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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-4
(Mark One)
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1998
/ / Transition report under 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
Incorporation or Organization) Identification Number)
5 East 80th Street, New York, New York 10021
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(Address of Principal Executive Offices) (Zip Code)
(212) 717-6544
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(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
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Purchase Rights for Class B Series 1 Preferred Stock, par value $0.001
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(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 / /
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K./ /
As of April 13, 1999, 15,477,471 shares of Common Stock, par value $0.001 per
share (the "Common Stock") of the registrant were outstanding and the aggregate
market value of the voting stock (computed based on the average of the last bid
and asked price on such date) held by non-affiliates was approximately
$77,138,355.
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EXPLANATORY NOTE
This Report on Form 10-K/A-4 amends and restates in its entirety the text of
Item 7 of the Company's Annual Report on Form 10-K for the year ended December
31, 1998 which was filed with the Securities and Exchange Commission on April
15, 1999 and amended on November 12, 1999 and January 21, 2000.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal Year 1998 Compared to Fiscal Year 1997
The Company incurred net losses of $7,284,800 and $5,053,100 for fiscal years
1998 and 1997, respectively, as revenues received have not been significant
relative to the Company's expenses incurred in implementing its business plan.
Lease, license and service revenues in 1998 represent fees paid to the Company,
primarily by Nordstrom, in connection with a test project done with the Company.
No significant future payments are anticipated from this source. The $2,231,700
increase in such losses in 1998 as compared to 1997 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 and expenses regarding:
consultants' compensation; (which increased by $67,300 in 1998 compared to 1997)
legal expenses incurred in respect of the Company's negotiations with its
medical device manufacturer and potential distribution partners, the recent
litigation and matters related to the short selling activities in the Company's
stock, and legal, consulting and other related expenses regarding regulatory
compliance with respect to manufacturing and other requirements for the
Company's ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System (which increased by $668,800 in 1998 compared to 1997); sales, marketing
and trade show expenses, primarily attributable to the Company's presentations
at the Annual Convention of the Pediatric Academic Societies, the Sinomed
Conference in China, the International Congress of Pediatrics, the National
Association of Neonatal Nurses, the American Academy of Pediatrics and the 5th
Annual Pediatric Critical Care Medicine Conference in China (which increased by
$715,800 in 1998 compared to 1997); option grants (which increased $261,000 in
1998 compared to 1997); public relations and promotions (which increased by
$289,700 in 1998 compared to 1997); and contributions to the new employee
benefit plan. These increased expenses were partially offset by a decrease in
patent application costs, as the Company has begun capitalizing certain of these
expenses in 1998. The Company incurred research and development expenses
primarily consisting of compensation of officers, employees and consultants of
$705,000 and $435,300 for fiscal years 1998 and 1997, respectively.
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 continue to incur significant
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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. The Company expects to
generate profits from the medical application of its technology from the
aggregate sales of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System and TLc Lensette(Trademark) calibration standards to its
third party distributor. The Company also anticipates significantly higher
compensation expenses in connection with increased hiring to staff its medical
division. See "Liquidity and Capital Resources," below. The Company will also
incur additional expenses implementing additional testing and clinical trials of
its technologies for the possible monitoring of other chromogenic diseases.
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. See "Legal Proceedings."
In 1998, the Company focused its resources on implementation of its long-range
business plan for the FDA medical application of its technologies and received
no revenues from operations. The Company believes the absence of sales in 1998
was also attributable to ongoing delays in manufacturing certain color shades of
the Company's new line of cosmetic products for its ColorMate(Registered
Trademark) System (which delays were attributable to finalizing color
formulations). Under the Nordstrom Agreement, the Company anticipates the new
cosmetics will be ready to market upon delivery of packaging materials from
Nordstrom and final cosmetic formulations.
