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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1999
/_/ 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.
(Exact Name of Registrant as Specified in Its Charter)
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<CAPTION>
NEW YORK 13-3253392
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<S> <C>
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
5 East 80th Street, New York, New York 10021
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(Address of Principal Executive Offices) (Zip Code)
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(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
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
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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 March 23, 2000, 15,901,403 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
$88,268,894.
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PART I
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 ("BUSINESS") AND ITEM 7
("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS "BELIEVE,"
"ANTICIPATE," "THINK," "INTEND," "PLAN," "WILL BE," "EXPECT" AND SIMILAR
EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REGARDING
FUTURE EVENTS AND/OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "RISK FACTORS"
BELOW AT PAGES 14 TO 25, WHICH COULD CAUSE ACTUAL EVENTS OR THE ACTUAL FUTURE
RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT.
SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE AVAILABILITY OF
ANY NEEDED FINANCING, THE COMPANY'S ABILITY TO IMPLEMENT ITS BUSINESS PLAN FOR
VARIOUS APPLICATIONS OF ITS TECHNOLOGIES, INCLUDING MEDICAL AND INDUSTRIAL
APPLICATIONS, THE COMPANY'S ABILITY TO ENTER INTO AGREEMENTS WITH ADDITIONAL
MARKETING AND DISTRIBUTION PARTNERS, THE OBTAINING AND MAINTAINING OF AND
COMPLIANCE WITH ANY NECESSARY REGULATORY APPROVALS OR CLEARANCES APPLICABLE TO
APPLICATIONS OF THE COMPANY'S TECHNOLOGY, THE IMPACT OF COMPETITION, THE
MANAGEMENT OF GROWTH, AND OTHER RISKS AND UNCERTAINTIES THAT MAY BE DETAILED
FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. IN LIGHT OF THE SIGNIFICANT RISKS AND UNCERTAINTIES
INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF
SUCH STATEMENTS SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY
OTHER PERSON THAT THE OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED.
Item 1. Business
General
Chromatics Color Sciences International, Inc. (the "Company") was formed in 1984
to research, develop and commercialize certain intellectual property rights,
proprietary technology and instrumentation in the field of color science
(collectively, the "Intellectual Properties"). The Intellectual Properties
provide color measurement to a laboratory standard of accuracy, analysis and
classification of human skin, tissue, fluid, hair, teeth or biological subject
which facilitates the detection and monitoring of conditions affecting their
coloration and the classification and organization by color of various
consumer-sensitive products such as cosmetics, tooth enamel, hair color,
hosiery, clothing fashion accessories and textiles. The Company has incorporated
certain of the Intellectual Properties into a proprietary color measurement
system and software marketed for various commercial applications as the
"ColorMate(Registered Trademark) System."
The Company has developed a ColorMate(Registered Trademark) device to measure
the incremental change of the yellow content of the skin color in newborns to
monitor newborn bilirubinemia (infant jaundice) (defined as bilirubin levels or
infant jaundice in a range above that which would be considered average in a
newborn). On July 30, 1997 the Company received U.S. Food and Drug
Administration ("FDA") clearance for commercial marketing of the
ColorMate(Registered Trademark) device for non-invasive monitoring of newborn
bilirubinemia (infant jaundice) in infants by healthcare professionals in the
hospital, institutional, pediatricians' office or home setting (the
"ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System").
The Company's efforts are currently primarily focused on successfully
commercializing this medical application of its Intellectual Properties.
Infant jaundice occurs in most newborns because of a combination of increased
bilirubin production, a waste product that is normally produced from the
breakdown of red blood cells, and decreased clearance of bilirubin by the liver.
Infant jaundice primarily affects infants within the first three to ten days of
life. Almost all newborn babies develop some degree of infant jaundice and very
high bilirubin levels, if left untreated, may, in extreme cases, lead to
permanent brain damage or death. Prior to birth, the bilirubin in an infant is
processed by the mother's liver and excreted. Following its birth, an infant
must eliminate bilirubin independent of its mother, and it may take an infant's
system several days to begin eliminating the bilirubin faster than it is
produced. Infants who are born prematurely, who are underfed or who belong to
certain ethnic groups are at an increased risk of developing newborn infant
jaundice. The initial screening of bilirubin levels is the observation of the
yellowing of the skin by professional care providers, which is a subjective
determination prone to errors due to differing skin colors. If the initial
clinical assessment suggests the possibility of significant elevated bilirubin
levels, the current procedure requires that a blood sample be obtained from the
infant, usually by lancing the infant's heel (heelstick). These laboratory
measurements are time-consuming, costly and a traumatic process for the infant.
In addition, repeated blood drawing in very low birth weight babies with
extremely small blood volumes may result in the need for blood transfusion.
Since infant jaundice is normally present in infants 36 to 72 hours following
birth, infants who are sent home after a short hospital stay pursuant to managed
care guidelines in the United States are at risk because the condition may not
have
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presented itself prior to release. Thus the Company believes a non-invasive
instrument that monitors infant jaundice in infants represents a significant
improvement in patient care. A joint statement by the American Academy of
Pediatrics and the Canadian Pediatric Society published in the February 2000
issue of Pediatrics, titled Prevention and Management of Pain and Stress in the
Neonate, urges doctors to take measures to alleviate pain in healthcare for
babies and prevent causing pain whenever possible. The statement recommends,
"Health care institutions should develop and implement patient care policies to
assess, prevent and manage pain in neonates, including those receiving
palliative care." Also, "whenever possible validated noninvasive monitoring
techniques . . . that are not tissue damaging should replace invasive methods."
Prior to marketing the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System, the Company's activities principally involved licensing the
Intellectual Properties, leasing the ColorMate(Registered Trademark) System and
marketing its own line of precisely color coordinated proprietary cosmetics ("My
Colors by Chromatics (Registered Trademark)") and proprietary color charts and
material swatchpacks (collectively, the "Beauty Aid Products") in the cosmetics,
hair color, beauty aid and fashion industries (i) in a national sales program
with Avon Products, Inc. and in limited test markets with Clairol, Inc. and
Hanes Hosiery, Inc. (all conducted prior to June 1991), (ii) under a product
development agreement with Gordon Laboratories, Inc. ("Gordon") and (iii) under
a license and lease agreement with Nordstrom, Inc. ("Nordstrom"). Presently, as
the result of its efforts to market commercially the ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for medical application,
the Company has not initiated any new relationships to distribute its Beauty-Aid
Products. Once the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System has achieved sufficient commercial distribution, the Company
will renew its efforts for commercial distribution of its Beauty-Aid Products.
Current Products
The Company has developed the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System for monitoring newborn infant jaundice
in infants of all races, including when under phototherapy. This device uses a
color measurement instrument in combination with certain apertures, calibration
systems, accessories and software which have been developed by the Company for
this specific medical application. The ColorMate (Registered Trademark)
TLc-BiliTest(Registered Trademark) System received FDA clearance for use in
monitoring newborn infant jaundice by measuring the color of the skin of the
newborn and periodically monitoring incremental changes in the skin color. The
FDA-cleared device includes the ColorMate(Registered Trademark) device for
monitoring newborn infant jaundice when operated using external power sources
with a computer and printer, and when operated as a battery-operated, hand-held,
optional computer assisted device. (This device together with the Company's
disposable calibration components is hereafter referred to as the
"ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System.")
The ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System is
a proprietary color measurement system containing a light source and optical
filters. Color measurements are obtained from an infant by placing the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System on
different physical sites of the newborn for five to ten seconds. Accuracy of the
color measurements is ensured by the TLc-Lensette(Trademark), a proprietary
disposable color-calibration and verification standard consisting of a device
containing a dye deposit specially colored and treated paper, which is used
prior to each baby's measurement. Each color measurement of the skin is analyzed
by the Company's proprietary technology to provide an estimate in milligrams per
deciliter (the laboratory scale used for blood serum tests) correlating to the
newborn's serum bilirubin concentration within a clinically useful range.
The ColorMate(Registration Trademark) TLc-BiliTest(Registered Trademark) System
for monitoring infant jaundice as currently marketed by the Company's
distribution partner, Datex-Ohmeda, Inc. and its Ohmeda Medical Division has a
list price of $3,000 to $5,000 depending on the model and may be leased or used
under a limited time offer for use and evaluation of the system, all with either
purchase of minimum monthly supplies of the TLc-Lensette(Trademark) calibration
standards at $11.90 per unit or minimum monthly charges per use under a Managed
Use Program.
Marketing and Distribution
In September 1997, the Company released the results of market research studies
which analyzed the existing market for methods currently used to monitor newborn
infant jaundice in infants in the United States and in the developed countries
of Europe, South America and Canada combined, and Asia. The study indicated that
the World Health Organization published annual birthrate is approximately
4,000,000 births in the United States, with approximately 10% of these births
being premature infants. The Company estimates that individual bilirubin
heelstick blood tests on newborn infants, which are not part of a general panel
blood test, total approximately 15,000,000 tests performed annually in the
United States, based on data made available by the World Health Organization,
the American Academy of Pediatrics, independent market studies commissioned by
the Company, business proposals from potential marketing partners and its
current distribution partner. Internationally, using the World Health
Organization birth rates, independent market studies and research obtained from
companies currently marketing neonatal medical devices in foreign countries, the
Company estimates that the current European market for infant bilirubin tests is
approximately the same size as the United States; South America and Canada
combined represent approximately 25% of the United States market size, and the
Southern Chinese and entire Japanese markets combined represent approximately
the same size of market as the United States.
In order to successfully market and sell its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System for monitoring of newborn infant
jaundice globally, the Company must either develop an extensive marketing and
sales force or enter into arrangements with third
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parties to market and sell this product in different territories and markets.
These arrangements could take the form of lease/license arrangements, marketing
and distribution arrangements, joint ventures or acquisitions. The Company's
strategy is to effect the sales and distribution of its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System through collaborative
distributors. The Company believes that by aligning with larger, more
established medical company distributors, in specific market segments and
territories, it can more effectively and quickly penetrate the medical
marketplace.
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 Trademark) TLc-BiliTest (Registered Trademark)
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 TLc-Lensette (Trademark) disposable standard that is used to calibrate
measurements taken by the ColorMate (Registered Trademark) TLc-BiliTest
(Registered Trademark) System. The terms of the agreement provide for minimum
purchases of ColorMate (Registered Trademark) System units and TLc-Lensette
(Trademark) disposable color-calibration and verification standards for the term
of the agreement. There are no financial penalties for failure to meet these
minimum levels. However, the Company has the option to terminate the agreement
if these minimums are not met. DO commenced marketing the ColorMate (Registered
Trademark) TLc-BiliTest (Registered Trademark) System in the third quarter of
1999 to hospitals and expects to launch the product to the home health care
market (in which the test is administered solely by a healthcare professional)
in the first quarter of 2000. Substantially all of the Company's sales in 1999
were from shipments under this agreement. There can be no assurance that the
Company will be able to successfully enter into additional marketing and sales
agreements with third parties on acceptable terms.
Prior to entering into the agreement with DO and in order to provide the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System to
hospitals and physicians, and to expedite evaluation of the product by the
medical community, the Company implemented a series of significant steps to
increase awareness of its products in the medical community and to initiate its
own sales and servicing of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System with United States physicians and
clinicians in hospitals.
In November 1998, the Company opened its medical division, supervised by Sheila
Kempf, Vice President Medical Division. Ms. Kempf is a former Vice President --
Marketing of Corometrics, a Marquette Medical Inc. company, and a former
Director of Marketing for Sensors and Accessories of Nelcor Puritan Bennet, Inc.
and has over 13 years experience in the medical marketing field. The Company
also hired neonatal nurse clinical specialists to provide training to hospital
staffs using the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System. The newly formed medical division provides sales and support
for the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System delivered to customers in the medical community, including hospitals,
pediatricians, clinics and home health care agencies, and performs delivery,
training and in-servicing for customers initially generated by the Company's
presentations to the medical community.
In January 1999, the Company formed a five-person sales unit led by Dennis A.
McClinton, Vice President of Sales. Mr. McClinton has an 18-year background in
sales of fetal and neonatal intensive care unit monitoring products at Marquette
Medical Systems and heads a staff that averages ten years experience in that
field. The unit's initial responsibility was to commence sales activity of the
ColorMate (Registered Trademark) TLc-BiliTest (Registered Trademark) System and
to further commercialize sales in the medical markets working in concert with
distribution partners.
Regulatory Clearances.
In June 1996, the Company retained government regulatory consultants and legal
counsel to oversee compliance with applicable federal and state regulations for
commercialization of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System, and for complying with any applicable European Community and
other foreign government requirements. The initial clinical studies conducted at
Mt. Sinai Hospital were completed with positive results and on November 14, 1996
the Company filed its application with the FDA for the medical application of
its technologies, specifically, the non-invasive monitoring of newborn infant
jaundice. On July 30, 1997, the Company received confirmation of marketing
clearance pursuant to a "substantial equivalence" determination order, dated
July 24, 1997, from the FDA's Center for Devices and Radiological Health (the
"CDRH"), authorizing the Company to commercially distribute the system in the
United States. The "substantial equivalence" order states that the Company must
comply with all relevant statutes enforced by and regulations promulgated by the
FDA, including Quality System Regulation ("QSR") requirements, labeling, and the
statutory prohibitions against adulteration and misbranding. The order also
states that the system is a "Class II device" which may be subject to additional
"special controls." The Company intends to maintain substantial compliance with
any applicable requirements and any special controls for purposes of commercial
distribution.
The Company's FDA market clearance authorizes use of the Company's technology as
an aid to the physician in monitoring the status of newborn babies for the
development and progression of newborn infant jaundice.
