Preferred Stock shall have
exercised their right to elect Directors in any default period
during the continuance of such period the number of Directors
shall not be increased or decreased except by vote of the
holders of Preferred Stock as herein provided or pursuant to
the rights of any equity securities ranking senior to or pari
passu with the Class B Series 1 Preferred Stock.
(ii) Unless the holders of Preferred
Stock shall during an existing default period have previously
exercised their right to elect Directors, the Board of
Directors may order or any shareholder or shareholders owning
the aggregate not less than twenty percent (20%) of the total
number of shares of Preferred Stock outstanding irrespective
of series, may request, the calling of a special meeting of
the holders of Preferred Stock, which meeting shall thereupon
be called by the Chairman of Board or the President and Chief
Executive officer of the Corporation. Notice of such meeting
and of any annual meeting at which holders Pain Relief
Preferred Stock are entitled to vote pursuant to this
Paragraph
48
<PAGE>
D.2(3)(c)(iii) shall be given each holder of record of
Preferred Stock by mailing a copy of such notice to him at his
last address as the same appears on the books of the
Corporation. Such meeting shall be called for a time not
earlier than ten days and not later than 60 days after such
order or request or in default of the calling of such meeting
within 60 days after such order or request, such meeting may
be called similar notice by any shareholder or shareholders
owning in the aggregate not less than twenty percent (20%) of
the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this Paragraph
D.2(3)(c)(iii), no such special meeting shall be called during
the period within 60 days immediately preceding the date fixed
for the next annual meeting of the shareholders.
(iv) In any default period the holders of
Common Stock, and other classes of stock of the Corporation if
applicable shall continue to be entitled to elect the whole
number of Directors until the holders of Preferred Stock shall
have exercised their right to elect two (2) Directors voting
as a class, after the exercise of which right (y) the
Directors so elected by the holders of Preferred Stock shall
continue in office until their successors shall have been
elected by such holders or until the expiration of the default
period, and (z) any vacancy in the Board of Directors may
(except as provided in Paragraph D.2(3)(c)(ii) be filled by a
vote of a majority of the remaining Directors theretofore
elected by the holders a particular class of stock shall
include Directors elected by such Directors to fill vacancies
as provided in clause (z) of the foregoing sentence.
(v) Immediately upon the expiration of a
default period, (x) the right of the holders of Preferred
Stock as a class to elect Directors shall cease, (y) the term
of any Directors elected by the holders of Preferred Stock as
a class shall terminate and (z) the number of Directors shall
be such number as may be provided for in the Certificate of
Incorporation or By-laws irrespective of any increase made
pursuant to the provisions of Paragraph D.2(3)(c)(ii) (such
number being subject, however, to change thereafter in any
manner provided by law or in the Certificate of Incorporation
or By-laws). Any vacancies in the Board of Directors effected
by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining
Directors.
(d) Except as set forth herein, holders of
Class B Series 1 Preferred Stock shall shave no special voting
rights, and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock
as set forth herein) for taking any corporate action.
(4) Certain Restrictions.
(a) Whenever quarterly dividends or other
dividends or distributions payable on the Class B Series 1
Preferred Stock as provided in
49
<PAGE>
Paragraph D.2.(2) are in arrears, thereafter and until all
accrued and unpaid dividends and distribution, whether or not
declared, on shares of Class 8 Series 1 Preferred Stock
outstanding shall have been paid in full, the Corporation
shall not:
(i) Declare or pay dividends on, make any
other distributions on or redeem or purchase or otherwise
acquire for consideration any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Class B Series 1 Preferred Stock;
(ii) Declare or pay dividends on or make
any other distributions on any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Class B Series 1 Preferred
Stock except dividends paid ratably on the Class B Series i
Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) Redeem or purchase or otherwise
acquire (or consideration share of any stock ranking on a
parity (either as to dividends or upon liquidation dissolution
or winding up) with the Class Series 1 Preferred Stock,
provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in
exchange (or shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Class B Series 1 Preferred
Stock; or
(iv) Purchase or otherwise acquire for
consideration any shares of Class B Series 1 Preferred Stock
or any shares of stock ranking on a parity with the Class B
Series 1 Preferred Stock except in accordance with a purchase
offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of its
respective annual classes shall determine in good faith will
result in fair and equitable treatment among the respective
series or clauses.
(b) The Corporation shall not permit any
subsidiary of the Corporation to purchase or otherwise acquire
for consideration any shares of stock of the Corporation
unless the Corporation could, under Paragraph D.2(4)(a),
purchase or otherwise acquire such shares at such time and in
such manner.
(5) Any shares of Class B Series 1 Preferred Stock
purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after
the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new class or
series Preferred Stock to be created by resolution or
resolutions
50
<PAGE>
of the Board of Directors, subject to conditions and
restriction on issuance set forth herein.
(6) (a) Upon any liquidation (voluntary or
otherwise), dissolution or winding up of the Corporation ,
first the holders of the Corporation's Class A Preferred Stock
will be entitled to a preferential liquidation payment of 0.01
per share; thereafter the holders of Class B Series 1
Preferred Stock and holders of shares of Common Stock shall
receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of 100 to 1 (as
appropriately adjusted as set forth in paragraph (c) below to
reflect such events to stock splits, stock dividends and
recapitalization with respect to the Common Stock) with
respect to such Preferred Stock and Common Stock, on a per
share basis, respectively.
(b) In the event the Corporation shall at
any time after the Rights Declaration Date (i) declare any
dividend or Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding common stock; or (iii) combine
the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number
by a fraction the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(7) If the Corporation shall enter into any
consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other
property, then in any such event the shares of Class B Series
1 Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the
provision for adjustment hereinafter set forth) equal to 100
times the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into
which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend out
Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each
such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Class B Series
1 Preferred Stock shall be adjusted by multiplying each amount
by a fraction the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common
Stock that are outstanding immediately prior ro such event.
(8) The shares of Class B Series 1 Preferred
Stock shall not be redeemable.
51
<PAGE>
(9) The Class B Series 1 Preferred Stock
shall rank junior to all other classes of the Corporation's
Preferred Stock as the payment of dividends and the
distribution of assets, unless the terms of any such series
shall provide otherwise.
(10) Fractional Shares. Class B Series 1
Preferred Stock may be issued in the discretion of the Board
of Directors of the Corporation in fractions of share which
shall entitle the holder, in proportion to such holder's
fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the
benefit of all other rights of holders of Class B Series 1
Preferred Stock.
(11) Amendment. The Certificate of
Incorporation of the Corporation shall not be further amended
in any manner which would materially alter or change the
powers, preferences or special rights of the Class B 1
Preferred Stock, so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the
outstanding shares of Class B Series1 Preferred Stock, voting
separately as a class."
31. The foregoing amendments to the Certificate of
Incorporation of the Corporation have been duly authorized by unanimous consent
of the Board of Directors of the Corporation.
IN WITNESS WHEREOF, the undersigned have signed this
Certificate and affirm under the penalties of perjury that the statements made
herein are true this 4th day of January, 1999.
/s/
-----------------------------
Darby S. Macfarlane
Chief Executive Officer
Chairman of the Board
/s/
------------------------------
Leslie Foglesong
Secretary
52
<PAGE>
Certificate of Amendment of the Certificate of Incorporation
of
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Under Section 805 of the Business Corporation Law
----------------
It is hereby certified that:
FIRST: The name of the corporation (the "Corporation") is
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
SECOND: The Certificate of Incorporation of the Corporation
was filed by the Department of State on March 30, 1984. The Corporation was
formed under the name Chromatics International, Inc.