The Company expects to generate profits from the aggregate sales of its
ColorMate (Registered Trademark) TLc-BiliTest(Registered Trademark) System and
the disposable TLc-Lensette (Trademark) Calibration Standards which calibrate
the device prior to its use. The ColorMate(Registered Trademark)
TLc-Bilitest(Registered Trademark) System consists of two distinct products: the
Colormate(Registered Trademark) TLc-Bilitest(Registered Trademark) System device
and the TLc-Lensette(Trademark) calibration standards. The initial transfer
prices of the Colormate(Registered Trademark) TLc-Bilitest(Registered Trademark)
System devices and the TLc-Lensette(Trademark) calibration standards are
initially set at established minimum amounts. The Company will receive
additional amounts from the distributor equal to a defined percentage of the
distributor's sales of the products ("Profit Sharing Payments"). The Company
will incur a small loss based on the initial transfer price of the
ColorMate(Registered Trademark) TLc-Bilitest(Registered Trademark) System
devices. This loss will be more than offset in the same period through the
profits generated from the sale of TLc-Lensette(Trademark) calibration
standards, which are initially transferred at a significant profit. In addition,
the Profit Sharing Payments will generate additional profits to the Company. The
Company expects to lower its production cost of the Colormate(Registered
Trademark) TLc-Bilitest(Registered Trademark) System device by June 2000 which
will eliminate the small loss from the initial transfer prices of the
ColorMate(Registered Trademark) TLc-Bilitest(Registered Trademark) System
devices.
The Company anticipates that it will continue to incur substantial and
increasing net losses for the foreseeable future as increased expenses are
incurred in implementing its long-range business plan for the medical
application of its technologies and as revenues from the cosmetics, beauty aid
and fashion areas are anticipated to continue to be insignificant relative to
the Company's anticipated expenses in the foreseeable future.
In November 1998, the Company entered into a manufacturing agreement with Nova
Biomedical Corporation for the production of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. Under this renewable, four year
medical device manufacturing agreement, the Company pays Nova Biomedical a per
unit fee for the manufacture of the ColorMate(Registered Trademark) TLc-
BiliTest(Registered Trademark) units.
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company incurred net losses of $5,053,100 and $4,442,300 for fiscal years
1997 and 1996, respectively, as revenues received have not been significant
relative to the Company's expenses incurred in implementing its business plan.
The $610,800 increase in such losses in 1997 as compared to 1996 is primarily
attributable to expenses incurred in 1997 in respect of increased patent
applications costs, write-offs of certain inventory, non-cash expenses relating
to the grant of options to consultants, and increased research and development
expense. The Company incurred research and development expenses primarily
consisting of compensation of officers, employees and consultants of $435,300
and $194,400 for fiscal years 1997 and 1996, respectively. The 1997 loss was
mitigated by the capitalization of $124,200 of software development costs,
decreased FDA medical application costs, and a decrease in other expenses
described below. See Note 1 of Notes to Financial Statements for a discussion of
the effect on net losses and net losses per share attributable to (i) the
Company's outstanding convertible securities and (ii) accounting for stock-based
compensation on the intrinsic value method, rather than the fair market value
method.
The Company believes that the level of expenses relating to the FDA initial
application and related patent applications will not be recurring in the future
at previous levels and that any future expenses incurred in connection therewith
will be significantly less than the amount incurred in 1997, although no
assurance can be given of such result.
Bad debt expense decreased to $5,000 in 1997 from $257,700 in 1996 primarily
attributable to the adjustment of amounts due from IMS in 1996. Depreciation and
amortization expense decreased to $80,500 in 1997 from $178,600 in 1996,
primarily attributable to the amortization of deferred legal expenses incurred
in 1996 in respect of financing activities. Compensation expense for employees,
officers and directors decreased to $729,300 in 1997 from $810,500 in 1996,
primarily because bonuses were not paid to executive officers during 1997.
Assets increased to $10,752,600 in 1997 from $6,747,500 in 1996 primarily
attributable to increased cash and cash equivalents from the proceeds received
from the exercise of Warrants and interest income, as well as the capitalization
of software development costs. See Notes 1 and 5 of Notes to Financial
Statements.