The Company believes a non-invasive instrument that monitors infant jaundice in
infants represents a significant improvement in patient care.
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Following a physician's examination of a newborn within the first hours of
birth, newborn babies would be measured initially and monitored periodically by
the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
for incremental changes in the yellow content of their skin color. Because the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System can
provide effective non-invasive monitoring of newborn infant jaundice, it may
have significant marketing advantages toward reducing the invasive, repeated,
daily blood testing techniques currently used, which in many cases leads to
blood transfusion of the infant. See "Risk Factors." However, because the
medical community is relatively slow to adopt new technologies, there can be no
assurance that practitioners will perceive a need for, or accept, the Company's
technology, or be willing to commit funds to its development or the purchase of
any such completed technology.
Since receiving FDA marketing clearance in the United States, the Company has
undertaken the procedures to obtain required international regulatory clearances
for its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System. In March 1999, the Company received ISO-9001 and EN46001 certifications,
signifying that the Company's New York facility meets important international
quality standards for product design and development, manufacturing, servicing
and distribution. In April 1999, the Company also was granted permission by the
European Union (EU) notified body, TUV Essen, to affix the CE Mark to its
ColorMate(Registered) TLc-BiliTest(Registered Trademark) System.
Manufacturing
One element of the Company's business strategy is to outsource the production of
the components and final assembly of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System and its TLc-Lensette(Trademark)
disposable calibration and verification standard to third-party manufacturers.
In November 1998, the Company reached an agreement with Nova Biomedical
Corporation for the production of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. Nova Biomedical is a medical device
production contractor, is ISO 9001/EN46001 certified, and has advised the
Company that it is in substantial compliance with all applicable regulatory
requirements for the contract manufacture of medical devices for the U.S. and
European Union distribution, including requirements under the FDA's Quality
System Regulation and the requirements applicable to the manufacture of medical
devices for the European Union (including ISO 9001 and EN46001).
Under this renewable, four-year medical device manufacturing agreement, the
contract manufacturer is the exclusive manufacturer/assembler and packager of
two models (a battery powered model and an electrically powered model) of the
Company's ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System for distribution in the United States (subject to limited volume
exceptions with respect to one model of the instrument). The manufacturer also
has a right of first refusal to match third party bids to manufacture/assemble
and package a third model of such instrument and a further right of first
refusal to match third party bids to manufacture/assemble and package the two
models referenced above for distribution outside the United States. In this
regard, subject to any failure of Nova Biomedical to exercise its right of first
refusal to match third party bids (thus permitting the Company to use other
manufacturers), Nova Biomedical is the Company's sole source of supply for the
instruments. Under the agreement, the Company is responsible for providing to
Nova Biomedical, for assembly and packaging, certain component parts.
In February 1999, the first manufacturing run of the Company's
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System (under
the FDA's QSR as well as ISO-9001/EN46001 manufacturing regulatory requirements)
for monitoring newborn jaundice was completed by Nova Biomedical. The Company
commenced shipping the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System to those hospitals having placed purchase orders for the
systems under a limited time price offer which allowed the hospitals to obtain
the device and evaluate its performance during a trial period. The Company also
began in-servicing at hospitals and with physicians who placed initial orders.
In the fourth quarter of 1999 the Company delivered the first 500 commercial
units purchased by DO and began to invoice the first substantial revenues for
the Company from the sale of its medical products.
The Company believes, based on discussions with suppliers of components used in
its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
and published price lists, that the components can be purchased in quantities of
1,000 or more on terms acceptable to the Company. However, there can be no
assurance the Company will be able to obtain such terms or order in such
quantities. Manufacturing of limited quantities of the ColorMate(Registered
Trademark) units would be significantly more expensive due to the higher unit
cost of components ordered in quantities of less than 1,000.
To the extent the Company successfully markets the ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for medical application,
the Company will use the nonproprietary and proprietary components of a portion
of the existing ColorMate(Registered Trademark) units in its possession for the
production of a limited number of such devices under the FDA's QSR and
ISO-9001/EN46001 for early stage marketing and sales efforts and for commercial
use.
In August 1995, the Company established a research and development facility in
Spokane, Washington. This office is staffed, in addition to support personnel,
by two engineers who are former principals of R.B.H. Electronics, one of the
companies which originally engineered and manufactured the Company's original
ColorMate(Registered Trademark) units. These engineers currently are primarily
engaged in developing the mass manufacture prototypes of the Bilirubin LED
Device and the ColorMate(Registered Trademark) LED Device. The Bilirubin LED
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Device is expected to require additional regulatory clearances or approvals.
Intellectual Properties, Patents and Patent Applications Pending
The Company owns U.S. Patent No. 4,909,632 (expiring in 2007) entitled "Method
for Selecting Personal Compatible Colors," U.S. Patents Nos. 5,311,293 (expiring
in 2007), 5,313,267 (expiring in 2011) both entitled "Method and Instrument For
Selecting Personal Compatible Colors" and 5,671,735 (expiring in 2014) entitled
"Method and Apparatus for Detecting and Measuring Conditions Affecting Color."
The Company has developed intellectual property rights in color analysis,
calibration and verification in a number of fields including medical,
biological, dental, cosmetic and materials testing. The intellectual property
rights include trade secrets, know how and 10 pending United States patent
applications. The Company also has filed patent applications in a number of
foreign jurisdictions which correspond, at least in part, to the Company's
United States patents. The Company has been granted European Patent No. 0446512
entitled "Method for Selecting Personal Compatible Colors." That European patent
has been nationalized in Austria, Belgium, France, Germany, Great Britain, Hong
Kong, Italy, Luxembourg, The Netherlands, Spain, Sweden, Switzerland and
Liechtenstein. The Company also has Australian, Canadian, Korean and Mexican
patents corresponding, at least in part, to its U.S. Patent No. 4,909,632,
Australian. Taiwanese and Korean patents corresponding, at least in part, to its
U.S. Patent No. 5,313,267 and a Singapore patent and two Taiwanese patents
corresponding, at least in part, to its U.S. Patent No. 5,671,735 (collectively,
together with the United States patents, the "Patents"). The Company has not yet
been granted any other foreign patents for its Intellectual Properties.
The proprietary information claimed by the Patents includes, among other things:
(i) a method of detecting a medical condition that involves a symptomatic,
detectable change in a test subject's skin coloration, such as a method for
monitoring newborn bilirubinemia (infant jaundice) in an infant test subject,
(ii) a method and instrument for identifying skin color and categories of
individuals, (iii) a method of determining color compatibility of an
individual's skin with non-skin matter and (iv) a method of assigning a skin
color compatibility classification to non-skin matter and color charts and
sample assemblages made by that method. Proprietary information claimed by the
Patents is incorporated in the proprietary software and measurement system used
in the ColorMate(Registered Trademark) units. Although many of the individual
hardware components of the ColorMate(Registered Trademark) System and the
ColorMate(Registered Trademark) TLc-BiliTest (Registered Trademark) System are
public and not proprietary to the Company, the color measurement sensor is
manufactured to proprietary specifications of the Company and when those
individual hardware components are assembled in conjunction with the Company's
proprietary software they form the ColorMate(Registered Trademark) System and
the ColorMate(Registered Trademark) TLc-BiliTest (Registered Trademark) System,
the operation of which is covered by the claims of the Company's patents. The
Company's TLc-Lensette (Trademark) disposable color-calibration and verification
standard is entirely proprietary to the Company because the proprietary color
formulation used is uniquely capable of effectively calibrating the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) system for
use on all human skin colors.
The Company has registered its trademarks COLORMATE, MY COLORS BY CHROMATICS,
TLC-BILITEST and the Baby Face Design in the United States Patent and Trademark
Office ("USPTO"). The Company believes it also has established common law rights
in the following marks: CCBRC, SITE FLAG, TLC, TLC BILI, TLC-LENSETTE, TLC
LENSPAK, TLC SOFT AND TLC TOUCH and has filed applications with the USPTO to
register the following marks: SITE FLAG and TLC BILI. Further, the Company
believes it has copyright protection for all of the software used in the
ColorMate(Registered Trademark) System and the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. After the respective expiration date
of each of the Company's Patents, the proprietary technology and instrumentation
disclosed in each Patent will be available for use by others without
compensation to the Company, unless protected by the claims of other U.S.
patents that may be issued to the Company. The Company has not applied for
patent protection for many aspects of the Intellectual Properties (i.e., its
proprietary trade secrets and other confidential information). The Company
typically imposes on its key employees, consultants and advisers confidentiality
obligations in connection with their employment, consulting or advisory
relationship with the Company. See "Risk Factors Protection of Intellectual
Property."
Competition
The medical device industry in general is intensely competitive. Now that the
Company believes it is in substantial compliance with QSR and other FDA
requirements and is beginning to market and distribute its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for monitoring newborn
infant jaundice in the United States, the Company will compete with other
providers of infant jaundice diagnostic and monitoring products.
As the Company implements its business plan to further commercialize the medical
application for its Intellectual Properties, it will be in a field characterized
by rapidly changing technology, intense competition and extensive research and
development. The Company will be competing with established companies which have
greater financial, technical, manufacturing, marketing, research and development
and management resources, including with respect to the monitoring of infant
jaundice, companies such as Minolta Co., Ltd. ("Minolta"), Air Shields,
Respironics, Inc. ("Respironics"), which recently acquired Healthdyne
Technologies, Inc. ("Healthdyne"), and SpectRx, Inc. ("SpectRx"), among others.
In addition, the invasive laboratory blood test detection methods currently in
use for bilirubin infant jaundice, have already achieved acceptance by and are
in widespread use in the medical community, unlike the Company's proposed
method. See "Risk Factors."
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The Company believes that Minolta developed and Air Shields markets a screening
device, the Minolta Jaundice Meter, to measure the amount of bilirubin in the
skin of a newborn infant to determine whether a serum bilirubin measurement is
required. The Company believes that the measurements obtained by the Minolta
device, unlike the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System, are not used when the infant is being treated by phototherapy
for hyperbilirubinemia, and are affected by the infant's race and skin color,
which the Company believes significantly limits its use in a heterogeneous
population. As a result, the Company believes that the Minolta device is
currently in limited use in the United States and that it is not used at all for
infants who are receiving phototherapy. There can be no assurance that Minolta
will not effect improvements to its device in the future to overcome these
apparent limitations. See "Risk Factors."
Based on public filings, the Company believes that in June 1996, SpectRx entered
into a collaborative arrangement with Respironics in which Respironics was
responsible for regulatory clearance and sales of SpectRx's device for infant
jaundice analysis in the United States and Canada. Based on these filings
SpectRx's infant jaundice device is intended to be a hand-held instrument, which
incorporates a microspectrometer to collect spectroscopic information from the
infant's skin. In February 1999, SpectRx announced that it had obtained 510(k)
clearance for its device and that it would commence U.S. marketing of its device
shortly. SpectRx also announced that during the third quarter of 1998 it entered
into a distribution agreement with Atom Medical Corporation for distribution of
the company's infant jaundice product in Japan, pending regulatory clearance
from Japan's Ministry of Health and Welfare. Also, during the third quarter of
1998 SpectRx announced receipt of regulatory clearance to market its infant
jaundice product in Canada and shipments to Respironics for sale in Canada
commenced in the same quarter. The Company believes that the measurements
obtained by the SpectRx device, unlike the ColorMate(Registered Trademark) TLc-
BiliTest(Registered Trademark) System, are not used when the infant is being
treated by phototherapy for bilirubinemia, which the Company believes
significantly limits its use in monitoring bilirubin infant jaundice. See "Risk
Factors."
The Company's success depends in large part on the acceptance by the medical
community of the Company's new technology. There can be no assurance that the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System will
effectively compete with any currently used systems. Furthermore, many of the
Company's competitors have substantially greater financial, research, technical,
manufacturing, marketing and distribution resources than the Company and have
greater name recognition and lengthier operating histories in the health care
industry. There can be no assurance that the Company will be able to effectively
compete against these and other competitors, including those competitors who
intend to promote their versions of non-invasive devices. Furthermore, there can
be no assurance that the Company's competitors will not succeed in developing,
during commercialization of the Company's products, devices and technologies
that permit more efficient, less expensive non-invasive analysis of bilirubin
(infant jaundice). It is also possible that one or more pharmaceutical or other
health care companies will develop therapeutic drugs, treatments or other
products that will substantially reduce the prevalence of infant jaundice or
otherwise render the Company's products obsolete. Such competition could have a
material adverse effect on the Company's business, financial condition and
results of operation.
The Company's ability to compete is affected by its product development and
innovation capabilities, its ability to maintain or obtain additional regulatory
clearances, as necessary, the marketing and manufacturing capabilities of the
Company, its distributors, and its third party vendors, its ability to protect
the proprietary technology of its products, its ability to attract and retain
skilled employees, and, for products sold in managed care environments, its
ability to maintain current distribution relationships and establish new
distribution relationships.
Government Regulations
The Company's advertising, sales practices, cosmetic products and medical
products (including the labeling and packaging thereof) are and will be subject
to applicable federal, state and local regulation (including regulation by the
FDA, the Federal Trade Commission, and the Federal Communications Commission,
under various laws such as the Fair Packaging and Labeling Act and/or any
comparable state authority, agency or statute) and will be subject to regulation
by comparable foreign authorities if the Company markets its
ColorMate(Registered Trademark) units and products abroad. In addition, the
research, development, testing, production and marketing of the Company's
medical products are subject to extensive governmental regulation in the United
States at the federal, state and local levels, and in certain other countries,
that regulate direct selling activities. Non-compliance with applicable
requirements may result in recall or seizure of products, total or partial
suspension of production, refusal of the government to allow clinical testing or
commercial distribution of products, civil monetary penalties, injunction and
criminal prosecution.