THIRD: The Certificate of Incorporation of the Corporation, as
heretofore amended, is hereby further amended to fix the relative rights,
preferences and limitations with respect to the Class B Preferred Stock of the
Corporation.
FOURTH: To accomplish the foregoing,
(i) Paragraph D of Article FOURTH of the Certificate of
Incorporation of the Corporation is amended to read as follows:
"3. Class B Series 2 Preferred Stock:
(1) The Corporation has authorized the creation of a series of Class B
Preferred Stock to be designated "Class B Series 2 Convertible Preferred Stock"
(the "Class B Convertible Preferred Stock").
(2) The number of shares constituting the Class B Convertible Preferred
Stock shall be fixed at 80,000. The Class B Convertible Preferred Stock shall
have no par value.
(3) The shares of Class B Convertible Preferred Stock shall, with
respect to the distribution of assets on liquidation, dissolution or winding up
of the Corporation, rank (i) senior and prior to the common stock, $.001 par
value (the "Common Stock"), of the Corporation and any other class or series of
capital stock of the Corporation hereafter issued, the terms of which
specifically provide that shares of such class or series shall rank junior to
shares of Class B Convertible Preferred Stock (collectively, the "Junior
Securities"), (ii) on a parity with any other class or series of capital stock
of the Corporation hereafter issued, the terms of which specifically provide
that shares of
<PAGE>
such class or series shall rank on a parity with the shares of Class B
Convertible Preferred Stock (collectively, the "Parity Securities") and (iii)
junior to the Class A Convertible Preferred Stock and any other class or series
of capital stock of the Corporation hereafter issued, the terms of which
specifically provide that shares of such class or series shall rank senior to
shares of Class B Convertible Preferred Stock (collectively, the "Senior
Securities").
(4) The holders of shares of Class B Convertible Preferred Stock shall
not be entitled to any voting rights other than those provided by law. However,
so long as any shares of Class B Convertible Preferred Stock are outstanding,
the Corporation shall not and shall cause its subsidiaries not to, without the
affirmative vote of the holders of a majority of the shares of the Class B
Convertible Preferred Stock then outstanding, (a) alter or change adversely the
absolute or relative powers, preferences or rights given to the Class B
Convertible Preferred Stock, (b) alter or amend this Certificate of Amendment,
(c) authorize or create any class of stock ranking as to dividends or
distribution of assets upon a liquidation or otherwise senior to the Class B
Convertible Preferred Stock, (d) amend its Certificate of Incorporation, bylaws
or other charter documents so as to affect adversely any rights of any holders
of Class B Convertible Preferred Stock, (e) increase the authorized number of
shares of Class B Convertible Preferred Stock or (f) enter into any agreement
with respect to the foregoing.
(5) Except as set forth in Section 7 hereof, the holders of shares of
Class B Convertible Preferred Stock shall not be entitled to receive dividends
with respect thereto.
(6) (a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, before any
distribution or payment shall be made to the holders of outstanding Junior
Securities, including, but not limited to, the Common Stock, the holders of
outstanding shares of Class B Convertible Preferred Stock shall be entitled to
receive, out of the assets of the Corporation at the time legally available
therefor, in exchange for their shares of Class B Convertible Preferred Stock an
amount in cash equal to $100.00 per share of Class B Convertible Preferred
Stock, together with all accrued but unpaid dividends thereon, on a pari passu
basis with the rights of the holders of any Parity Securities; provided,
however, that the holders of the Class B Convertible Preferred Stock and any
outstanding Parity Securities shall not be entitled to receive such preferential
liquidation payments until the preferential liquidation payments on all
outstanding Senior Securities have been paid in full. If, upon any such
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, the assets of the Corporation available therefor shall be
insufficient to permit the payment in full to the holders of outstanding shares
of Class B Convertible Preferred Stock of the preferential liquidation amounts
to which they are then entitled pursuant to the provisions of this clause (a),
the entire assets of the Corporation thus distributable shall be distributed
among the holders of outstanding shares of Class B Convertible Preferred Stock
and any Parity Securities ratably, in proportion to the full
2
<PAGE>
amounts to which such holders would otherwise be entitled if such assets were
sufficient to permit payment in full.
(b) Upon any such voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, after the payment in full to the
holders of outstanding shares of Class B Convertible Preferred Stock and any
Parity Securities of the preferential liquidation amounts to which they are then
entitled pursuant to the provisions of clause (a) above, the holders of
outstanding shares of Class B Convertible Preferred Stock shall not be entitled
to participate in any further distributions made to the holders of the Common
Stock or any other class of Senior Securities or Junior Securities.
(c) At the option of the holders of a majority of the issued and
outstanding Class B Convertible Preferred Stock, the sale of all or
substantially all of the assets of the Corporation or the merger of the
Corporation with or into another corporation shall be deemed to be a
dissolution, liquidation or winding up of the Corporation.
(7) (a) On the third anniversary of the date of initial issuance of the
shares of Class B Convertible Preferred Stock (the "Redemption Date"), and
provided the Corporation has not delivered a timely Extension Notice (as
hereinafter defined), all of the outstanding shares of Class B Convertible
Preferred Stock shall be subject to mandatory redemption by the Corporation for
a purchase price payable in cash equal to $115.00 per share (such amount is
hereinafter referred to the "Redemption Amount").
(b) From and after the Redemption Date, unless (i) default shall be
made by the Corporation on the Redemption Date in providing funds for the
payment of the Redemption Amount payable, or (ii) the Corporation, in its sole
discretion, has notified the holders of the shares of Class B Convertible
Preferred Stock by written notice delivered at least thirty (30) days prior to
the Redemption Date (the "Extension Notice") of its election to extend the
Redemption Date to the fifth anniversary of the date of initial issuance of the
shares of Class B Convertible Preferred Stock (the "Extended Redemption Date"),
all rights of the holders of the shares of Class B Convertible Preferred Stock
surrendered for redemption, except the right to receive the Redemption Amount in
respect of such shares, shall cease and terminate. The redemption of the shares
of Class B Convertible Preferred Stock upon the Redemption Date shall take place
at the principal place of business of the Corporation. On the Redemption Date,
the Corporation shall tender the Redemption Amount by check, subject to
collection, against receipt of the certificate or certificates representing the
shares of Class B Convertible Preferred Stock being redeemed.
(c) If the Redemption Date has been extended to the Extended Redemption
Date by timely delivery by the Corporation of the Extension Notice to each of
the holders of the shares of Class B Convertible Preferred Stock then
outstanding, on the Extended Redemption Date all of the outstanding shares of
Class B Convertible Preferred Stock shall be subject to mandatory redemption by
the Corporation for a
3
<PAGE>
purchase price payable in cash equal to $115.00 per share, together with all
accrued but unpaid Extension Dividends (as hereinafter defined) (such amount is
hereinafter referred to the "Extended Redemption Amount"). The "Extension
Dividends" shall be the aggregate amount of dividends accrued and owing on the
Class B Convertible Preferred Stock, which shall be paid at the rate of $8.00
per share per annum (computed on the basis of the actual number of days elapsed
over a year of 365 days), shall accrue beginning on the day after the Redemption
Date and shall be cumulative whether or not declared. From and after the
Extended Redemption Date, unless default shall be made by the Corporation on the
Extended Redemption Date in providing funds for the payment of the Extended
Redemption Amount payable, all rights of the holders of the shares of Class B
Convertible Preferred Stock surrendered for redemption, except the right to
receive the Extended Redemption Amount in respect of such shares, shall cease
and terminate. The redemption of the shares of Class B Convertible Preferred
Stock upon the Extended Redemption Date shall take place at the principal place
of business of the Corporation. On the Extended Redemption Date, the Corporation
shall tender the Extended Redemption Amount by check, subject to collection,
against receipt of the certificate or certificates representing the shares of
Class B Convertible Preferred Stock being redeemed.