Revenues from lease, license and service contracts decreased in 1997 as the
Company continued to focus its resources on implementation of its long range
business plan for the medical application of its technologies. The Company
receives payments from licensees, distributors or other sources sporadically
during the year. Accordingly, these payments have had, and payments that may be
received in the future will have, a significant impact on quarter-to-quarter
comparisons inasmuch as the Company has not developed stable recurring revenues.
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The Company anticipates that it will continue to incur substantial and
increasing net losses for the foreseeable future as increased expenses are
incurred in implementing its long-range business plan for the medical
application of its technologies and as revenues from the Company's existing
activities in the cosmetics, beauty-aid and fashion areas are anticipated to
continue to be insignificant relative to its anticipated expenses in the
foreseeable future.
Liquidity and Capital Resources
Fiscal Year 1998 Compared to Fiscal Year 1997
Current assets decreased to $4,251,200 at December 31, 1998 as compared to
$9,542,300 at December 31, 1997, primarily attributable to a decrease in cash
and cash equivalents resulting from the loss incurred in 1998 and the purchase
of equipment and component parts in respect of future manufacturing and sales
and costs relating to patents and software.
As indicated in the Company's Statements of Cash Flows, the Company continued to
experience significant negative net cash flows from operating and investing
activities in 1998. The 1998 increase in cash outflows from operating activities
is primarily attributable to the increase in the Company's net loss, offset by
an increase in non-cash compensation costs to consultants. Cash flows from
investing activities during 1998 of $2,554,200 are attributable to software
development costs of $421,800, patent costs of $540,300, purchases of property
and equipment of $87,700 and purchases and deposits on ColorMate(Registered
Trademark) TLc BiliTest(Registered Trademark) units of $1,504,400. The increase
is primarily a result of the Company's rollout of its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System. Cash flows from financing
activities during 1998 principally represent $3,114,300 from the issuance of
Common Stock (net of related costs) representing the receipt of proceeds from
the exercise of options and warrants. Although the Company anticipates that
penetration of the medical marketplace will be through establishing
relationships with specialized distributors, rather than through a direct sales
force, the Company has established a medical division to support its own efforts
to initially market and distribute the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System , and to support training, technical
and marketing efforts once the Company enters into distribution agreements. See
"Proposed Marketing Plan," "Recent Events" and "Risk Factors." Management
believes that if its proposed marketing plans for nonmedical applications of its
technology are successful, then it will generate revenues from fees from the
licensing of the Intellectual Properties and leasing of the ColorMate(Registered
Trademark) units, consulting fees, and sales of cosmetics, although there can be
no prediction or assurance as to which, or whether any, of these potential
revenue sources will be successful. In 1998, such licensing, leasing and sales
yielded limited revenue, primarily because the Company devoted its resources to
the commercialization of its technologies for medical application and because
the Company's new cosmetics line was not yet available.
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. 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. Management expects that taking into account existing
resources, anticipated revenues from future sales of the ColorMate(Registered
Trademark) units, anticipated payments received under distribution agreements
and/or the proceeds of the Debentures and any additional financing, the Company
will have sufficient liquidity at least until December 31, 1999, although there
can be no assurance of such result. If the Company is able to profitably market
its Intellectual Properties, ColorMate(Registered Trademark) units and
Beauty-Aid Products, the Company would use any cash flow obtained from
operations, and may seek additional debt or equity financing, to further support
and expand its operations. The Company's ColorMate(Registered Trademark) units
will be marketed interchangeably as the only differences between the different
models are design and power supply improvements and software systems. There can
be no assurance that the Company will not require additional funding. If the
Company is not able to attract additional future financing, enter into a
distribution agreement generating such payments, generate significant revenue
from operations and/or successfully market its products and technologies, at
such point in time, it may have to significantly curtail and/or cease
operations.