The FDA regulates the development, production, distribution and promotion of
medical devices in the United States. The medical products being developed for
manufacture and sale by the Company are subject to regulation as medical devices
by the FDA. Pursuant to the Federal Food, Drug and Cosmetic Act (the "Act"), a
medical device is classified as a Class I, Class II or Class III device. Class I
devices are subject to general controls, including establishment registration,
device listing, premarket notification (510(k)) clearance (in some cases),
labeling requirements, QSR requirements, prohibitions on adulteration and
misbranding, and reporting of certain adverse events (known as medical device
reporting or "MDR"). In addition to general controls, Class II devices may be
subject to special controls that could include performance standards, postmarket
surveillance, patient registries, guidelines, recommendations and other actions
as the FDA deems necessary to provide reasonable assurance of safety and
effectiveness of the device. Class III devices must meet the most stringent
regulatory requirements and must be approved as safe and effective by the FDA
before they can be marketed. Such premarket (PMA) approval can involve extensive
preclinical and clinical testing to prove safety and effectiveness of the device
and generally is more costly and time consuming than a 510(k) submission.
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Unless otherwise exempt, all medical devices introduced to the market since 1976
are required by the FDA, as a condition of marketing, to secure 510(k) clearance
or premarket approval through a PMA. A product will be cleared by the FDA under
a 510(k) if it is found to be substantially equivalent in terms of safety,
effectiveness, technology and intended use to another legally marketed medical
device that was on the market prior to May 28, 1976 (that subsequently did not
require a PMA application) or to a product that has previously received a 510(k)
and is lawfully on the market. If a product is not substantially equivalent to
such a medical device, and not otherwise exempt, the FDA must first approve a
PMA application before it can be marketed. An approved PMA indicates that the
FDA has determined the product has been proven, through the submission of
clinical data and manufacturing and other information, to be safe and effective
for its labeled indications. The PMA process typically takes more than a year
and typically requires the submission of significant quantities of clinical data
and supporting information. The process of obtaining a 510(k) currently takes,
on average, approximately four months from the date of submission (based on
FDA's fiscal year 1998 figures). However, the review process for a particular
product may be shorter or substantially longer depending upon the circumstances.
Moreover, there can be no assurance that a 510(k) will be cleared. A 510(k) must
include submission of supporting information, including design details and draft
labeling, and may be required to contain safety and efficacy data, possibly from
clinical trials. Product modifications intended to be made to a cleared device
also may require filing and clearance of a new 510(k) submission or filing and
approval of a PMA supplement, during which time the modified product cannot be
commercially distributed.
The 510(k) clearance order obtained from the FDA's CDRH indicates that the
Company's ColorMate(Registered Trademark)TLc-BiliTest(Registered Trademark)
System is a Class II device, subjecting it to "general controls" and "special
controls." Currently, the Company is unaware of any special controls applicable
to the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System. The Company is not currently developing, manufacturing or distributing
any Class III devices, although it may do so in the future. The Company also is
subject to additional FDA and foreign statutes and regulations and/or may be
subject to additional clearances or approvals to the extent the Company
continues its efforts to test, manufacture and license the Intellectual
Properties and lease the ColorMate(Registered Trademark) units to the medical
community in additional or significantly modified forms or for new uses. See
"Risk Factors."
Although the Company has received FDA clearance on its ColorMate(Registered
Trademark)TLc-BiliTest(Registered Trademark) System pursuant to a "substantial
equivalence" determination order, in the form of a letter dated July 24, 1997
from the FDA's CDRH, authorizing the Company to commercially distribute its
device for monitoring newborn infant jaundice by healthcare professionals in the
United States, the Company also must comply with the other applicable statutes
enforced, and applicable rules and regulations promulgated, by the FDA, in order
to legally market the device. The "substantial equivalence" order states that
the Company must comply with the medical device general controls, e.g., device
establishment registration, medical device listing, good manufacturing practices
(QSR requirements), medical device reporting, labeling requirements, and the
statutory prohibitions against adulteration and misbranding.
The process of obtaining marketing clearance or approval for new medical
products from the FDA can be costly and time consuming, and there can be no
assurance that such clearance or approval will be granted for the Company's
future products on a timely basis, if at all, or that FDA review will not
involve delays that would adversely affect the Company's ability to
commercialize additional or significantly modified products or to expand
permitted uses of existing products. Regulatory clearance or approval to market
a product from the FDA may entail limitations on the indicated uses of the
product. The ability to market can be challenged (and possibly withdrawn) by the
FDA due to failure to comply with regulatory standards or the occurrence of
unforeseen problems following initial clearance. The Company may be required to
file further marketing applications with the FDA under certain circumstances,
such as the addition of product claims or product redesign. The FDA also could
limit or prevent the manufacture or distribution of the Company's products, and
has the power to require the recall of such products, given certain
circumstances. FDA regulations depend heavily on administrative interpretation
and there can be no assurance that future interpretation made by the FDA or
other regulatory bodies will not adversely affect the Company. There can be no
assurance the Company will be able to maintain substantial compliance with FDA
requirements.
Since receiving FDA marketing clearance in the United States, the Company has
undertaken the procedures to obtain required international regulatory clearances
for its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System. In March 1999, the Company received ISO-9001 and EN46001 certifications,
signifying that the Company's New York facility meets important international
quality standards for product design and development, manufacturing, servicing
and distribution. In April 1999, the Company also was granted permission by the
European Union (EU) notified body, TUV Essen, to affix the CE Mark to its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System.
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company and its distributors and agents obtained and
must maintain required regulatory registrations and/or approvals and must
otherwise comply with extensive regulations regarding safety, efficacy and
quality in those jurisdictions. Specifically, certain foreign regulatory bodies
have adopted various regulations, among other things, governing product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. These regulations vary from
country to country. To market its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System in the European Union, the Company
sought ISO-9001/EN46001 certification and the right to affix the CE mark.
ISO-9001/EN46001 certification recognizes that the Company has established a
quality system for the design, development, manufacturing, servicing and
distribution of its medical device. The CE mark is a symbol of quality and
compliance with applicable European Union medical device directives. In March
1999, the Company received ISO-9001/EN46001 certification and passed a product
inspection in February 1999
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for purposes of receiving the right to affix the CE mark to such specific
inspected product. In April 1999, the Company was granted permission by the EU
notified body, TUV Essen, to affix the CE Mark to its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System. Failure to maintain
ISO-9001/EN46001 certification, CE mark rights or other foreign regulatory
registrations or approvals for the Company's medical products would prevent the
Company from marketing its medical products abroad, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will obtain any other
required regulatory registrations or approval in such countries or that it will
not be required to incur significant costs in obtaining or maintaining such
regulatory registrations or approvals. Delays in obtaining any registrations or
approvals required to market the Company's products, failure to receive these
registrations or approvals, or future loss or previously obtained
certifications, rights, registrations or approvals could have a material adverse
affect on the Company's business, financial condition and results of operations.
The Company may rely on its third-party foreign distributors to comply with
certain foreign regulatory requirements. The inability or failure of the Company
or such foreign distributors to comply with varying foreign regulations or the
imposition of new regulations could restrict the sale of the Company's products
internationally and thereby adversely affect the Company's business, financial
condition and results of operations.
The Company and any third party with which it has made contract manufacturing or
other regulated arrangements will be required to adhere to applicable FDA
regulations, including the QSR requirements and similar regulations in other
countries, which include, among other things, testing, control, and
documentation requirements. Ongoing compliance with QSR requirements and other
applicable regulatory requirements will be strictly enforced in the United
States through periodic inspections by federal and possibly state agencies,
including the FDA, and in foreign jurisdictions by comparable agencies. The FDA
revised the QSR requirements in 1996 which increases the cost of regulatory
compliance for the Company. Failure to comply with applicable regulatory
requirements could result in, among other things, warning letters, injunctions,
civil monetary penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant premarket clearance
or premarket approval for devices, possible rescission or withdrawal of
clearances or approvals previously obtained and criminal prosecution. The
restriction, suspension or revocation of regulatory clearances or approvals, or
government enforcement actions due to any failure to comply with regulatory
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Future products developed by the Company and products currently under
development may require FDA clearance through either 510 (k) or PMA application
procedures. There can be no assurance that marketing clearances or approvals
will be obtained on a timely basis or at all. Delays in receiving such
clearances or approvals could have a material adverse effect on the Company.
The FDA also regulates the commencement and conduct of clinical investigations
to determine the safety and effectiveness of unapproved investigational devices,
including investigations involving new intended uses of previously cleared or
approved devices. Clinical investigations are regulated by the FDA under the
Investigational Device Exemptions ("IDE") regulations. The IDE regulations
include significant requirements that must be met, including, but not limited
to, informed patient consent, institutional review board ("IRB") review and
approval of research protocols, reporting obligations to the FDA, recordkeeping
requirements and prohibitions against commercialization of investigational
devices. A sponsor must obtain FDA approval of an IDE application before
starting the investigation, unless the device is found to be a non-significant
risk ("NSR") device by the sponsor and each IRB that reviews and approves the
study. The FDA, however, has the authority to determine that a study designated
as involving an NSR device by the sponsor and IRBs involves a significant risk
device, and to require that an IDE application be submitted and approved before
the study can resume. In addition, a study of an NSR device must still comply
with the above-referenced and certain other IDE requirements. A violation of the
IDE regulations can result in a variety of sanctions, such as warning letters,
prohibition against additional clinical research, the refusal to accept data and
criminal prosecution. The Company also may provide devices for use in FDA
approved or recognized clinical trials as a contract manufacturer.
There can be no assurance that any clinical study will comply with all elements
of the FDA's IDE regulations, that a study will provide evidence of the safety
or effectiveness of the device, or that a study will ultimately result in the
clearance or approval of the device.
A federal law commonly known as the "anti-kickback statute" prohibits the offer,
solicitation, payment or receipt of anything of value (direct or indirect, overt
or covert, in cash or in kind) which is intended to induce business for which
payment may be made under a federal health care program, i.e., any plan or
program that provides health benefits, whether directly or indirectly, through
insurance, or otherwise, which is funded directly, in whole or in part, by the
United States Government (e.g., Medicare, Medicaid and CHAMPUS). The type of
remuneration covered by the anti-kickback statute is very broad. It includes not
only kickbacks, bribes and rebates, but also proscribes any remuneration,
whether made directly or indirectly, overtly or covertly, or in cash or in kind.
Moreover, prohibited conduct includes not only remuneration intended to induce
referrals, but also remuneration intended to induce purchasing, leasing,
arranging or ordering of any goods, facilities, services, or items paid for by a
federal health care program.
In part to address concerns regarding the implementation of the anti-kickback
statute, in 1991, the federal government published regulations that provide
exceptions or "safe harbors" for certain transactions that are deemed not to
violate the anti-kickback statute. Among the safe harbors included in the
regulations are transactions involving discounts or the payment of certain
administrative fees to group purchasing organizations. While the failure to
satisfy all the criteria for a safe harbor does not necessarily mean that an
arrangement is unlawful, engaging in a business practice for which there is a
safe harbor may be regarded as suspect if the practice fails to meet each of the
prescribed criteria of the safe harbor.
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Violations of the statute are punishable by civil and criminal penalties and/or
exclusion of the provider from participation in the federal health care
programs. Also, there is the risk that, in a civil lawsuit to enforce a contract
that contains a structure in violation of the anti-kickback statute, a court
might conclude that the contract is unenforceable as against public policy.
Congress directed the Secretary of the United States Department of Health and
Human Services ("HHS") to issue advisory opinions regarding compliance with the
anti-kickback statute. Failure of a party to seek an advisory opinion, however,
may not be introduced into evidence to prove that the party intended to violate
the anti-kickback statute. Several states also have statutes or regulations
prohibiting financial relationships with referral sources that are not limited
to services for which a federal health care program pays.
While the Company believes its marketing programs meet the requirements of the
anti-kickback statute and its implementing regulations, there is no guaranty
that the HHS Office of the Inspector General would view all of the Company's
marketing arrangements as meeting all of the requirements of the appropriate
safe harbors. The Company has not sought, and has no present intention to seek,
an HHS advisory opinion regarding any aspect of its current marketing
arrangements. A finding of noncompliance with the anti-kickback laws by federal
or state regulatory officials, including noncompliance with appropriate safe
harbors, could have a material adverse effect on the Company.
The Company's products are intended to be purchased or leased by health care
providers or suppliers which submit claims for reimbursement for such products
or their use to third-party payors such as Medicare, Medicaid and private health
insurers. In the United States, patients, hospitals and physicians who purchase
medical devices, generally rely on such third-party payors to reimburse them for
all or a portion of the cost of the medical device or its use. Reimbursement for
devices (or their use) that have received FDA clearance has generally been
available in the United States. Third-party payors are increasingly challenging
the prices charged for medical products and services. There can be no assurance
that the Company's products will be considered cost effective and that
reimbursement to the consumer will be or continue to be available, or sufficient
to allow the Company to sell its medical device products on a competitive basis.
Moreover, obtaining and maintaining health care payors' approval of
reimbursement for the Company's products or their use, and the level of
reimbursement made available, will be an important factor in establishing
pricing, structure and market acceptance. The Company is unable to predict what
changes will be made in the reimbursement methods utilized by third-party health
care payors. Furthermore, the Company could be adversely affected by changes in
reimbursement policies of governmental or private health care payors. Although
the Company has no knowledge that third-party payors will adopt measures that
would limit coverage of, or reimbursement for, its products or their use, any
such measures that were applied to the Company's products could have a material
adverse effect on the Company.