(8) (a) Subject to the provision for adjustment set forth below, each
share of the Class B Convertible Preferred Stock, plus the aggregate amount of
all accrued but unpaid Extension Dividends, shall be convertible at the option
of the holder thereof at any time after the date hereof, into a number of shares
of Common Stock equal to the then effective Conversion Ratio (as hereinafter
defined). As used herein, "Conversion Ratio," determined as of any date, shall
equal the number of shares of Common Stock into which one share of Class B
Convertible Preferred Stock is convertible pursuant to this Section 8, which
shall be determined by dividing $100.00, plus the amount of all accrued but
unpaid Extension Dividends per share, by the then effective Conversion Price (as
defined below). The "Conversion Price" shall initially be $10.00 and shall be
subject to adjustment as provided in Section 8(d). The Conversion Ratio shall
initially be ten shares and shall be subject to adjustment as provided in
Section 8(d).
(b) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of Class B Convertible Preferred Stock, free from
any preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Class B Convertible Preferred Stock, such number of
shares of its authorized but unissued shares of Common Stock as will from time
to time be necessary to permit the conversion of all outstanding shares of Class
B Convertible Preferred Stock, together with all accrued but unpaid dividends
thereon, into shares of Common Stock, and shall take all action required to
increase the authorized number of shares of Common Stock if necessary to permit
the conversion of all outstanding shares of Class B Convertible Preferred Stock.
The Corporation covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, fully paid,
nonassessable and freely tradeable.
4
<PAGE>
(c) (i) Conversion of Class B Convertible Preferred Stock may be
effected by any holder thereof upon the surrender to the Corporation at the
offices of the Corporation of certificates representing Class B Convertible
Preferred Stock to be converted, accompanied by a written notice stating that
such holder elects to convert all or a specified portion of such Class B
Convertible Preferred Stock in accordance with the provisions of this Section 8
and specifying the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation shall pay
the issue and transfer taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Class B Convertible
Preferred Stock pursuant hereto. As promptly as practicable, and in any event
within two business days after the surrender of such certificates representing
Class B Convertible Preferred Stock and the receipt of such notice relating
thereto, the Corporation shall deliver or cause to be delivered (i) certificates
representing the number of validly issued, fully paid and nonassessable shares
of Common Stock to which the holder of Class B Convertible Preferred Stock being
converted shall be entitled and (ii) if less than all of the shares represented
by the surrendered certificates are being converted, a new certificate
representing the number of shares of Class B Convertible Preferred Stock which
remains outstanding upon such partial conversion. Such conversion shall be
deemed to have been made at the close of business on the date of giving such
notice so that the rights of the holder thereof as to Class B Convertible
Preferred Stock being converted shall cease except for the right to receive
shares of Common Stock in accordance herewith, and the persons entitled to
receive shares of Common Stock shall be treated for all purposes as having
become the record holder of such shares of Common Stock at such time.
(ii) If the Corporation fails to deliver to the holder such certificate
or certificates pursuant to this Section 8, including for purposes hereof, any
shares of Common Stock to be issued on account of accrued but unpaid dividends
hereunder, on or prior to the third trading day after the date the holder
surrenders to the Corporation the certificates to be converted (the "Delivery
Date"), in addition to all other remedies that such holder may pursue hereunder
or otherwise, the Corporation shall pay to such holder in cash, as liquidated
damages and not as a penalty, $1,000 per day (increasing to $5,000 per day after
the fifth trading day after the Delivery Date) until such certificates are
delivered. If the Corporation fails to deliver to the holder such certificate or
certificates pursuant to this Section 8 prior to the 15th day after the Delivery
Date the Corporation shall, at the holder's option, (i) redeem from funds
legally available therefor at the time of such redemption, such number of shares
of Preferred Stock then held by such holder, as requested by such holder and
(ii) pay all accrued but unpaid dividends on account of the Class B Convertible
Preferred Stock for which the Corporation shall have failed to issue Common
Stock certificates hereunder, in cash. If such holder opts to redeem any number
of shares of Preferred Stock pursuant to this Section 8(c)(ii), then the
Corporation shall immediately redeem, from funds legally available therefor at
the time of such redemption, such number of shares of Class B Convertible
Preferred Stock then held by such holder, as requested by such holder. The
redemption price shall be equal to the sum of (A) the aggregate of all accrued
but unpaid dividends, plus
5
<PAGE>
(B) the number of shares of Class B Convertible Preferred Stock then held by
such holder multiplied by (1) the average closing price of the Corporation's
Common Stock for the five trading days immediately preceding the Delivery Date
multiplied by (2) the Conversion Ratio calculated on the Delivery Date. If the
holder has requested that the Corporation redeem shares of Class B Convertible
Preferred Stock pursuant to this Section 8(c)(ii) and the Corporation fails for
any reason to pay the redemption price referenced above within seven days after
such notice is deemed delivered pursuant to Section 8(c)(ii), the Corporation
will pay interest on the redemption price at a rate of 15% per annum in cash to
such holder, accruing from such seventh day until the redemption price and any
accrued interest thereon is paid in full. Nothing herein shall limit a holder's
right to pursue actual damages for the Corporation's failure to deliver
certificates representing shares of Common Stock upon conversion within the
period specified herein (including, without limitation, damages relating to any
purchase of shares of Common Stock by such holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares of Common
Stock upon conversion, such damages to be in an amount equal to (A) the
aggregate amount paid by such holder for the shares of Common Stock so purchased
minus (B) the aggregate amount of net proceeds, if any, received by such holder
from the sale of the shares of Common Stock issued by the Corporation pursuant
to such conversion), and such holder shall have the right to pursue all remedies
available to it at law or in equity (including, without limitation, a decree of
specific performance and/or injunctive relief).
(iii) In addition to any other rights available to the holder, if the
Corporation fails to deliver to the holder such certificate or certificates
pursuant to Section 8(c)(ii) by the Delivery Date and after the Delivery Date
the holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver to the satisfaction of a sale by such holder of the
shares underlying the Class B Convertible Preferred Stock which the holder
anticipated receiving on the Delivery Date upon such conversion (a "Buy-In"),
then the Corporation shall pay in cash to the holder (in addition to any
remedies available to or elected by the holder) the amount by which (A) the
holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock purchased for a Buy-In exceeds (B) the aggregate
Conversion Price for the number of shares of Common Stock in the Buy-In for
which such conversion was not timely honored. For example, if the holder
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of $10,000 aggregate
Conversion Price for the number of shares of Common Stock in the Buy-In, the
Corporation shall be required to pay the holder $1,000. The holder shall provide
the Corporation written notice indicating the amounts payable to the holder in
respect of the Buy-In.
(d) (i) In the event of any change in the number of issued and
outstanding shares of capital stock of the Corporation by reason of any stock
split, stock dividend, subdivision, merger, consolidation, recapitalization,
combination, conversion or exchange of shares, or any other change in the
corporate or capital structure of the Corporation which would have the effect of
diluting or otherwise adversely affecting the
6
<PAGE>
rights and privileges of the holders of Class B Convertible Preferred Stock
under this Section 8, the Conversion Ratio and Conversion Price in effect on the
effective date thereof shall be adjusted so that the holder of any shares of
Class B Convertible Preferred Stock shall be entitled to receive the number and
type of shares of Common Stock or other securities of the Corporation which such
holder would have owned or have been entitled to receive after the happening of
any of the events described above had such shares of Class B Convertible
Preferred Stock been converted into Common Stock immediately prior to the
happening of such event or the record date therefor. An adjustment made pursuant
to this Section 8(d) shall become effective (x) in the case of any such dividend
or distribution to holders of shares of Common Stock entitled to receive such
dividend or distribution, or (y) in the case of such subdivision, merger,
consolidation, recapitalization, combination, conversion or exchange, at the
close of business on the day upon which such corporate action becomes effective.