Fiscal Year 1997 Compared to Fiscal Year 1996
In 1997, the Company continued to experience significant negative net cash flows
from operating activities. Net cash out flows from operating activities
increased by $509,200 in 1997 as compared to 1996, primarily due to the increase
in net loss in 1997 and the non-cash expense of options granted to consultants.
Cash flows from financing activities increased to $8,386,700 from $7,387,800 in
1997 as compared to 1996, primarily attributable to $8,424,800 proceeds from the
exercise of Warrants.
The Company has applied a substantial portion of the proceeds of the 1995
Private Placement and Debenture Financing to continue its implementation of its
long-range business plan for commercialization of its technologies for medical
applications in diagnosing certain diseases, including the completion of the FDA
application and the related patent applications. In this regard, the Company
hired FDA and governmental regulatory consultants (in addition to legal counsel)
to assist in obtaining marketing regulatory clearances for such medical
applications and
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is currently applying for foreign regulatory approvals of commercial use of its
technology for the monitoring of bilirubin infant jaundice. Management believes
that, if its proposed marketing plans for non-medical applications of its
technology are successful, then it will generate revenues from fees from the
licensing of the Intellectual Properties and leasing of the ColorMate(Registered
Trademark) units, sales of swatch packs, consulting fees, and sales of
cosmetics, although there can be no prediction or assurance as to which or any
of these potential revenue sources will be successful. However, since
consummation of the IPO, the Company's marketing of its Intellectual Properties,
Beauty-Aid Products and ColorMate(Registered Trademark) units in the beauty-aid
industry have resulted in immaterial revenues.
As of December 31, 1997, management expects that the Company will have
sufficient liquidity at least until December 31, 1998, even if no revenues from
operations are generated. If the Company is able to profitably market its
Intellectual Properties, the ColorMate(Registered Trademark) units, the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System and
Beauty-Aid Products, the Company would use any cash flow obtained from
operations, and may seek additional debt or equity financing, to further support
and expand its operations. There can be no assurance that the Company will not
require additional funding. If the Company has not been able to attract
additional future financing at such point in time it may have to cease
operations.
Year 2000
Until recently computer programs were generally written using two digits rather
than four to define the applicable year. Accordingly, such programs may be
unable to distinguish properly between the year 1900 and the year 2000. This
could result in system failures or data corruption for the Company or its
vendors which could cause disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in business
activities or to receive information, services or payment from vendors.
The Company's internal computing systems are primarily limited to hardware and
software for its financial systems, such as general ledger and accounts
receivable and payable systems, and word processing and database systems. The
Company is not dependent on large legacy systems and does not use mainframes.
The Company's management is continuing to conduct an assessment of the Company's
operations from an internal, vendor and customer perspective. The assessment
addresses all of the Company's material computer systems, applications and any
other material systems that the Company believes may be vulnerable to the year
2000 issue and significantly affect the Company's operations. This assessment
includes contacting third parties with whom the Company has a material
relationship to determine their year 2000 readiness. The Company's assessment is
not yet complete and there can be no assurances that any such problems will not
arise.
The total costs associated with the Company's year 2000 compliance are not
expected to be material to the Company's financial position. 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 financial
position 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 business and
its operations could be materially adversely affected.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
By: /s/ Darby S. Macfarlane Date: January 25, 2000
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Darby S. Macfarlane,
Chief Executive Officer
By: /s/ Leslie Foglesong Date: January 25, 2000
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Leslie Foglesong,
Treasurer
(Chief Financial and Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Darby S. Macfarlane Date: January 25, 2000
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Darby S. Macfarlane,
CEO; Chairman of the Board;
Assistant Treasurer; Director
By: /s/ David K. Macfarlane Date: January 25, 2000
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David K. Macfarlane,
Vice President, Research & Development;
Director
By: /s/ Leslie Foglesong Date: January 25, 2000
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Leslie Foglesong,
Secretary; Treasurer; Director
By: /s/ Edmund Vimond Date: January 25, 2000
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Edmund Vimond,
Director
By: /s/ Edward Mahoney Date: January 25, 2000
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Edward Mahoney,
Director
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