American Medical Association ("AMA") CPT codes are generally used to facilitate
the processing of insurance reimbursement claims and to provide a simplified
reporting procedure. However, assignment of a code does not assure that the
insurer will provide reimbursement or that the AMA endorses the medical
procedure at issue. In March 1998, the Company was assigned AMA CPT Code 82250
for processing claims for use of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. The same code is assigned for the
reimbursement of laboratory blood tests currently used to monitor newborn
bilirubinemia (infant jaundice). Subsequently, the AMA informed the Company that
CPT Code 84999 ("Unlisted Chemistry Procedure"), not Code 82250, was the
assigned code. However, the AMA indicated that it was reviewing coding in this
area generally. The Company believes the original Code 82250 is correct and will
continue its efforts to have the AMA reassign this code, or apply for a new
code. There can be no assurance that the Company will be reassigned the original
CPT Code 82250. Claims for reimbursement under CPT Code 84999 may not be as
easily processed for reimbursement as claims made under CPT Code 82250.
If the Company moves forward with European Union commercialization plans, and if
the Company obtains necessary regulatory marketing approvals from other foreign
countries, market acceptance of the Company's products in international markets
will be dependent in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country and include both
government sponsored health care and private insurance. Although the Company
intends to seek international reimbursement approvals, there can be no assurance
that such approvals will be obtained in a timely manner, if at all.
The Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. Although the Company
anticipates that hospitals and physicians will justify the use of the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System by
clinical benefits that the Company believes will be derived from the use of the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System,
there can be no assurance that this will be the case.
Because the cost of health care delivery has been rising steadily and because
the cost of a significant portion of medical care in the United States and other
countries is typically funded by governmental insurance programs, there have
been a number of government initiatives to reduce health care costs. Congress
and various state legislatures have proposed changes in laws and regulations
that, if ever enacted, could effect major restructuring of the health care
industry. Although many of these proposals may seek to maintain or expand access
to health care services, the common objective of the proposed legislation is to
achieve cost containment in the health care sector. Changes in governmental
support of health care services, the methods by which such services are
delivered, the prices for such services or the regulations governing such
services or mandated benefits all may have a material adverse effect on the
Company. Even if the ultimate impact of any such changes on net sales is
positive, no assurance can be given that the costs of complying with possible
new requirements would not have a negative impact on the Company's future
earnings. No assurance can be given that any such legislation will not have a
material adverse effect on the Company.
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Employees
The Company currently employs 37 persons on a full-time basis, 18 of which are
medical marketing or regulatory personnel. None of the Company's employees is
represented by a union. The Company believes that its relationship with its
employees is good. The Company intends to hire additional employees and
consultants to carry out its proposed business plans. Such persons will be
compensated with salaries, or on a fee or commission basis, as applicable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Recent Events
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 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.
For as long as the Debentures are outstanding, the Company's obligation to pay
the principal of and interest on the Debentures shall be senior in right of
payment and priority to any current or future (i) obligations of the Company to
commercial banks, institutional lenders or other lenders for borrowed money,
(ii) obligations of the Company to commercial banks, institutional lenders or
other lenders under guarantees by the Company of obligations of wholly-owned
subsidiaries of the Company to any such lenders and (iii) convertible preferred
equity or convertible debt security issued by the Company.
The Company filed a registration statement for all of the shares of Common Stock
issuable upon the conversion of the outstanding principal amount of and a
portion of the accrued interest on the Debentures, which registration statement
was declared effective by the Securities and Exchange Commission (the
"Commission") on January 28, 2000.
An "Event of Default" under the Debentures shall constitute any of the
following: (i) failure by the Company to make any payment (whether principal,
interest or otherwise) on the Debentures when due and such default continues for
ten days; (ii) breach of any of the representations or warranties made by the
Company in the Debentures or Subscription Agreement therefor, or in any written
statements furnished by the Company in connection with the financing; (iii) the
Company shall fail to perform its agreements or obligations under the Debentures
or the Subscription Agreement and such failure shall continue for 30 days; (iv)
the Company shall (1) make an assignment of the benefit of its creditors or
commence proceedings for its dissolution; or (2) apply for or consent to the
appointment of a trustee, liquidator, custodian or receiver thereof, or for a
substantial part of its property or business; (v) a trustee, liquidator,
custodian or receiver shall be appointed for the Company or for a substantial
part of its property or business without its consent and shall not be discharged
within ninety (90) days after such appointment; (vi) bankruptcy, reorganization,
insolvency or liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law of the relief of debtors shall be instituted by or
against the Company and, if instituted against the Company, shall not be
dismissed within ninety (90) trading days after such institution or the Company
shall by any action or answer approve of, consent to, or acquiesce in any such
proceeding or admit the material allegations of, or default in answering a
petition filed in any such proceeding; or (vii) the Company shall dispose of all
or substantially all of its assets in one or more transactions or shall redeem
more than a de minimis amount of its outstanding shares of capital stock.
Following the occurrence of any Event of Default which is not waived by the
Debenture holders, the holders may accelerate the maturity of the Debentures,
whereupon all principal and interest thereunder shall be immediately due and
payable. See "Risk Factors."
On June 15, 1999, the Company completed a private placement of 40,000 shares of
convertible preferred stock (the "Preferred Stock") to an affiliate of Lehman
Brothers, Inc. for aggregate proceeds of $4 million. The Preferred Stock is
convertible into shares of the Company's Common Stock at a price of $6.29 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 its
Common Stock
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(excluding options under the Company's 1992 Stock Option Plan (the "1992 Plan")
and a limited number of other securities excluded under the terms of the
agreement with the Lehman Brothers affiliate) at a price of less than $6.29 per
share to the price at which the Company issues or agrees to issue the
lower-priced shares of its Common Stock or securities convertible or
exchangeable for shares of its Common Stock. The Preferred Stock is redeemable
in cash for an amount equal to $115 per share of Preferred Stock on the third
anniversary of the date of initial issuance if not sooner converted unless the
Company elects in its discretion to extend the redemption date to the fifth
anniversary of the date of initial issuance. The Preferred Stock is also subject
to mandatory conversion into shares of the Company's Common Stock at its 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 $9.44
per share. The Preferred Stock is not entitled to any voting rights except as
otherwise required by applicable law and is 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 its option.
In addition to the shares of Preferred Stock, on June 15, 1999 the Company also
issued an aggregate of 220,690 warrants (the "Warrants") to purchase shares of
its Common Stock to the Lehman Brothers affiliate. An additional 50,000 Warrants
were issued to the Lehman Brothers affiliate as compensation for services
rendered in connection with this placement of Preferred Stock. The Warrants
issued have a five-year term unless sooner exercised, are exercisable for shares
of the Company's Common Stock at a price of $6.99 per share, subject to
adjustment in the same circumstances as the shares of the Preferred Stock and
are subject to mandatory exercise into shares of the Company's Common Stock at
its 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 $13.98. In connection with this private placement, the Company
filed registration statements for the shares of Common Stock issuable upon the
conversion of the shares of Preferred Stock and exercise of the Warrants, which
registration statements were declared effective by the Commission on January 28,
2000 and February 8, 2000.
On February 11, 2000, the Company completed a private placement of 40,000 shares
of Preferred Stock and 254,372 Warrants to purchase shares of the Company's
Common Stock to the Lehman Brothers affiliate for aggregate proceeds of $4
million. The terms of the Preferred Stock and Warrants issued on that date are
identical to the terms of the Preferred Stock described above. An additional
50,000 Warrants were issued to the Lehman Brothers affiliate as compensation for
services rendered in connection with this placement of Preferred Stock. In
connection with this private placement, the Company agreed to register the
shares of its Common Stock issuable upon the conversion of the Preferred Stock
and Warrants for resale by the Lehman Brothers affiliate under the Securities
Act of 1933 and to use its best efforts to maintain the effectiveness of this
registration statement until the date that all of the shares of the Company's
Common Stock issuable upon the conversion of the Preferred Stock and Warrants
have been sold.
On December 31, 1998, the Company's Board of Directors adopted a Shareholders'
Rights Plan (the "Plan") designed to protect shareholders from various abusive
or coercive takeover tactics, including attempts to acquire control of the
Company at an inadequate price. The Plan is also intended to provide additional
protection from partial or two-tiered takeover attempts, coercive stock
accumulation programs, street-sweeps, squeeze-outs and other tactics that may be
used to gain control of the Company without offering an adequate price to all
shareholders. The Plan is similar to plans adopted by many public companies.
Under the Plan, each shareholder will receive a dividend of one right for each
share of the Company's outstanding Common Stock (a "Right"). Subject to the
terms of the rights agreement between the Company and its transfer agent (the
"Rights Agreement"), each Right will entitle the holder to purchase one
one-hundredth of a share of the Company's new Class B Series 1 Preferred Stock
at an initial exercise price of $28. Until the Rights become exercisable, they
will be represented by, and trade with, the outstanding Common Stock; the
Company does not anticipate issuing separate certificates for the Rights at this
time.
Initially, the Rights are attached to the Company's Common Stock and are not
exercisable. They become detached from the Common Stock, and become immediately
exercisable, (i) following expiration of the Board of Directors' right to redeem
the Rights during the ten-day window period (the "Window Period"), or any
extension of the Window Period, after any person or group (other than the
exempted shareholder) becomes the beneficial owner of 20 percent or more of the
Company's Common Stock (other than acquisitions which are approved in advance by
the Board of Directors), or (ii) ten days after any person or group announces a
tender or exchange offer that would result in that same beneficial ownership
level (other than pursuant to certain permitted offers).
If a person (other than the exempted shareholder or pursuant to a pre-approved
acquisition) becomes a 20 percent owner in the Company, all Rights holders,
other than such person, will be entitled to purchase shares of the Company's
stock at a discounted price. If the Company is acquired in a merger after such
an acquisition, all Rights holders except the buyer also will be entitled to
purchase stock in the buyer at a discount.
The Plan exempts any existing shareholder (including Darby Macfarlane, the
Company's founder and Chief Executive Officer, her heirs and entities controlled
by her, currently the owner of approximately 861,895 shares of the Company's
Common Stock, 1,380,000 shares of the Company's Class A Preferred Stock and
450,000 options granted pursuant to the 1992 Plan), so long as the number of
shares of Common Stock beneficially owned by that shareholder does not exceed,
with respect to all such exempt shareholders other than Mrs. Macfarlane, by more
than
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ten percent (by acquisition) the number of shares of Common Stock beneficially
owned by that shareholder as of December 30, 1998. In the case of Mrs.
Macfarlane, such ownership cannot exceed by more than one percent the sum of (i)
the shares of Common Stock beneficially owned by Mrs. Macfarlane as of December
30, 1998, plus (ii) all shares acquired upon exercise of options issued to Mrs.
Macfarlane and her heirs, relatives and entities controlled by her, including,
without limitation, options issued under the 1992 Plan, plus (iii) all shares
issued upon conversion of the Class A Preferred Stock owned by Mrs. Macfarlane
and her heirs, relatives and entities controlled by her.
The distribution of Rights was made on January 11, 1999 to shareholders of
record of Common Stock on that date, and shares of Common Stock that are newly
issued after that date will also carry Rights until the Rights become detached
from the Common Stock. The Rights will expire on January 11, 2009. The Rights
distribution is not taxable to shareholders. The Company may redeem the Rights
for $0.001 each at any time during the Window Period, or any extension thereof,
after a buyer acquires a 20 percent position in the Company, and under certain
other circumstances.
In February 1998, at a special meeting of shareholders held at the Company's
offices in New York, New York (the "Special Meeting"), the shareholders
approved, among other things, a revision to the Company's capital structure to
effect a three-for-two forward stock split of the Company's issued and
outstanding shares of Common Stock (the "Stock Split"). The Stock Split was
effective as of February 13, 1998.
Additionally, at the Special Meeting, the shareholders approved an amendment to
the Company's Certificate of Incorporation (i) to extend for two years from
December 31, 1998 to December 31, 2000 the expiration date of the period during
which the Company's outstanding Class A Convertible Preferred Stock can become
convertible into Common Stock upon the Company's achieving certain stock
performance or earnings goals, (ii) to extend the date by which the Company is
to call the Class A Convertible Preferred Stock for redemption from December 31,
1998 to December 31, 2000, (iii) 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 (iv) to delete from
the formula for the calculation of the earnings goal that need to be satisfied
to trigger the conversion feature of the Class A Convertible Preferred Stock,
extraordinary items and revenues generated by businesses acquired by the
Company.
Lastly, at the Special Meeting, the shareholders approved an amendment to the
1992 Plan to increase the number of shares of Common Stock with respect to which
options may be granted from 3,500,000 to 4,500,000 (later increased to 5,500,000
at the Company's Annual Meeting of Shareholders held on December 20, 1999).
Beauty-Aid Products
The ColorMate(Registered Trademark) System. Although it is not currently
expanding in this activity as a result of its efforts to market commercially the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System for
medical application, the Company has engaged in efforts to commercialize its
Intellectual Properties for beauty-related applications. The
ColorMate(Registered Trademark) System consists of a color measurement
instrument to be held against a subject's skin, hair, teeth or sample, a series
of filters and a computer and related proprietary software all housed in a
portable briefcase. The color measurement instrument used within the
ColorMate(Registered Trademark) unit or as a handheld battery operated
instrument is utilized in the Company's medical, cosmetic and other
applications. The instrument is held against the subject's skin, hair, teeth or
sample and performs color measurement of coloration and luminosity to a
laboratory standard of accuracy. In skin color analysis, the software then
analyzes the color measurements so obtained and assigns the subject to one of
the approximately 200 skin color categories identified by the Company through
its research and development effort.