(ii) Except with respect to Excluded Securities (as defined below), in
case the Corporation shall issue any shares of Common Stock or Common Stock
Equivalents (as defined below) after the date of initial issuance of the shares
of Class B Convertible Preferred Stock (the "Issue Date") at a price per share
(or having a conversion or exercise price per share) of less than $10.00 per
share (the "Adjusted Conversion Price"), in each such case the Conversion Price
as in effect immediately prior thereto shall be reduced to the Adjusted
Conversion Price and the Conversion Ratio shall be recalculated by dividing
$100.00 by the Adjusted Conversion Price. Any adjustment made pursuant to this
clause (ii) shall be made on the next business day following the date on which
any such issuance is made and shall be effective retroactively to the close of
business on the date of such issuance. For purposes of this clause (ii), the
consideration receivable by the Corporation in connection with the issuance of
additional shares of Common Stock or of Common Stock Equivalents since the Issue
Date shall be deemed to be equal to (X) in the case the consideration received
by the Corporation is cash, the sum of the aggregate offering price (before
deduction of underwriting discounts or commissions and expenses payable to third
parties, if any) of all such Common Stock and/or Common Stock Equivalents plus
the minimum aggregate amount, if any, payable upon conversion, exchange or
exercise of any such Common Stock Equivalents, and (Y) in the case the
consideration received by the Corporation is other than cash, the fair market
value of the consideration received by the Corporation as determined by the good
faith judgment of the Board of Directors of the Corporation provided, however,
that in the event the holder disagrees in good faith with the determination of
the Board of Directors of the Corporation, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing (an
"Appraiser") selected in good faith by the holders of the Class B Convertible
Preferred Stock; and provided, further, that the Corporation, after receipt of
the determination by such Appraiser shall have the right to select in good faith
an additional Appraiser meeting the same qualifications, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. Such adjustment shall be made whenever any such distribution is made
and shall become effective
7
<PAGE>
immediately after the record date mentioned above. The issuance or reissuance of
any shares of Common Stock or Common Stock Equivalents (whether treasury shares
or newly issued shares) pursuant to a dividend or distribution on, or
subdivision, combination or reclassification of, the outstanding shares of
Common Stock requiring an adjustment in the Conversion Price and Conversion
Ratio pursuant to this clause (ii) shall not be deemed to constitute an issuance
of Common Stock or Common Stock Equivalents by the Corporation to which clause
(i) of this Section 8(d) applies. Upon the expiration or termination of any
unconverted, unexchanged or unexercised Common Stock Equivalents for which an
adjustment has been made pursuant to this clause (ii), the adjustments shall
forthwith be reversed to effect such Conversion Ratio as would have been in
effect at the time of such expiration or termination had such Common Stock
Equivalents, to the extent outstanding immediately prior to such expiration or
termination, had never been issued. As used herein, "Excluded Securities" shall
mean: (i) shares of Common Stock issuable upon conversion of the Class B
Convertible Preferred Stock; (ii) shares of Common Stock issuable or issued to
employees of the Corporation pursuant to the Management Option Plan (as
hereinafter defined); (iii) any capital stock issued as a stock dividend or upon
any stock split or other subdivision or combination of shares of the
Corporation's capital stock; (iv) shares of Common Stock issuable upon
conversion of any Common Stock Equivalents outstanding on the Issue Date, (v)
shares of Common Stock issuable upon conversion of the Corporation's Class A
Convertible Preferred Stock outstanding on the Issue Date or (vi) Common Stock
issued upon the conversion or exercise of Common Stock Equivalents issued after
the Issue Date as to which an adjustment to the Conversion Ratio has been made
pursuant to this clause (d) upon the issuance of such Common Stock Equivalents.
As used herein, "Common Stock Equivalents" shall mean securities convertible
into, or exchangeable or exercisable for, shares of Common Stock of the
Corporation. As used herein, the "Management Option Plan" shall mean the
Corporation's 1992 Stock Option Plan, as amended.
(iii) If the Corporation shall set a record date for the holders of its
Common Stock for the purpose of entitling them to receive a dividend or other
distribution and shall thereafter, and before such dividend or distribution is
paid or delivered to stockholders entitled thereto, legally abandon its plan to
pay or deliver such dividend or distribution, then no adjustment in the
Conversion Ratio or the Conversion Price then in effect shall be made by reason
of the taking of such record, and any such adjustment previously made as a
result of the taking of such record shall be reversed.
(e) (i) Unless sooner redeemed or converted in accordance with the
provisions of Section 7 hereof or this Section 8 the outstanding shares of Class
B Convertible Preferred Stock shall be subject to involuntary conversion at the
option of the Corporation, at its sole discretion, in whole but not in part, at
any time after six months after the Issue Date, for shares of the Corporation's
Common Stock at the Conversion Ratio. The Corporation may effectuate such
involuntary conversion on such date (the "Involuntary Conversion Date") provided
that the following conditions have been met:
8
<PAGE>
(A) the Current Market Price (as hereinafter defined) of the
Common Stock is equal to or in excess of one hundred and fifty
percent (150%) of the Conversion Price for a period of at
least ten (10) consecutive trading days; and
(B) all of the shares of Common Stock into which the Preferred
Stock is being converted have been registered under the
Securities Act of 1933, as amended, and such registration has
been declared effective by the Securities and Exchange
Commission, and is effective on such date; and
(C) the Corporation has a sufficient number of authorized shares
of Common Stock reserved for issuance upon full conversion of
the Class B Convertible Preferred Stock.
As used herein, "Current Market Price" shall mean for any day, the last sale
price for the Common Stock on the principal securities exchange on which the
Common Stock is listed or admitted to trading, or, if not so listed or admitted
to trading on any securities exchange, the last sale price for the Common Stock
on the National Association of Securities Dealers National Market System, or, if
the Common Stock shall not be listed on such system, the closing bid price in
the over-the-counter market.
(ii) Notice of involuntary conversion of outstanding shares of Class B
Convertible Preferred Stock shall be sent by or on behalf of the Corporation,
postage prepaid, to the holders of record of outstanding shares of Class B
Convertible Preferred Stock not less than ten (10) and not more than twenty (20)
days prior to the Involuntary Conversion Date.
(iii) Notice having been so given as provided in clause (ii) above,
from and after the Involuntary Conversion Date, unless default shall be made by
the Corporation on the Involuntary Conversion Date in issuing the Common Stock
issuable upon conversion of the Class B Convertible Preferred Stock pursuant to
the Conversion Ratio, all rights of the holders of the shares of Class B
Convertible Preferred Stock surrendered for conversion, except the right to
receive the Common Stock in respect of such shares, shall cease and terminate.
The involuntary conversion of the shares of Class B Convertible Preferred Stock
for the Common Stock upon the Involuntary Conversion Date shall take place at
the principal place of business of the Corporation. On the Involuntary
Conversion Date, the Corporation shall tender such Common Stock against receipt
of the certificate or certificates representing the shares of Class B
Convertible Preferred Stock being converted.
(iv) If any portion of the applicable redemption price under Sections 7
or 8 shall not be paid by the Corporation within seven (7) calendar days after
the date due, interest shall accrue thereon at the rate of 15% per annum until
the redemption price plus all such interest is paid in full (which amount shall
be paid as liquidated damages and not as a penalty). In addition, if any portion
of such redemption price remains
9
<PAGE>
unpaid for more than seven (7) calendar days after the date due, the holder of
the Class B Convertible Preferred Stock subject to such redemption may elect, by
written notice to the Corporation given within 30 days after the date due, to
either (i) demand conversion in accordance with the formula and the time frame
therefor set forth in Section 8 of all of the shares of Class B Convertible
Preferred Stock for which such redemption price, plus accrued liquidated damages
thereof, has not been paid in full (the "Unpaid Redemption Shares"), in which
event the Conversion Price for such shares shall be the lower of the Current
Market Price of the Corporation's Common Stock on the date such redemption price
was originally due and the Current Market Price of the Corporation's Common
Stock as of the holder's written demand for conversion, or (ii) invalidate ab
initio such redemption, notwithstanding anything herein contained to the
contrary. If the holder elects option (i) above, the Corporation shall within
five (5) trading days of its receipt of such election deliver to the holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares
subject to such holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the holder elects option (ii) above, the
Corporation shall promptly, and in any event not later than five (5) trading
days from receipt of holder's notice of such election, return to the holder all
of the Unpaid Redemption Shares.
(9) Upon any adjustment of the Conversion Price and the Conversion
Ratio then in effect pursuant to the provisions of Section 8, then, and in each
such case, the Corporation shall promptly deliver to each of the holders of
Class B Convertible Preferred Stock a certificate signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation setting forth in reasonable detail
the event requiring the adjustment, the method by which such adjustment was
calculated and the Conversion Price and Conversion Ratio then in effect
following such adjustment. Where appropriate, such notice to the holders of
Class B Convertible Preferred Stock may be given in advance."
FIFTH: The foregoing Amendment of the Certificate of
Incorporation of the Corporation was authorized by unanimous consent of the
Board of Directors of the Corporation.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this Certificate and
affirm under the penalties of perjury that the statements made herein are true
this 10th day of June, 1999.
/s/ Darby S. Macfarlane
---------------------------------
Darby S. Macfarlane
Chief Executive Officer and
Chairman of the Board
[Corporate Seal]
/s/ Leslie Foglesong
---------------------------------
Leslie Foglesong
Secretary
11
<PAGE>
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Under Section 105 of the Business Corporation Law
----------------------
It is hereby certified that:
1. The name of the corporation is Chromatics Color Sciences
International, Inc.
2. The instrument to be hereby corrected was filed by the
Department of State on June 10, 1999.
3. The nature of the informality, error, incorrect statement,
or defect of the said instrument to be hereby corrected is as follows: the
introductory clause to Article Fourth of the Certificate of Amendment was not
clear in indicating that the subsection 3 recited therein was not meant to
replace Paragraph D in its entirety, but was meant to be added as a new
subsection to Paragraph D of Article Fourth (after existing subsection 2).
4. The introductory clause to Article Fourth of the
Certificate of Amendment hereinabove described is hereby corrected to read as
follows:
"FOURTH: To accomplish the foregoing,
(i) Paragraph D of Article FOURTH of the Certificate of
Incorporation of the Corporation is amended to add a new Section 3 thereof to
read in full as follows:"
<PAGE>
Signed on June 15, 1999. /s/ Darby S. Macfarlane
---------------------------
Darby S. Macfarlane
Chairperson of the Board
and Chief Executive Officer
<PAGE>
Certificate of Amendment of the Certificate of Incorporation
of
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Under Section 805 of the Business Corporation Law
----------------
It is hereby certified that:
FIRST: The name of the corporation (the "Corporation") is
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
SECOND: The Certificate of Incorporation of the Corporation
was filed by the Department of State on March 30, 1984. The Corporation was
formed under the name Chromatics International, Inc.
THIRD: The Certificate of Incorporation of the Corporation, as
heretofore amended, is hereby further amended to fix the relative rights,
preferences and limitations with respect to the Class B Preferred Stock of the
Corporation.
FOURTH: To accomplish the foregoing,
(i) Paragraph D of Article FOURTH of the Certificate of
Incorporation of the Corporation is amended to add a new Section 3 thereof to
read in full as follows:
"3. Class B Series 2 Preferred Stock:
(1) The Corporation has authorized the creation of a series of Class B
Preferred Stock to be designated "Class B Series 2 Convertible Preferred Stock"
(the "Class B Convertible Preferred Stock").
(2) The number of shares constituting the Class B Convertible Preferred
Stock shall be fixed at 80,000. The Class B Convertible Preferred Stock shall
have no par value.
(3) The shares of Class B Convertible Preferred Stock shall, with
respect to the distribution of assets on liquidation, dissolution or winding up
of the Corporation, rank (i) senior and prior to the common stock, $.001 par
value (the "Common Stock"), of the Corporation and any other class or series of
capital stock of the Corporation hereafter issued, the terms of which
specifically provide that shares of such class or series shall rank junior to
shares of Class B Convertible Preferred Stock (collectively,
<PAGE>
the "Junior Securities"), (ii) on a parity with any other class or series of
capital stock of the Corporation hereafter issued, the terms of which
specifically provide that shares of such class or series shall rank on a parity
with the shares of Class B Convertible Preferred Stock (collectively, the
"Parity Securities") and (iii) junior to the Class A Convertible Preferred Stock
and any other class or series of capital stock of the Corporation hereafter
issued, the terms of which specifically provide that shares of such class or
series shall rank senior to shares of Class B Convertible Preferred Stock
(collectively, the "Senior Securities").
(4) The holders of shares of Class B Convertible Preferred Stock shall
not be entitled to any voting rights other than those provided by law. However,
so long as any shares of Class B Convertible Preferred Stock are outstanding,
the Corporation shall not and shall cause its subsidiaries not to, without the
affirmative vote of the holders of a majority of the shares of the Class B
Convertible Preferred Stock then outstanding, (a) alter or change adversely the
absolute or relative powers, preferences or rights given to the Class B
Convertible Preferred Stock, (b) alter or amend this Certificate of Amendment,
(c) authorize or create any class of stock ranking as to dividends or
distribution of assets upon a liquidation or otherwise senior to the Class B
Convertible Preferred Stock, (d) amend its Certificate of Incorporation, bylaws
or other charter documents so as to affect adversely any rights of any holders
of Class B Convertible Preferred Stock, (e) increase the authorized number of
shares of Class B Convertible Preferred Stock or (f) enter into any agreement
with respect to the foregoing.
(5) Except as set forth in Section 7 hereof, the holders of shares of
Class B Convertible Preferred Stock shall not be entitled to receive dividends
with respect thereto.
(6) (a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, before any
distribution or payment shall be made to the holders of outstanding Junior
Securities, including, but not limited to, the Common Stock, the holders of
outstanding shares of Class B Convertible Preferred Stock shall be entitled to
receive, out of the assets of the Corporation at the time legally available
therefor, in exchange for their shares of Class B Convertible Preferred Stock an
amount in cash equal to $100.00 per share of Class B Convertible Preferred
Stock, together with all accrued but unpaid dividends thereon, on a pari passu
basis with the rights of the holders of any Parity Securities; provided,
however, that the holders of the Class B Convertible Preferred Stock and any
outstanding Parity Securities shall not be entitled to receive such preferential
liquidation payments until the preferential liquidation payments on all
outstanding Senior Securities have been paid in full. If, upon any such
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, the assets of the Corporation available therefor shall be
insufficient to permit the payment in full to the holders of outstanding shares
of Class B
2
<PAGE>
Convertible Preferred Stock of the preferential liquidation amounts to which
they are then entitled pursuant to the provisions of this clause (a), the entire
assets of the Corporation thus distributable shall be distributed among the
holders of outstanding shares of Class B Convertible Preferred Stock and any
Parity Securities ratably, in proportion to the full amounts to which such
holders would otherwise be entitled if such assets were sufficient to permit
payment in full.