In the beauty-related applications the ColorMate(Registered Trademark) System
matches each skin color type to a range of pre-tested compatible product colors.
The unit is equipped with a printer and can provide the subject with a record of
his or her skin color category and color compatible shades of specific products
(including the Company's cosmetic products) appropriate for that skin color
category and other product colors.
The ColorMate(Registered Trademark) System also can be used to perform
chromaticity studies of various product lines in manufactured or applied forms
(for example, tooth enamel, hair coloring, hosiery, other cosmetic lines) on
behalf of licensees. This capability permits the organization of the licensee's
products into precise color categories so that the consumer can be assisted with
proper color coordination within the licensee's product line.
My Colors by Chromatics(Registered Trademark) Cosmetics Line. The Company's
cosmetics line ("My Colors by Chromatics (Registered Trademark)") divides the
product shades into four color classifications. The product shades recommended
by the ColorMate(Registered Trademark) System are individually prescribed for
color coordination with each of the approximately 200 skin color categories. The
Company's cosmetic line is precisely formulated and balanced to provide color
coordinated products for the skin color of all races. In the past the Company
has also marketed, through the use of the ColorMate(Registered Trademark)
System, a line of fashion swatch packs consisting of 36 objectively measured
colors, coordinated with each other and with the consumer's skin tone color to
aid the consumer in selecting color compatible fabrics and fashion accessories.
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In December 1996, the Company entered into a lease and license agreement with
Gordon Laboratories, Inc. granting Gordon a license and lease of the Company's
Intellectual Properties and the ColorMate(Registered Trademark) System to
formulate and develop custom blended cosmetic foundations for use in a field
test retail program.
Other Potential Products and Applications. The Company has conducted research
and development and developed engineering specifications regarding a hand-held
light-emitting diode version of the ColorMate(Registered Trademark) System (the
"LED Device"). This version may be marketed for medical use after collecting
further clinical testing and is subject to FDA clearance (the Bilirubin LED
Device). For non-medical applications, the LED Device may be marketed in various
industries including the dental, beauty aid and fashion industries and also may
be marketed directly to consumers for home and personal use. The Company expects
the new LED versions will also be capable of being manufactured at a cost
substantially less than the cost incurred in manufacturing the Company's
existing ColorMate(Registered Trademark) System units because of technological
improvements which have resulted in substantially lower component part costs.
The Company believes that the Intellectual Properties and ColorMate(Registered
Trademark) System have commercial applications in (i) healthcare relating to the
non-invasive detection and monitoring of certain chromogenic diseases, such as
skin diseases, tuberculosis and anemia and (ii) dental care (i.e., the color
matching of teeth and tooth enamel). Additional medical applications for the
Intellectual Properties require extensive and lengthy clinical testing and will
be subject to various federal and state regulatory requirements, including FDA
clearances and approvals, and may be subject to comparable foreign regulatory
approvals to the extent the Company markets such applications abroad. There can
be no assurance that the Company will obtain any additional FDA or foreign
approvals or clearances or will be able to comply with such regulatory
requirements for additional applications.
In July 1998, following IRB approval from Mt. Sinai, Dr. Mark Lebwohl, chairman
of the Department of Dermatology at Mt. Sinai, commenced ongoing clinical trials
of the non-invasive ColorMate(Registered Trademark) System for monitoring
various skin diseases and patient tolerance for levels of phototherapy by
quantifying the amount of pigmentation and hence, photo-sensitivity in the skin
of patients. This potential dermatological application of the Company's
proprietary technology and device would be for patients suffering from a variety
of diseases including psoriasis, excema, cutaneous T-cell lymphoma, vitiligo and
others. Post inflammatory hyperpigmentation also would be a condition subject to
monitoring by the ColorMate(Registered Trademark) System. The non-invasive
measurement of the skin by the Company's ColorMate(Registered Trademark) System
will be tested and verified against minimal erythema dose-testing intended to be
used in support of future applications for FDA marketing clearance of the
Company's technology for such uses. There can be no assurance that the Company
will obtain any additional FDA or foreign approvals or clearances or will be
able to comply with such regulatory requirements for such uses.
In 1990, the Company concluded a feasibility study for Dentsply, Inc., a dental
supply company, for use of the Intellectual Properties and ColorMate(Registered
Trademark) units in the color measurement and matching of human tooth color and
tooth enamel color for dentures, bonding, inlays and caps, for use by dentists
and dental laboratories. This study concluded that the ColorMate(Registered
Trademark) units could accurately and reproducibly measure the colors of both
human teeth and tooth enamels, but needed further design research and
engineering studies to develop a stabilized housing system for such a small area
of measurement. The project was discontinued by both companies at that time due
to an inability to agree on financial terms for the project. The Company is in
preliminary discussions with dental supply distribution companies with respect
to the possible development of prototypes for dental applications and the
marketing of such application. There can be no assurance that the Company will
be able to commercialize this application.
The Company also believes that the Intellectual Properties and
ColorMate(Registered Trademark) System may have commercial applications in
industrial color measurement applications, in order to achieve and confirm
uniformity of color shades within a given product line or between two products
of the same line (i.e., paint, textile and food products). To that end, the
Company intends to increase its efforts to lease the ColorMate(Registered
Trademark) System and license the Intellectual Properties, including the
Company's chromaticity study capabilities, to industrial companies such as
paint, textile and food companies, that use or could use existing color
measurement technologies in the manufacturing and marketing of their own
products. Many companies in these industries currently use color measurement
instruments to ensure uniformity of product line colors (e.g., that
manufacturing facilities are producing different dye lots and/or goods of the
same color). These instruments are generally available at prices well in excess
of the price at which the Company would market the ColorMate(Registered
Trademark) System for such application, because the Company has been able to
mass manufacture its color measurement technology, thereby taking advantage of
the economies of scale and lower unit prices available through large volume
orders from component parts suppliers. In addition, the ColorMate(Registered
Trademark) System provides machine-to-machine stability and reproducibility
(i.e., that each machine will achieve results consistent with that of other
machines), whereas the competing color measurement instruments available today
generally cannot produce such consistent machine-to-machine results without
complex inter-machine calibration adjustments.
Risk Factors
Limited Operating History. The Company has a limited operating history upon
which its prospects can be evaluated. Such prospects must be considered in light
of the substantial risks, expenses and difficulties encountered by entrants into
the medical device industry, which is characterized by an increasing number of
participants, intense competition and a high failure rate. Until 1986, the
Company was principally engaged in research and development relating to the
Intellectual Properties, ColorMate(Registered Trademark) units and the Company's
Beauty-Aid Products. From early 1986 through October 1987, the Company was
engaged in limited test-marketing of certain of the Intellectual
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Properties and Beauty-Aid Products through its former licensees. From October
1987 until June 1991, the Company was principally engaged in the Avon Project.
Since 1991, the Company has been engaged in the research and development of its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System for
the monitoring of newborn bilirubinemia (infant jaundice), the development of
prototypes of additional versions of the ColorMate(Registered Trademark) unit
and the refinement of its technologies for other applications. The Company has
only recently begun to generate material revenues and there can be no assurance
it will be able to continue to do so in the future. The Company's business is
subject to the risks inherent in the development of new products using new
technologies and approaches, many of which are beyond the Company's control,
such as unanticipated development, manufacturing and regulatory delays and
expenses. There can be no assurance that unforeseen problems will not develop
with these technologies or applications, that the Company will be able to
successfully address technological challenges it encounters in its research and
development program or that commercially feasible products will ultimately be
successfully developed and marketed by the Company.
Operating Losses. The Company has incurred significant losses from operations
for the years ended December 31, 1999 and December 31, 1998 ($12,808,000 and
$7,284,800, respectively). The Company anticipates incurring substantially
increased operating expenses as it attempts to expand its marketing and sales
activity, incurs manufacturing expenses for the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System and otherwise continues to implement
its business plan, including for the medical application involving the
monitoring of newborn bilirubinemia (infant jaundice). There can be no assurance
the Company will not continue to incur such losses or will ever generate
revenues at levels sufficient to support profitable operations.
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 additional costs and
expenses in connection with FDA manufacturing and other regulations, state
regulatory requirements and foreign market clearances and other requirements.
Additional expenses are anticipated in connection with certain international
multicenter studies being conducted on the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. See "Business." In addition, the
Company expects to incur significant expenses relating to manufacturing
expenses, product 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 also anticipates significantly higher compensation
expenses in connection with increased hiring of staff. 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. The Company also anticipates
further 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."
Need for Additional Financing; Cessation of Operations. The Company has limited
resources and has not been able to finance its activities with cash flow from
operations. There can be no assurance that proceeds from warrants issued
previously by the Company to a placement agent (the "Placement Agent Warrants"),
Debentures, Preferred Stock or Warrants, together with any anticipated sales
revenues, future distributor payments and/or additional financing, if any, will
be sufficient to fund operations until December 31, 2000, that sufficient sales
levels, if any, will be achieved thereafter to fund operations or that the
Company will not incur additional unanticipated expenses. In this regard, if the
Company is unable to successfully market its Intellectual Properties,
ColorMate(Registered Trademark) units and Beauty-Aid Products, and in
particular, its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System for monitoring of newborn bilirubinemia (infant jaundice), it
is extremely doubtful it will be able to obtain additional future financing and,
at such point, may have to cease operations. The Company's continued operation
will depend on the successful marketing of the ColorMate(Registered Trademark)
unit, its ability to obtain significant commercial sales of the Beauty-Aid
Products and/or licensing and leasing fees from its Intellectual Properties and
the ColorMate(Registered Trademark) units, and the availability of future
financing. The Company expects that, in addition to the Placement Agent
Warrants, Debentures, Preferred Stock and Warrants, further financing will be
required to successfully commercialize the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System and any additional medical application
of its technologies. There can be no assurance that the Company will be able to
obtain additional financing, such commercial sales or fees, in which case the
Company's operations would be materially adversely affected and it may be forced
to significantly curtail and/or cease operations.
Under the terms of the Company's manufacturing agreement it must provide its
manufacturing partner with a number of key component parts to be assembled into
its ColorMate(Registered Trademark) System and its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System. Without the funds to
provide these component parts, the Company's products cannot be manufactured and
it will be unable to fulfill its obligations to its distribution partner. The
terms of the Preferred Stock that require a downward adjustment in the
conversion price if the Company issues shares of Common Stock at a price of less
than $6.29 per share will increase the cost to the Company of any subsequent
equity financing effected at less than $6.29 per share. If the Company fails to
make any payment required or if the Company is otherwise in default under the
manufacturing and distribution agreements relating to its ColorMate(Registered
Trademark) System and its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, the other parties will have the right
to terminate the agreements. Termination of any of these agreements would have a
material adverse effect on the Company's business by rendering it unable to
manufacture and distribute its ColorMate(Registered Trademark) System and its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System until
replacement agreements were entered into.
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Additional Funds Required if the Debentures and Preferred Stock Are Not
Converted Prior to Maturity. The Company will be obligated to repay the holders
of the Debentures $7,100,000 in cash on the April 15, 2002 maturity date unless
they elect to convert or the Company is able to compel conversion. Under the
terms of the Preferred Stock private placements, the Company will be obligated
to repay the holder $4,600,000 on June 15, 2002 and $4,600,000 on February 11,
2003 unless it elects to convert the Preferred Stock or the Company is able to
compel conversion. Each of the Preferred Stock redemption dates may be postponed
at the Company's option for two years, subject to the accrual of an 8% dividend.
In the event that the Company postpones the redemption dates of the Preferred
Stock, it must pay to the holder $5,240,000 on June 15, 2004 and $5,240,000 on
February 11, 2005.
The holders of the Debentures generally will not elect to convert unless the
market price of the Company's Common Stock exceeds $5.00 per share at the time
of conversion. Similarly, the holder of the Preferred Stock generally will not
elect to convert unless the market price of the Company's Common Stock exceeds
$6.29 per share at the time of conversion. In addition, if an Event of Default
occurs with respect to the Debentures prior to the stated maturity date the
holders of the Debentures may elect to accelerate the maturity of the Debentures
with the effect that the principal amount and all accrued but unpaid interest
would become immediately due and payable. There can be no assurance that the
Company would have sufficient funds available to satisfy these obligations.
Failure to satisfy these obligations would have a material adverse effect on the
Company's business and could force the Company to close its operations and seek
protection from its creditors under applicable bankruptcy laws.
No Assurance of Successful Commercialization of ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. The Company's current ability to
generate revenues and to achieve profitability and positive cash flow in the
immediate future substantially will depend on the successful introduction of the
medical application of its technology to monitor newborn bilirubinemia (infant
jaundice). Although the Company is aware that studies have been conducted on
non-invasive transcutaneous bilirubinometer devices other than the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System and
that some of these devices have received FDA marketing clearance, the Company
believes the ability of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System to provide non-invasive monitoring for
babies over a wide range of gestation, in babies of all racial categories and in
babies receiving phototherapy, distinguishes it from the other existing
non-invasive bilirubinometers with FDA clearance for commercial marketing. While
the Company believes the non-invasive nature of its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for monitoring newborn
bilirubinemia (infant jaundice) provides benefits to patients, no assurance can
be given that the medical community will accept and support the Company's
medical device. There is no assurance that the Company's ColorMate(Registered
Trademark) Device for newborn bilirubinemia (infant jaundice), or other future
medical applications of the Company's technology will be capable of being
produced in commercial quantities at acceptable costs. There can be no assurance
that the existing medical applications for monitoring newborn bilirubinemia
(infant jaundice), or for future applications even if all regulatory and
reimbursement approvals are obtained, will be successfully marketed or achieve
any significant degree of market acceptance among physicians, health care payors
and others. The medical community generally has had limited exposure to the
Company and its proposed medical application. Because the medical community is
generally relatively slow to adopt new technologies, procedures or devices, the
Company might be unable to gain access to potential customers to demonstrate the
operation and efficacy of its Intellectual Properties in the medical field. Even
if the Company gains access to sufficient potential customers, no assurance can
be given that members of the medical community will perceive a need for or
accept the Company's proposed medical application.