(b) Upon any such voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, after the payment in full to the
holders of outstanding shares of Class B Convertible Preferred Stock and any
Parity Securities of the preferential liquidation amounts to which they are then
entitled pursuant to the provisions of clause (a) above, the holders of
outstanding shares of Class B Convertible Preferred Stock shall not be entitled
to participate in any further distributions made to the holders of the Common
Stock or any other class of Senior Securities or Junior Securities.
(c) At the option of the holders of a majority of the issued and
outstanding Class B Convertible Preferred Stock, the sale of all or
substantially all of the assets of the Corporation or the merger of the
Corporation with or into another corporation shall be deemed to be a
dissolution, liquidation or winding up of the Corporation.
(7) (a) On the third anniversary of the date of initial issuance of the
shares of Class B Convertible Preferred Stock (the "Redemption Date"), and
provided the Corporation has not delivered a timely Extension Notice (as
hereinafter defined), all of the outstanding shares of Class B Convertible
Preferred Stock shall be subject to mandatory redemption by the Corporation for
a purchase price payable in cash equal to $115.00 per share (such amount is
hereinafter referred to the "Redemption Amount").
(b) From and after the Redemption Date, unless (i) default shall be
made by the Corporation on the Redemption Date in providing funds for the
payment of the Redemption Amount payable, or (ii) the Corporation, in its sole
discretion, has notified the holders of the shares of Class B Convertible
Preferred Stock by written notice delivered at least thirty (30) days prior to
the Redemption Date (the "Extension Notice") of its election to extend the
Redemption Date to the fifth anniversary of the date of initial issuance of the
shares of Class B Convertible Preferred Stock (the "Extended Redemption Date"),
all rights of the holders of the shares of Class B Convertible Preferred Stock
surrendered for redemption, except the right to receive the Redemption Amount in
respect of such shares, shall cease and terminate. The redemption of the shares
of Class B Convertible Preferred Stock upon the Redemption Date shall take place
at the principal place of business of the Corporation. On the Redemption Date,
the Corporation shall tender the Redemption Amount by check, subject to
collection, against receipt of the certificate or certificates representing the
shares of Class B Convertible Preferred Stock being redeemed.
(c) If the Redemption Date has been extended to the Extended Redemption
Date by timely delivery by the Corporation of the Extension Notice to each of
the holders of the shares of Class B Convertible Preferred Stock then
outstanding, on the Extended Redemption Date all of the outstanding shares of
Class B Convertible
3
<PAGE>
Preferred Stock shall be subject to mandatory redemption by the Corporation for
a purchase price payable in cash equal to $115.00 per share, together with all
accrued but unpaid Extension Dividends (as hereinafter defined) (such amount is
hereinafter referred to the "Extended Redemption Amount"). The "Extension
Dividends" shall be the aggregate amount of dividends accrued and owing on the
Class B Convertible Preferred Stock, which shall be paid at the rate of $8.00
per share per annum (computed on the basis of the actual number of days elapsed
over a year of 365 days), shall accrue beginning on the day after the Redemption
Date and shall be cumulative whether or not declared. From and after the
Extended Redemption Date, unless default shall be made by the Corporation on the
Extended Redemption Date in providing funds for the payment of the Extended
Redemption Amount payable, all rights of the holders of the shares of Class B
Convertible Preferred Stock surrendered for redemption, except the right to
receive the Extended Redemption Amount in respect of such shares, shall cease
and terminate. The redemption of the shares of Class B Convertible Preferred
Stock upon the Extended Redemption Date shall take place at the principal place
of business of the Corporation. On the Extended Redemption Date, the Corporation
shall tender the Extended Redemption Amount by check, subject to collection,
against receipt of the certificate or certificates representing the shares of
Class B Convertible Preferred Stock being redeemed.
(8) (a) Subject to the provision for adjustment set forth below, each
share of the Class B Convertible Preferred Stock, plus the aggregate amount of
all accrued but unpaid Extension Dividends, shall be convertible at the option
of the holder thereof at any time after the date hereof, into a number of shares
of Common Stock equal to the then effective Conversion Ratio (as hereinafter
defined). As used herein, "Conversion Ratio," determined as of any date, shall
equal the number of shares of Common Stock into which one share of Class B
Convertible Preferred Stock is convertible pursuant to this Section 8, which
shall be determined by dividing $100.00, plus the amount of all accrued but
unpaid Extension Dividends per share, by the then effective Conversion Price (as
defined below). The "Conversion Price" shall be $7.25 for the shares of Class B
Convertible Preferred Stock issued on the date of initial issuance of shares of
Class B Convertible Preferred Stock (the "Issue Date") and shall be subject to
adjustment as provided in Section 8(d). For all shares of Class B Convertible
Preferred Stock issued subsequent to the Issue Date the "Conversion Price" shall
be the lower of (i) $7.25 and (ii) the average of the closing bid prices of the
Common Stock over the five consecutive trading days ending on the date
immediately prior to the date of the issuance of such shares, in either case
subject to adjustment as provided in Section 8(d). The Conversion Ratio shall be
subject to adjustment as provided in Section 8(d).
(b) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of Class B Convertible Preferred Stock, free from
any preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Class B Convertible Preferred Stock, such number of
shares of its authorized but unissued shares of Common Stock as will from time
to time be necessary to permit the conversion of all outstanding shares of Class
B Convertible Preferred Stock, together
4
<PAGE>
with all accrued but unpaid dividends thereon, into shares of Common Stock, and
shall take all action required to increase the authorized number of shares of
Common Stock if necessary to permit the conversion of all outstanding shares of
Class B Convertible Preferred Stock. The Corporation covenants that all shares
of Common Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, fully paid, nonassessable and freely tradeable.
(c) (i) Conversion of Class B Convertible Preferred Stock may be
effected by any holder thereof upon the surrender to the Corporation at the
offices of the Corporation of certificates representing Class B Convertible
Preferred Stock to be converted, accompanied by a written notice stating that
such holder elects to convert all or a specified portion of such Class B
Convertible Preferred Stock in accordance with the provisions of this Section 8
and specifying the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation shall pay
the issue and transfer taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Class B Convertible
Preferred Stock pursuant hereto. As promptly as practicable, and in any event
within two business days after the surrender of such certificates representing
Class B Convertible Preferred Stock and the receipt of such notice relating
thereto, the Corporation shall deliver or cause to be delivered (i) certificates
representing the number of validly issued, fully paid and nonassessable shares
of Common Stock to which the holder of Class B Convertible Preferred Stock being
converted shall be entitled and (ii) if less than all of the shares represented
by the surrendered certificates are being converted, a new certificate
representing the number of shares of Class B Convertible Preferred Stock which
remains outstanding upon such partial conversion. Such conversion shall be
deemed to have been made at the close of business on the date of giving such
notice so that the rights of the holder thereof as to Class B Convertible
Preferred Stock being converted shall cease except for the right to receive
shares of Common Stock in accordance herewith, and the persons entitled to
receive shares of Common Stock shall be treated for all purposes as having
become the record holder of such shares of Common Stock at such time.