Physicians and other health care professionals will not recommend or use the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System unless
they determine, based on experience, clinical data, relative cost, and other
factors, that the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System is an attractive alternative for reducing the current
traumatic blood tests that have a long history of safe and effective use. The
Company believes that recommendations by physicians and clinicians will be
essential for the market acceptance of these products, but there can be no
assurance that any such recommendations will be obtained. To the extent the
Company is able to market and distribute its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, broad market acceptance of the
Company's device will require the training of numerous physicians and
clinicians, and the time required to complete such training could result in a
delay of successful commercial distribution to the medical market. Moreover,
obtaining and maintaining health care payors' approval of reimbursement for the
Company's products, and the level of reimbursement made available, will be an
important factor in establishing pricing, structure and market acceptance. In
addition, purchase decisions for the device will be greatly influenced by health
care administrators who are subject to increasing pressures to reduce costs.
Some purchasers, such as hospitals, pediatrician's offices and home health care
facilities, also might be reluctant to purchase products from a company that has
not demonstrated the ability to satisfy ongoing delivery requirements. In
addition, hospitals, clinics and pediatricians may be unwilling or unable to
commit funds to the purchase of the Company's ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System due to institutional budgetary
constraints.
User acceptance of these products will depend on many factors, including
physician recommendations, the degree, rate and severity of potential
complications, the cost and benefits compared to competing products or
alternative medical treatments, available reimbursement and other
considerations. In addition, the Company's pricing policies could adversely
impact market acceptance of these products as compared to competing products and
alternative treatments. If any of the Company's marketing or development
programs are not successfully completed, required regulatory approvals or
clearances are not obtained or maintained, or products for which approvals or
clearances are obtained (such as the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System for monitoring infant jaundice) are
not commercially successful, the Company's business, financial condition and
results of operations would be materially adversely affected. There can be no
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assurance that the Company will be able to successfully address any problems
that may arise during the commercialization process of its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System.
Early Stage of Development of Other Potential Medical Applications. Although the
Company has received FDA clearance to commercially market its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System as
described above, has conducted early stage research and commenced initial
clinical studies with respect to certain other Chromogenic Diseases identified
by the Company (See "Business"), the Company's clinical and research development
programs for other medical applications of its technology are at a very
preliminary stage and substantial additional research and development and
further clinical trials will be necessary before commercial versions of any
additional proposed products are submitted for FDA marketing clearance and
produced for other such medical applications. The Company could encounter
unforeseen problems in the development of such other products such as delays in
conducting clinical trials, delays in the supply of key components or delays in
overcoming technical hurdles. There can be no assurance that the Company will be
able to successfully address the problems that may arise during the
development/commercialization process. In addition, there can be no assurance
that any of the Company's proposed products for any such other medical
application will be successfully developed, proven safe and efficacious in
clinical trials, obtain regulatory approval or clearance, or meet applicable
regulatory standards and requirements.
Assumptions Regarding Medical Business Plan and Strategy. The Company has
formulated its medical business plan and strategy based upon certain assumptions
provided by the Company's medical distribution partner regarding the size of the
bilirubin monitoring market, the Company's anticipated short term and eventual
share of this market, the price at which the Company believes it will be able to
sell or lease its products, and consumer acceptance of the Company's products.
There can be no assurance that these assumptions will prove to be correct. The
Company's ability to operate in the future will depend upon many factors,
including technological advances and product obsolescence; levels of
competition, including the entry into the market of additional competitors and
increased success by existing competitors; changes in general economic
conditions; increases in operating costs including costs of production,
supplies, personnel or equipment; and changes in requirements and regulations
promulgated by applicable federal, state, local and foreign regulatory
authorities. There can be no assurance that the Company will successfully obtain
or apply the human, operational and financial resources needed to manage a
developing business. Failure by the Company to manage its growth effectively
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Need for Additional Personnel. In order to generate and service sales of the
Company's products, the Company needs to attract and retain significant
additional senior and midlevel personnel experienced in marketing, sales and
regulatory matters in the medical, beauty, dental and other industries. The
Company currently has only 37 full-time employees, of which 18 are medical
marketing or regulatory personnel. In order to effectively implement its
marketing and sales strategy for the medical market and other markets, the
Company will need to hire additional sales, marketing, technical and operations
personnel. The success of the Company will also be dependent upon its ability to
hire, train and retain new and existing personnel. The Company will compete with
other companies with greater financial and other resources for such qualified
personnel. There can be no assurance that the Company will be able to hire and
retain additional personnel to support the Company's marketing, sales, research
and product development efforts.
Lack of Marketing and Sales Experience. The Company has not previously licensed
its Intellectual Properties for use in any industry other than the beauty aid,
hosiery and cosmetics industries and management of the Company has not had any
experience in marketing the Intellectual Properties, ColorMate(Registered
Trademark) units or Beauty-Aid Products in any other field. Prior to licensing
the Company's Intellectual Properties in any industry, including the cosmetic,
beauty aids and fashion industries, the Company will be required to develop
additional marketing skills relevant to such industries and conduct significant
further marketing activity, and in certain of these industries, overcome
regulatory hurdles, professional skepticism and develop specific practical
applications therefor. The Company's medical support and sales division was only
recently established and the Company's medical distribution agreement only
recently executed. There can be no assurance either will successfully generate
commercial levels of sales. There can be no assurance that the Company will be
able to successfully maintain a marketing and sales force, or that it will be
able to enter into additional marketing and sales agreements with third parties
on acceptable terms.
Dependence on Marketing and Distribution Arrangements with Third Parties. The
Company has established a medical division as well as a distribution partnership
with Datex-Ohmeda, Inc. and its Ohmeda Medical Division to support its marketing
efforts and has entered into a separate third party manufacturing agreement for
the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System.
The Company's business strategy for the commercialization of its medical
products depends upon the Company's ability to maintain existing and selectively
enter into and maintain arrangements with additional leading marketing and
distribution companies in the medical field. There can be no assurance that the
Company will be able to do so. Any revenues to be received by the Company from
its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
will be dependent on arrangements with third parties for marketing, distribution
and sales of the products. The obligation of any existing or additional third
party to fund or undertake the marketing, distribution and/or sale of the
product covered by any arrangements with the Company may be dependent upon the
satisfaction of certain goals or "milestones" by certain specified dates, some
of which are outside the Company's control. To the extent that the obligations
of any third party to fund or undertake the foregoing activities are not
contingent upon the satisfaction of certain goals or milestones, a third party
may retain a significant degree of discretion regarding the timing of these
activities and the amount and quality of financial, personnel and other
resources that they devote to these activities. Furthermore, there can be no
assurance that disputes will not arise between the Company and any third party
regarding their
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respective rights and obligations under the arrangements. Finally, there can be
no assurance that a third party will not be able, due to financial, regulatory
or other reasons, to satisfy its obligations under its collaborative arrangement
with the Company or will not intentionally or unintentionally breach its
obligations under the arrangement.
There can be no assurance that any third party will not, for competitive
reasons, support, directly or indirectly, a company or product that competes
with the Company's business. Furthermore, any dispute between the Company and a
third party might require the Company to initiate or defend expensive litigation
or arbitration proceedings.
Any significant dispute with or breach, inability to perform, or termination of
any arrangement with such third party would require the Company to seek and
reach an agreement with another third party or to assume, to the extent possible
and at its own expense, all the responsibilities being undertaken by the first
such third party. There can be no assurance that the Company would be able to
reach an agreement with a replacement third party. If the Company were not able
to find a replacement third party, there can be no assurance that the Company
would be able to perform or fund the activities for which the first such third
party would be responsible. Even if the Company were able to perform and fund
these activities, the Company's capital requirements would increase
substantially. In addition, the further manufacture, development, marketing,
distribution and sale of the product covered by such arrangement would be
significantly delayed.
Dependence on Medical Device and other Product Manufacturers. The Company does
not itself manufacture the ColorMate(Registered Trademark) units, the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System or the
Beauty-Aid Products, and in the past has been wholly dependent on third-party
OEMs of parts, assemblers, cosmetics suppliers and textile suppliers. The
Company may encounter various problems in establishing and maintaining
manufacturing relationships and/or operations, resulting in inefficiencies and
delays. Specifically, companies often encounter difficulties in scaling up
production, including problems involving production yield, quality control and
assurance, and shortages of qualified personnel. In addition, the manufacturing
facilities retained by the Company to manufacture its ColorMate(Registered
Trademark) products for medical applications are subject to FDA QSR requirements
and other regulatory requirements, international quality standards (such as ISO
9001/EN46001) and other regulatory requirements. Currently, the Company is
dependent on the sole source manufacturer of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System under the existing exclusivity
arrangements. The Company will have to maintain relationships with such
manufacturer and third party suppliers of component parts for the production of
its devices. There can be no assurance the Company will be able to maintain its
relationships with its current manufacturer, or will be able to maintain
arrangements with the other parts suppliers or assemblers on terms satisfactory
to the Company. Although the Company believes that a number of manufacturers are
capable of manufacturing and assembling the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, any change in manufacturers, or the
retention of additional subcontractors, could result in additional costs and
delays. Difficulties encountered by the Company in subcontracting to third-party
manufacturers, scaling up production or failure by the Company to utilize
manufacturing facilities in substantial compliance with FDA requirements,
international quality standards or other regulatory requirements, could result
in a delay or termination of production or regulatory enforcement action, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In connection with manufacturing of the ColorMate(Registered Trademark) units,
the Company could be required to make significant advance payments, obtain
letters of credit, cause potential customers or licensees to advance funds under
their agreements entered into with the Company or otherwise secure its payment
obligations to third-party manufacturers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Although the
Company's existing manufacturing agreement for the ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System does not require such
obligations, there can be no assurance the Company will be able to maintain the
existing relationship, or that the Company will be able to enter into
replacement agreements that do not provide for such obligations and are
otherwise on acceptable terms. There can be no assurance the Company will be
able to secure its payment obligations itself or by having customers and/or
licensees advance funds, or otherwise be able to manufacture the
ColorMate(Registered Trademark) units or obtain further manufacture of the
ColorMate(Registered Trademark) units or its products.
To the extent the Company obtains any required FDA clearance for and markets the
Bilirubin LED Device or markets the ColorMate(Registered Trademark) LED Device,
the Company will need to outsource the production and assembly of the components
of the Bilirubin LED Device and the ColorMate(Registered Trademark) LED Device
to third party manufacturers and assemblers. One of the components of the
Bilirubin LED Device is available from only one supplier. The Company is reliant
on that one source of supply and these products would require a major redesign
in order to incorporate any substitute components.
Lack of Market Penetration in Other Industries. The Company has not yet achieved
commercial market penetration in any industry, and there can be no assurance the
Company will be able to do so in the future. The Company has not achieved
significant levels of cosmetics sales from its ColorMate(Registered Trademark)
unit locations, and expects based on the de minimus cosmetics sales levels
achieved per location to date, that it will have to greatly increase the number
of ColorMate(Registered Trademark) unit installations to achieve significant
levels of cosmetics sale revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company also believes, based
on its operating history since February 1993, that obtaining such increased
cosmetic sales revenue will take significantly longer to achieve than was
originally anticipated. In order to implement its marketing plans in the United
States and abroad, including in industries in which the Company does not have
prior experience, the Company will have to develop additional marketing skills
and incur significant expenses on sales
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and marketing activities, including hiring finders, new personnel and
consultants, and entering into arrangements with retailers and distribution
companies having a regional or national presence. There can be no assurance the
Company's marketing plan will be successful.
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 Trademark)
TLc-BiliTest(Registered Trademark) System; (ii) the market size and revenue
potential of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System; and (iii) the existence and status of negotiations with
potential distributors of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) 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 moved to dismiss the complaint, which motion was fully briefed and
submitted to the court. On March 24, 2000, the defendants' motion to dismiss the
complaint was granted subject to a 30-day period within which the plaintiffs may
refile a complaint. If the plaintiffs do, in fact, refile a complaint within
such 30-day period 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 of 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.
Potential International Operations. The Company believes that sales of products
to customers outside of the United States represents a significant potential
source of growth. Following compliance with applicable foreign regulatory
requirements, the Company expects to market its medical products internationally
through affiliates and distributors. The primary targeted markets for the
Company's products outside the United States are Western Europe, Canada, Asia,
South Africa and South America. See "Business - The Bilirubin Project." The
Company also intends to contract with a number of foreign manufacturers to
provide certain of its sourcing needs for its medical device, although there can
be no assurance it will be able to do so. To market its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System in the European Union, the
Company sought ISO-9001/EN46001 certification and the right to affix the CE
mark. ISO-9001/EN46001 certification recognizes that the Company has established
a quality system for the design, development, manufacturing, servicing and
distribution of its medical device. The CE mark is a symbol of quality and
compliance with applicable European Union medical device directives. In March
1999, the Company received ISO-9001/EN46001 certification. In April 1999, the
Company was granted permission by the EU notified body, TUV Essen, to affix the
CE Mark to its ColorMate (Registered Trademark) TLc-BiliTest (Registered
Trademark) System.