(ii) If the Corporation fails to deliver to the holder such certificate
or certificates pursuant to this Section 8, including for purposes hereof, any
shares of Common Stock to be issued on account of accrued but unpaid dividends
hereunder, on or prior to the third trading day after the date the holder
surrenders to the Corporation the certificates to be converted (the "Delivery
Date"), in addition to all other remedies that such holder may pursue hereunder
or otherwise, the Corporation shall pay to such holder in cash, as liquidated
damages and not as a penalty, $1,000 per day (increasing to $5,000 per day after
the fifth trading day after the Delivery Date) until such certificates are
delivered. If the Corporation fails to deliver to the holder such certificate or
certificates pursuant to this Section 8 prior to the 15th day after the Delivery
Date the Corporation shall, at the holder's option, (i) redeem from funds
legally available therefor at the time of such redemption, such number of shares
of Preferred Stock then held by such holder, as requested by such holder and
(ii) pay all accrued but unpaid dividends
5
<PAGE>
on account of the Class B Convertible Preferred Stock for which the Corporation
shall have failed to issue Common Stock certificates hereunder, in cash. If such
holder opts to redeem any number of shares of Preferred Stock pursuant to this
Section 8(c)(ii), then the Corporation shall immediately redeem, from funds
legally available therefor at the time of such redemption, such number of shares
of Class B Convertible Preferred Stock then held by such holder, as requested by
such holder. The redemption price shall be equal to the sum of (A) the aggregate
of all accrued but unpaid dividends, plus (B) the number of shares of Class B
Convertible Preferred Stock then held by such holder multiplied by (1) the
average closing price of the Corporation's Common Stock for the five trading
days immediately preceding the Delivery Date multiplied by (2) the Conversion
Ratio calculated on the Delivery Date. If the holder has requested that the
Corporation redeem shares of Class B Convertible Preferred Stock pursuant to
this Section 8(c)(ii) and the Corporation fails for any reason to pay the
redemption price referenced above within seven days after such notice is deemed
delivered pursuant to Section 8(c)(ii), the Corporation will pay interest on the
redemption price at a rate of 15% per annum in cash to such holder, accruing
from such seventh day until the redemption price and any accrued interest
thereon is paid in full. Nothing herein shall limit a holder's right to pursue
actual damages for the Corporation's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein (including, without limitation, damages relating to any purchase of
shares of Common Stock by such holder to make delivery on a sale effected in
anticipation of receiving certificates representing shares of Common Stock upon
conversion, such damages to be in an amount equal to (A) the aggregate amount
paid by such holder for the shares of Common Stock so purchased minus (B) the
aggregate amount of net proceeds, if any, received by such holder from the sale
of the shares of Common Stock issued by the Corporation pursuant to such
conversion), and such holder shall have the right to pursue all remedies
available to it at law or in equity (including, without limitation, a decree of
specific performance and/or injunctive relief).
(iii) In addition to any other rights available to the holder, if the
Corporation fails to deliver to the holder such certificate or certificates
pursuant to Section 8(c)(ii) by the Delivery Date and after the Delivery Date
the holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver to the satisfaction of a sale by such holder of the
shares underlying the Class B Convertible Preferred Stock which the holder
anticipated receiving on the Delivery Date upon such conversion (a "Buy-In"),
then the Corporation shall pay in cash to the holder (in addition to any
remedies available to or elected by the holder) the amount by which (A) the
holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock purchased for a Buy-In exceeds (B) the aggregate
Conversion Price for the number of shares of Common Stock in the Buy-In for
which such conversion was not timely honored. For example, if the holder
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of $10,000 aggregate
Conversion Price for the number of shares of Common Stock in the Buy-In, the
Corporation shall be required to pay the holder
6
<PAGE>
$1,000. The holder shall provide the Corporation written notice indicating the
amounts payable to the holder in respect of the Buy-In.
(d) (i) In the event of any change in the number of issued and
outstanding shares of capital stock of the Corporation by reason of any stock
split, stock dividend, subdivision, merger, consolidation, recapitalization,
combination, conversion or exchange of shares, or any other change in the
corporate or capital structure of the Corporation which would have the effect of
diluting or otherwise adversely affecting the rights and privileges of the
holders of Class B Convertible Preferred Stock under this Section 8, the
Conversion Ratio and Conversion Price in effect on the effective date thereof
shall be adjusted so that the holder of any shares of Class B Convertible
Preferred Stock shall be entitled to receive the number and type of shares of
Common Stock or other securities of the Corporation which such holder would have
owned or have been entitled to receive after the happening of any of the events
described above had such shares of Class B Convertible Preferred Stock been
converted into Common Stock immediately prior to the happening of such event or
the record date therefor. An adjustment made pursuant to this Section 8(d) shall
become effective (x) in the case of any such dividend or distribution to holders
of shares of Common Stock entitled to receive such dividend or distribution, or
(y) in the case of such subdivision, merger, consolidation, recapitalization,
combination, conversion or exchange, at the close of business on the day upon
which such corporate action becomes effective.
(ii) Except with respect to Excluded Securities (as defined below), in
case the Corporation shall issue any shares of Common Stock or Common Stock
Equivalents (as defined below) after the Issue Date at a price per share (or
having a conversion or exercise price per share) of less than the Conversion
Price per share (the "Adjusted Conversion Price"), in each such case the
Conversion Price as in effect immediately prior thereto shall be reduced (but
not increased) to the Adjusted Conversion Price and the Conversion Ratio shall
be recalculated and increased (but not decreased) by dividing $100.00 by the
Adjusted Conversion Price. Any adjustment made pursuant to this clause (ii)
shall be made on the next business day following the date on which any such
issuance is made and shall be effective retroactively to the close of business
on the date of such issuance. For purposes of this clause (ii), the
consideration receivable by the Corporation in connection with the issuance of
additional shares of Common Stock or of Common Stock Equivalents since the Issue
Date shall be deemed to be equal to (X) in the case the consideration received
by the Corporation is cash, the sum of the aggregate offering price (before
deduction of underwriting discounts or commissions and expenses payable to third
parties, if any) of all such Common Stock and/or Common Stock Equivalents plus
the minimum aggregate amount, if any, payable upon conversion, exchange or
exercise of any such Common Stock Equivalents, and (Y) in the case the
consideration received by the Corporation is other than cash, the fair market
value of the consideration received by the Corporation as determined by the good
faith judgment of the Board of Directors of the Corporation provided, however,
that in the event the holder disagrees in good faith with the determination of
the Board of Directors of the Corporation, such fair market value shall
7
<PAGE>
be determined by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of recognized standing
(an "Appraiser") selected in good faith by the holders of the Class B
Convertible Preferred Stock; and provided, further, that the Corporation, after
receipt of the determination by such Appraiser shall have the right to select in
good faith an additional Appraiser meeting the same qualifications, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above. The issuance or reissuance of any shares of Common Stock
or Common Stock Equivalents (whether treasury shares or newly issued shares)
pursuant to a dividend or distribution on, or subdivision, combination or
reclassification of, the outstanding shares of Common Stock requiring an
adjustment in the Conversion Price and Conversion Ratio pursuant to this clause
(ii) shall not be deemed to constitute an issuance of Common Stock or Common
Stock Equivalents by the Corporation to which clause (i) of this Section 8(d)
applies. Upon the expiration or termination of any unconverted, unexchanged or
unexercised Common Stock Equivalents for which an adjustment has been made
pursuant to this clause (ii), the adjustments shall forthwith be reversed to
effect such Conversion Ratio as would have been in effect at the time of such
expiration or termination had such Common Stock Equivalents, to the extent
outstanding immediately prior to such expiration or termination, had never been
issued. As used herein, "Excluded Securities" shall mean: (i) shares of Common
Stock issuable upon conversion of the Class B Convertible Preferred Stock; (ii)
shares of Common Stock issuable or issued to employees of or consultants to the
Corporation pursuant to the Management Option Plan (as hereinafter defined);
(iii) any capital stock issued as a stock dividend or upon any stock split or
other subdivision or combination of shares of the Corporation's capital stock;
(iv) shares of Common Stock issuable upon conversion of any Common Stock
Equivalents outstanding on the Issue Date, (v) shares of Common Stock issuable
upon conversion of the Corporation's Class A Convertible Preferred Stock
outstanding on the Issue Date or (vi) Common Stock issued upon the conversion or
exercise of Common Stock Equivalents issued after the Issue Date as to which an
adjustment to the Conversion Ratio has been made pursuant to this clause (d)
upon the issuance of such Common Stock Equivalents. As used herein, "Common
Stock Equivalents" shall mean securities convertible into, or exchangeable or
exercisable for, shares of Common Stock of the Corporation. As used herein, the
"Management Option Plan" shall mean the Corporation's 1992 Stock Option Plan, as
amended.