Foreign operations are subject to special risks that can materially affect
potential sales, including currency exchange rate devaluations and fluctuations,
the impact of inflation, exchange controls, labor unrest, political instability,
import and export duties and quotas, domestic and international customs and
tariffs, unexpected changes in regulatory environments, potentially adverse tax
consequences and other risks. Changes in certain exchange rates could have a
material adverse effect on the Company.
Prior Marketing Attempts. Other than the Company's marketing efforts with Avon,
arrangements with IMS and its beauty salon placements and a lease and license
agreement with Nordstrom, the Company's own attempts to license and/or lease its
Intellectual Properties and the ColorMate(Registered Trademark) units and to
market its Beauty-Aid Products independently and/or through licensees never
proceeded beyond the test marketing stage. There can be no assurance the Company
will in the future achieve commercial leasing of its ColorMate(Registered
Trademark) units and commercial licensing of the Intellectual Properties or the
sale of the Beauty-Aid Products. In addition, other than the Company's
distribution partnership with Datex-Ohmeda, Inc. and its Ohmeda Medical Division
for the sale of its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System and its installation of ColorMate(Registered Trademark) units
in beauty salons and beauty-related businesses (which are generating
insignificant revenue), the Company's revenue generating activities have been
primarily conducted in conjunction with its former licensees (i.e., Clairol,
Hanes and Avon), that provided substantial economic, administrative, marketing
and advertising support. There can be no assurance that without the support of a
marketing partner with financial resources, an advertising
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budget, market presence and consumer recognition, the Company will be able to
achieve successful operations, including for medical applications of its
products and technologies. Further, there can be no assurance the Company will
ever develop a commercial market for the licensing or leasing of its
ColorMate(Registered Trademark) units and Intellectual Properties, for the sale
of the Beauty-Aid Products or for any additional medical applications of its
technologies.
Competition. To the extent the Company continues to implement its business plan
to commercialize a medical application for its Intellectual Properties, it will
be in a field characterized by rapidly changing technology, intense competition
and extensive research and development. The medical products market in general
is highly competitive. The Company's ability to compete in the monitoring of
newborn bilirubinemia (infant jaundice) market depends primarily on the
acceptance by the medical community of the Company's new technology, which can
be influenced by factors such as price, product quality and features, technical
capability, breadth of product line and distribution capabilities. The Company
will be competing with companies, some of which are more established and which
have greater financial, technical, manufacturing, marketing, research and
development and management resources than the Company (including companies such
as Minolta Co., Ltd., AirShields, Respironics, Inc., which recently acquired
Healthdyne Technology, Inc., and SpectRx, Inc., among others), and some of which
have greater name recognition and lengthier operating histories in the health
care industry. The Company believes the only commercially available non-invasive
bilirubinometers with FDA marketing clearance in the United States are the
Minolta Jaundice Meter and the SpectRx Bilicheck. In addition, there will be
other companies with which the Company will compete regarding other potential
medical applications which the Company may pursue. Furthermore, the monitoring
methods currently in use for monitoring of newborn bilirubinemia (infant
jaundice) as well as dermatological diseases and tuberculosis, the principal
diseases with respect to which the Company may seek regulatory marketing
clearance in the future, have already achieved acceptance by and are in
widespread use in the medical community, unlike the Company's proposed methods.
There can be no assurance that the Company's proposed methods will be accepted
by the medical community or receive regulatory clearance.
There can be no assurance that the Company will be able to effectively compete
against these and other competitors, including those competitors who intend to
promote their versions of non-invasive devices. Additionally, there can be no
assurance that the Company's competitors will not succeed in developing, either
before, during or after the commercialization of the Company's product, devices
and technologies that permit more efficient, less expensive non-invasive
detection and monitoring of infant jaundice. It is also possible that one or
more pharmaceutical or other health care companies will develop therapeutic
drugs, treatments or other products that will substantially reduce the
prevalence of infant jaundice or otherwise render the Company's products
obsolete. There can be no assurance that the Company will be able to upgrade its
medical applications and devices to compete with such competitors or with
persons who may in the future develop products or monitoring methods competitive
with the Company's proposed medical applications and devices.
Now that the Company has developed its own marketing and sales capabilities and
entered into an agreement with its medical distribution partner, it will compete
with other companies that have experienced and well-funded marketing and sales
operations. In addition, the Company's ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, as well as any future medical
applications marketed by the Company, will compete with existing devices,
technologies and methods in achieving acceptance in the medical community and in
attracting support from independent medical device distribution organizations
which sell medical equipment to the anticipated target market (i.e., hospitals,
pediatrician's offices and home health care services).
Independent medical supply distributors who may be retained by the Company will
distribute other products which may compete with those of the Company or which
would provide greater revenues to such distributors than would be provided by
the Company's products. In addition, many medical supply companies with which
the Company's proposed medical application and device will compete, and which
have significantly greater financial research, technical, manufacturing, and
distribution resources and broader product lines than the Company, have their
own in-house marketing and distribution capabilities and have established
relationships with potential customers for the Company's proposed medical
application, such as pediatricians and hospitals. In addition, many of the
Company's competitors offer broader product lines than the Company, which may be
a competitive advantage in obtaining contracts with health care purchasing
groups. No assurance can be given that the Company will successfully and
effectively market its medical products against these and other competitors or
contract with health care providers.
The cosmetics industry and fashion industry are particularly sensitive to
changing consumer preferences and demands, which are difficult to predict and
beyond the Company's control. Competition in the cosmetics industry is diverse
and fragmented, but is nevertheless dominated by a number of large, established,
well-known corporations having, among other things, significantly greater
financial, marketing and human resources than the Company. Virtually all of such
companies have in the past marketed, and continue to market, their products
based on their own color analysis system and advertised claims of "color
compatibility" with the personal color and/or wardrobe of the consumer. These
competitors also have established presence in the market and their own cosmetic
manufacturing facilities, unlike the Company. There can be no assurance that
consumers will prefer products based on the Company's scientifically based color
determinations, rather than the products sold by the Company's competitors based
on subjective techniques.
Protection of Intellectual Property. The Company depends on its ability to
obtain and maintain patent protection for its products and processes, to
preserve its trade secrets, and to operate without infringing upon the
proprietary rights of third parties. The validity and breadth of claims
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covered in medical technology patents involve complex legal and factual
questions and therefore, may be highly uncertain. No assurance can be given that
the scope of any patent protection under the Company's current patents, or under
any patent the Company might obtain in the future, will exclude competitors or
provide competitive advantages to the Company; that any of the Company's patents
will not be held invalid if subsequently challenged; or that others will not
claim rights in or ownership of the patents and other proprietary rights held by
the Company.
The Company's U.S. Patents Nos. 4,909,632 and 5,311,293 expire in 2007; the
Company's U.S. Patent No. 5,313,267 expires in 2011; the Company's U.S. Patent
No. 5,671,735 expires in 2014; after the respective expiration date of each, the
proprietary technology and instrumentation disclosed in each Patent will be
available for use by others without compensation to the Company, unless
protected by the claims of other U.S. patents that may be issued to the Company.
The Company has developed intellectual property rights in color analysis,
calibration and verification in a number of fields including medical,
biological, dental, cosmetic and materials testing. The intellectual property
rights include trade secrets, know how and 10 pending United States patent
applications. These rights also include various foreign patent applications
corresponding, at least in part, to the U.S. Patents and the U.S. patent
applications. There can be no assurance that patents will issue based on these
patent applications or that any patent claims will provide sufficient protection
to exclude others from the Company's proprietary technology and instrumentation.
There can be no assurance that the Company will not be involved in litigation to
protect its trade secrets and know how or that the Company will prevail in such
litigation. There can be no assurance that challenges will not be instituted
against the validity or enforceability of any patents owned by or issued in the
future to the Company, or that such challenges will not be successful. There can
be no assurance that patent infringement claims will not be asserted against the
Company and found to have merit, that the Company will not be enjoined from
using its proprietary technology and instrumentation and from manufacturing and
selling certain of its Products, or would not be forced to obtain a license and
pay future royalty fees as well as past damages to the party claiming
infringement in amounts not presently determinable. There can be no assurance
that any such license will be available to the Company. Conversely, to the
extent third parties infringe upon the Company's patented Intellectual
Properties, the Company may have to litigate against such third parties in order
to prevent further infringement. There can be no assurance the Company will have
the resources to prosecute any such litigation, or that any such litigation
would be resolved in favor of the Company. In the event it is unable to bring
such litigation or obtain a favorable outcome, the Company's operations could be
materially adversely affected in that the Company's failure to enforce its
Patents could result in increased competition. If the Patents are declared
invalid, the Company would lose patent protection for certain of its
Intellectual Properties, which could have a material adverse effect on its
operations.
There can be no assurance that the Company's Intellectual Properties will
provide it with a competitive advantage in that it may be possible for a
competitor independently to develop non-infringing technologies, independently
duplicate the Company's unpatented technology through reverse engineering,
design around the patented aspects of the Company's technology, or otherwise
independently develop scientifically accurate processes, instruments or color
charts to measure skin coloration, skin tone color categories and conduct
comparative color analysis without infringing the Company's Patents.
The Company's U.S. Patents apply only to the United States. The Company has
filed patent applications in a number of foreign jurisdictions which correspond,
at least in part, to the Company's U.S. Patents. The Company has been granted
European Patent No. 0446512, nationalizations of that European Patent in
Austria, Belgium, France, Germany, Great Britain, Hong Kong, Italy, Luxembourg,
The Netherlands, Spain, Sweden and Switzerland and Liechtenstein, as well as
Australian, Canadian, Korean and Mexican Patents corresponding, at least in
part, to its U.S. Patent No. 4,909,632, Australian, Taiwanese and Korean Patents
corresponding, at least in part, to its U.S. Patent No. 5,313,267 and a
Singapore Patent and two Taiwanese Patents corresponding, at least in part, to
its U.S. Patent No. 5,671,735. The Company has not yet been granted any other
foreign patents for its Intellectual Properties and there can be no assurance
that it will be granted any such patents. Consequently, wherever the Company
does not have foreign patents, third parties currently could exploit, outside
the United States, the technology disclosed in the U.S. Patents, thereby
increasing competition in such foreign markets. In addition, persons gaining
access to the Company's unpatented proprietary information and technology and
who are not bound by confidentiality agreements with the Company would have the
ability to exploit the Company's unpatented proprietary information and
technology both inside and outside the United States, thereby increasing
competition.
There can be no assurance that one or more of the Patents held by the Company
will not be successfully challenged or circumvented or that the Company will
otherwise be able to rely on such Patents. In addition, there can be no
assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that prevent, limit or interfere with the Company's
ability to make, use and sell its products either in the United States or in
foreign markets. If the Company's right or ability to manufacture its products
were to be proscribed or limited, the Company's ability to continue to
manufacture and market its Products could be adversely affected, which would
likely have a material adverse effect upon the Company's business, financial
condition and results of operations.
The Company has not applied for patent protection for many aspects of the
Intellectual Properties (i.e., its proprietary trade secrets and other
confidential information). The Company typically imposes on its consultants, key
employees and advisers confidentiality obligations in connection with their
employment, consulting or advisory relationship with the Company. There can be
no assurance that such confidentiality obligations will be observed or that the
Company will have adequate remedies if those obligations are breached. To the
extent that consultants, key employees or other advisors apply technological
information taken from the Company in violation of confidentiality obligations,
disputes
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may arise as to the proprietary rights to such information which may not be
resolved in favor of the Company. There can be no assurance that others will not
independently develop technology that is substantially equivalent or superior to
that included in the Company's Intellectual Properties which are not protected
by patents.
There can be no assurance that the Company's copyright protection for the
software used in the ColorMate(Registered Trademark) Systems will provide it
with a competitive advantage in that it may be possible for a competitor
independently to develop similar software, design around the Company's
copyrighted software or otherwise independently develop software with the
capacity to accurately measure skin tone categories and conduct comparative
color analysis.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, particularly with
respect to newly developed technology. In addition, re-examination or
interference proceedings may be instituted in the United States Patent and
Trademark Office ("USPTO"). There can be no assurance that the Company will not
become subject to patent infringement claims brought by third parties, or
re-examination of previously issued patents by the USPTO or interference
proceedings instituted in the USPTO to determine the priority of inventions. The
defense and prosecution of intellectual property suits, USPTO re-examination and
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the Company
or to determine the enforceability, scope and validity of the proprietary rights
of the Company and others. Any litigation or interference proceedings brought
against, initiated by or otherwise involving the Company may require the Company
to incur substantial legal and other fees and expenses and may require some of
the Company's employees to devote all or a substantial portion of their time to
the prosecution or defense of such litigation or proceedings. An adverse
determination in litigation or interference proceedings to which the Company may
become a party, including any litigation that may arise against the Company,
could subject the Company to significant liabilities to third parties, disputed
rights to be licensed from such third parties or prevent the Company from
selling its products in certain markets, or at all. If third-party patents
containing claims affecting the Company's technology were issued, and such
claims were determined to be valid, there can be no assurance that the Company
would be able to obtain licenses to such patents at costs reasonable to the
Company, if at all, or be able to develop or obtain alternate technology.