(iii) If the Corporation shall set a record date for the holders of its
Common Stock for the purpose of entitling them to receive a dividend or other
distribution and shall thereafter, and before such dividend or distribution is
paid or delivered to stockholders entitled thereto, legally abandon its plan to
pay or deliver such dividend or distribution, then no adjustment in the
Conversion Ratio or the Conversion Price then in effect shall be made by reason
of the taking of such record, and any such adjustment previously made as a
result of the taking of such record shall be reversed.
8
<PAGE>
(e) (i) Unless sooner redeemed or converted in accordance with the
provisions of Section 7 hereof or this Section 8 the outstanding shares of Class
B Convertible Preferred Stock shall be subject to involuntary conversion at the
option of the Corporation, at its sole discretion, in whole but not in part, at
any time after six months after the Issue Date, for shares of the Corporation's
Common Stock at the Conversion Ratio. The Corporation may effectuate such
involuntary conversion on such date (the "Involuntary Conversion Date") provided
that the following conditions have been met:
(A) the Current Market Price (as hereinafter defined) of the
Common Stock is equal to or in excess of one hundred and fifty
percent (150%) of the Conversion Price for a period of at
least ten (10) consecutive trading days; and
(B) all of the shares of Common Stock into which the Preferred
Stock is being converted have been registered under the
Securities Act of 1933, as amended, and such registration has
been declared effective by the Securities and Exchange
Commission, and is effective on such date; and
(C) the Corporation has a sufficient number of authorized shares
of Common Stock reserved for issuance upon full conversion of
the Class B Convertible Preferred Stock.
As used herein, "Current Market Price" shall mean for any day, the last sale
price for the Common Stock on the principal securities exchange on which the
Common Stock is listed or admitted to trading, or, if not so listed or admitted
to trading on any securities exchange, the last sale price for the Common Stock
on the National Association of Securities Dealers National Market System, or, if
the Common Stock shall not be listed on such system, the closing bid price in
the over-the-counter market.
(ii) Notice of involuntary conversion of outstanding shares of Class B
Convertible Preferred Stock shall be sent by or on behalf of the Corporation,
postage prepaid, to the holders of record of outstanding shares of Class B
Convertible Preferred Stock not less than ten (10) and not more than twenty (20)
days prior to the Involuntary Conversion Date.
(iii) Notice having been so given as provided in clause (ii) above,
from and after the Involuntary Conversion Date, unless default shall be made by
the Corporation on the Involuntary Conversion Date in issuing the Common Stock
issuable upon conversion of the Class B Convertible Preferred Stock pursuant to
the Conversion Ratio, all rights of the holders of the shares of Class B
Convertible Preferred Stock surrendered for conversion, except the right to
receive the Common Stock in respect of such shares, shall cease and terminate.
The involuntary conversion of the shares of Class B Convertible Preferred Stock
for the Common Stock upon the Involuntary Conversion Date shall take place at
the principal place of business of the Corporation.
9
<PAGE>
On the Involuntary Conversion Date, the Corporation shall tender such Common
Stock against receipt of the certificate or certificates representing the shares
of Class B Convertible Preferred Stock being converted.
(iv) If any portion of the applicable redemption price under Sections 7
or 8 shall not be paid by the Corporation within seven (7) calendar days after
the date due, interest shall accrue thereon at the rate of 15% per annum until
the redemption price plus all such interest is paid in full (which amount shall
be paid as liquidated damages and not as a penalty). In addition, if any portion
of such redemption price remains unpaid for more than seven (7) calendar days
after the date due, the holder of the Class B Convertible Preferred Stock
subject to such redemption may elect, by written notice to the Corporation given
within 30 days after the date due, to either (i) demand conversion in accordance
with the formula and the time frame therefor set forth in Section 8 of all of
the shares of Class B Convertible Preferred Stock for which such redemption
price, plus accrued liquidated damages thereof, has not been paid in full (the
"Unpaid Redemption Shares"), in which event the Conversion Price for such shares
shall be the lower of the Current Market Price of the Corporation's Common Stock
on the date such redemption price was originally due and the Current Market
Price of the Corporation's Common Stock as of the holder's written demand for
conversion, or (ii) invalidate ab initio such redemption, notwithstanding
anything herein contained to the contrary. If the holder elects option (i)
above, the Corporation shall within five (5) trading days of its receipt of such
election deliver to the holder the shares of Common Stock issuable upon
conversion of the Unpaid Redemption Shares subject to such holder conversion
demand and otherwise perform its obligations hereunder with respect thereto; or,
if the holder elects option (ii) above, the Corporation shall promptly, and in
any event not later than five (5) trading days from receipt of holder's notice
of such election, return to the holder all of the Unpaid Redemption Shares.
(9) Upon any adjustment of the Conversion Price and the Conversion
Ratio then in effect pursuant to the provisions of Section 8, then, and in each
such case, the Corporation shall promptly deliver to each of the holders of
Class B Convertible Preferred Stock a certificate signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation setting forth in reasonable detail
the event requiring the adjustment, the method by which such adjustment was
calculated and the Conversion Price and Conversion Ratio then in effect
following such adjustment. Where appropriate, such notice to the holders of
Class B Convertible Preferred Stock may be given in advance. "
FIFTH: The foregoing Amendment of the Certificate of
Incorporation of the Corporation was authorized by unanimous consent of the
Board of Directors of the Corporation.
10
<PAGE>
Signed on June 15, 1999. /s/ Darby S. Macfarlane
-------------------------------
Darby S. Macfarlane
Chairperson of the Board
and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financ ial information extracted from the
consolidated finanial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,862,400
<SECURITIES> 0
<RECEIVABLES> 92,400
<ALLOWANCES> 0
<INVENTORY> 2,486,500
<CURRENT-ASSETS> 10,703,500
<PP&E> 732,100
<DEPRECIATION> (400,700)
<TOTAL-ASSETS> 13,173,000
<CURRENT-LIABILITIES> 1,546,100
<BONDS> 0
13,800
2,731,000
<COMMON> 15,500
<OTHER-SE> 6,000,500
<TOTAL-LIABILITY-AND-EQUITY> 13,173,000
<SALES> 0
<TOTAL-REVENUES> 84,300
<CGS> 0
<TOTAL-COSTS> 6,971,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,519,800
<INCOME-PRETAX> (5,971,300)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,971,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,971,300)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