Although patent and intellectual property disputes regarding medical devices are
often settled through licensing or similar arrangements, there can be no
assurance that the Company would be able to reach a satisfactory settlement of
such a dispute that would allow it to license necessary patents or other
intellectual property. Even if such a settlement were reached, the settlement
process may be expensive and time consuming, and the terms of the settlement may
require the Company to pay substantial royalties. An adverse determination in a
judicial or administrative proceeding or the failure to obtain a necessary
license could prevent the Company from manufacturing and selling its products,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is aware that others have obtained and are pursuing patent
protection for various aspects of infant jaundice diagnostic and monitoring
products and their use, including products that are non-invasive. There can be
no assurance that the Company's technology, current or future products or
activities will not be deemed to infringe upon the patent rights of others.
Failure to Obtain and Maintain Third-Party Reimbursement. In the United States
and elsewhere, sales of medical products and their use are dependent, in part,
on the ability of consumers of these products to obtain reimbursement for all or
a portion of their cost from third-party payors, such as government and private
insurance plans. Third-party payors are increasingly challenging the prices
charged for medical products and services. As the Company brings its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System or
other future products to market, there can be no assurance that such products
will be considered cost effective and that reimbursement to the consumer will be
or continue to be available, or sufficient to allow the Company to sell its
medical device products on a competitive basis. Moreover, obtaining and
maintaining health care payors' approval of reimbursement for the Company's
products or their use, and the level of reimbursement made available, will be an
important factor in establishing pricing, structure and market acceptance. The
Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. Furthermore, the Company
could be adversely affected by changes in reimbursement policies of governmental
or private health care payors.
American Medical Association ("AMA") CPT codes are generally used to facilitate
the processing of insurance reimbursement claims and to provide a simplified
reporting procedure. However, assignment of a code does not assure that the
insurer will provide reimbursement or that the AMA endorses the medical
procedure at issue. In March 1998, the Company was assigned AMA CPT Code 82250
for processing claims for use of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. The same code is assigned for the
reimbursement of laboratory blood tests currently used to monitor newborn
bilirubinemia (infant jaundice). Subsequently, the AMA informed the Company that
CPT Code 84999 ("Unlisted Chemistry Procedure"), not Code 82250, was the
assigned code. However, the AMA indicated that it was reviewing coding in this
area generally. The Company believes the original Code 82250 is correct and will
continue its efforts to have the AMA reassign this code, or apply for a new
code. There can be no assurance that the Company will be reassigned the original
CPT Code 82250. Claims for reimbursement under CPT Code 84999 may not be as
easily processed for reimbursement as claims made under CPT Code 82250.
Market acceptance of the Company's products in international markets will be
dependent in part upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country and include both government
sponsored health care and private insurance. Although the Company intends to
seek international reimbursement
22
<PAGE>
approvals, there can be no assurance that such approvals will be obtained in a
timely manner, if at all. Failure to obtain and maintain third-party
reimbursement coverage for use of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System will have a material adverse effect on
the Company's ability to commercialize its technology for medical applications.
Government Regulations. The Company's advertising, sales practices, and
cosmetics and medical products (including the labeling and packaging thereof)
are and will be subject to applicable federal, state and local regulation
(including regulation by the FDA, the Federal Trade Commission, and the Federal
Communications Commission, under various laws such as the Fair Packaging and
Labeling Act and/or any comparable state authority, agency or statute) and will
be subject to regulation by comparable foreign authorities if the Company
markets its products abroad. The Company will also be subject to regulation by
various governmental agencies that regulate direct selling activities.
Although the Company has received FDA marketing clearance of its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
pursuant to a "substantial equivalence" determination order, in the form of a
letter dated July 24, 1997 from the FDA's CDRH, authorizing the Company to
commercially distribute its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System for monitoring newborn bilirubinemia
(infant jaundice) by healthcare professionals in the United States, the Company
also must maintain such clearance and comply with the other applicable statutes
and applicable rules and regulations promulgated by the FDA, in order to legally
market the device. The "substantial equivalence" order states that the Company
must comply with the medical device general controls, e.g., device establishment
registration, medical device listing, good manufacturing practices (QSR
requirements), medical device reporting, labeling, and the statutory
prohibitions against adulteration and misbranding. The order also states that
the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System is
a Class II device which may be subject to additional special controls.
In the United States, the FDA regulates the introduction of medical devices as
well as, among other things, manufacturing, labeling and recordkeeping
procedures for such products. The process of obtaining marketing clearance for
new medical products from the FDA can be costly and time consuming, and there
can be no assurance that such clearance will be granted for the Company's future
products on a timely basis, if at all, or that FDA review will not involve
delays that would adversely affect the Company's ability to commercialize
additional or significantly modified products or to expand permitted uses of
existing products. Regulatory clearance to market a product from the FDA may
entail limitations on the indicated uses of the product. The ability to market
can be challenged (and possibly withdrawn) by the FDA due to failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial clearance. The Company may be required to file further marketing
applications with the FDA under certain circumstances, such as the addition of
product claims or product redesign. FDA regulations depend heavily on
administrative interpretation, and there can be no assurance that future
interpretation made by the FDA or other regulatory bodies, will not adversely
affect the Company.
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company and its distributors and agents must maintain
required regulatory registrations or approvals and otherwise comply with
extensive regulations regarding safety, efficacy and quality in those
jurisdictions. Specifically, certain foreign regulatory bodies have adopted
various regulations, among other things, governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. These regulations vary from country to country. To
market its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System in the European Union, the Company sought ISO-9001/EN46001 certification
and the right to affix the CE mark. ISO- 9001/EN46001 certification recognizes
that the Company has established a quality system for the design, development,
manufacturing, servicing and distribution of its medical device. The CE mark is
a symbol of quality and compliance with applicable European Union medical device
directives. In March 1999, the Company received ISO-9001/EN46001 certification.
In April 1999, the Company also was granted permission by the European Union
notified body, TUV Essen, to affix the CE Mark to its ColorMate (Registered
Trademark) TLc-BiliTest (Registered Trademark) System. Failure to maintain ISO
9001/EN 46001 certification, CE mark rights or other foreign regulatory
approvals for the Company's medical products would prevent the Company from
marketing its medical products abroad, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will obtain any other required
regulatory registrations or approval in such countries or that it will not be
required to incur significant costs in obtaining or maintaining such regulatory
registrations or approvals. Delays in obtaining any registrations or approvals
required to market the Company's products, failure to receive these
registrations or approvals, or future loss of previously obtained registration
or approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company may rely on its
third-party foreign distributors to comply with certain foreign regulatory
requirements. The inability or failure of the Company or such foreign
distributors to comply with varying foreign regulations or the imposition of new
regulations could restrict the sale of the Company's products internationally
and thereby adversely affect the Company's business, financial condition and
results of operations.
The Company and any third party with which it has made contract manufacturing or
other regulated arrangements is required to adhere to applicable FDA
regulations, including the QSR requirements and similar regulations in other
countries, which include, among other things, testing, control, and
documentation requirements. Ongoing compliance with QSR requirements and other
applicable regulatory requirements will be strictly enforced in the United
States through periodic inspections by federal and possibly state agencies,
including the FDA, and in foreign jurisdictions by comparable agencies. Failure
to comply with applicable regulatory requirements could result in, among other
things, warning letters, injunctions, civil monetary penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
possible rescission or withdrawal of clearances or approvals
23
<PAGE>
previously obtained and criminal prosecution. The restriction, suspension or
revocation of regulatory clearances or approvals or government enforcement
actions due to any other failure to comply with regulatory requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Product Liability. The medical products industry is subject to substantial
product liability litigation, and the Company faces an inherent business risk of
exposure to product liability claims in the event that the use of its products
is alleged to have resulted in adverse effects to a patient or product user. Any
such claims could have a material adverse effect on the Company, including on
market acceptance of its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System. As the ColorMate(Registered Trademark) TLc-
BiliTest(Registered Trademark) System enters commercial use, the Company will be
in a field where it may become subject to product liability claims by patients
and/or users and might become a defendant in product liability litigation.
Although the Company has product liability insurance, there can be no assurance
that it will be able to maintain such product liability insurance or that such
insurance would be sufficient to protect the Company against any such
liabilities.
The Company maintains its own product liability insurance with respect to
cosmetic and beauty aid applications. There can be no assurance that such
insurance will be adequate to protect the Company from claims that may be
brought against it by users of the ColorMate(Registered Trademark) units or its
Beauty-Aid Products.
The Company has not established, and the Company does not intend to establish,
any reserves against any of the foregoing liabilities. In the event of an
uninsured or inadequately insured product liability claim in the future based on
the performance of the Company's ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, its ColorMate(Registered Trademark)
units or Beauty-Aid Products, the Company's business and financial condition
could be materially adversely affected and the Company could be forced to cease
operations.
Control; Dependence on Management. Darby Simpson Macfarlane, Chief Executive
Officer of the Company, owns shares of Common Stock and Series A preferred
stock, par value $0.001 per share (the "Preferred Stock") aggregating 2,991,895
(including currently exercisable stock options) of the shares eligible to vote
on matters presented to the shareholders, which amount is sufficient to permit
her to significantly influence the election of directors and the approval of
significant corporate transactions. The Company is dependent primarily on the
services of Darby Simpson Macfarlane and David Kenneth Macfarlane, Vice
President, Research and Development. The loss of either of their services could
have a material adverse effect on the Company. Although the Company has
purchased key-man life insurance policies in the amounts of $1,000,000 on the
lives of both Mrs. and Mr. Macfarlane, there can be no assurance that the
proceeds from such policies would enable the Company to retain suitable
replacements for them.
No Assurance of Continued Nasdaq SmallCap Market Listing; Risk of Application of
Penny Stock Rules. The trading of the Company's stock in the Nasdaq SmallCap
Market will be conditioned upon the Company's continuing to meet certain asset,
capitalization, earnings and stock price tests. To maintain eligibility for
trading on the Nasdaq SmallCap Market, the Company will be required to maintain,
among other things, net tangible assets of at least $2,000,000; a minimum bid
price for the listed securities of $1.00 per share; a market value of the public
float of at least $1,000,000; and at least two market makers for its securities.
If the Common Stock were to be delisted from the Nasdaq SmallCap market, the
prices and the holders' ability to sell such securities would be adversely
affected. If the Common Stock were delisted and the Company desired to have it
relisted, the Company would be required to satisfy the more stringent initial
listing requirements of the Nasdaq SmallCap Market.
If the Company is delisted from the Nasdaq SmallCap Market and the price per
share dropped below $5.00, then unless the Company satisfied certain net assets
tests, the Common Stock would become subject to certain penny stock rules
promulgated by the Securities and Exchange Commission (the "Commission"). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. In addition, the penny
stock rules require that prior to a transaction in a penny stock not otherwise
exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activities in the secondary market for stock that becomes subject to the penny
stock rules. If the Common Stock becomes subject to the penny stock rules,
investors may find it more difficult to sell their Common Stock.
Lack of Public Market; Possible Volatility of Stock Price. There is no assurance
that a regular trading market for the Company's securities will be sustained.
The market price for the Company's Common Stock may be significantly affected by
such factors as the Company's financial performance, the results of the
Company's efforts to license its Intellectual Properties and to market its
products, and various factors affecting the color science industry and the
beauty aid and cosmetics industries generally. Additionally, in recent years,
the stock market has experienced a high level of price and volume volatility for
many companies, particularly small and emerging growth companies traded in the
over-the-counter market, and these wide price fluctuations are not necessarily
related to the operating performance of these companies. Accordingly, there may
24
<PAGE>
be significant volatility in the market for the Company's securities.
Exercise of Outstanding Placement Agent Warrants and Warrants and Conversion of
Debentures and Preferred Stock. The price which the Company will receive for the
Common Stock issued upon exercise of the Placement Agent Warrants and Warrants
and the conversion of Debentures and Preferred Stock is expected to be
substantially less than the market price of the Common Stock at the time such
Placement Agent Warrants and Warrants are exercised or such Debentures or
Preferred Stock are converted. For the life of such Placement Agent Warrants,
Warrants, Debentures and Preferred Stock, the holders thereof are given, at
little or no cost, the opportunity to profit from a rise in the market price of
the Common Stock, if any, without assuming the risk of ownership. So long as
such Placement Agent Warrants and Warrants remain unexercised and Debentures and
Preferred Stock remain unconverted, the terms under which the Company could
obtain additional equity financing may be adversely affected. Moreover, the
holders of such Placement Agent Warrants, Warrants, Debentures and Preferred
Stock may be expected to exercise (or convert, as applicable) them at a time
when the Company would, in all likelihood, be able to obtain any needed capital
by a new offering of securities on terms more favorable than those provided by
such securities. To the extent of any exercise or conversion of Placement Agent
Warrants, Warrants, Debentures or Preferred Stock, the interests of the
Company's shareholders will be diluted proportionately.
Outstanding Voting Preferred Stock. The Company has outstanding 1,380,000 shares
of Class A Preferred Stock. Each share of Class A Preferred Stock has voting
rights equivalent to each share of Common Stock and is convertible to Common
Stock if (i) the Company's earnings (i.e. pre tax operating income, before
interest expense) for any two consecutive calendar years ending on December 31,
2000 exceed $20,000,000 or (ii) the closing bid price of the Common Stock has
been at least $31.11 on 30 consecutive trading days at any time ending on
December 31, 2000. Further, the Class A Preferred Stock has a $13,800
liquidation preference and earns an annual non-cumulative dividend of $0.001 per
share. The voting rights, conversion rights, dividend rights and liquidation
preference of the Class A Preferred Stock may adversely affect the trading value
or the market price of the Common Stock.
Additional Authorized Preferred Stock. The Company's Amended Certificate of
Incorporation (the "Certificate of Incorporation") authorizes the Board of
Directors to issue, without shareholder approval, up to 10,000,000 shares of
preferred stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of preferred stock or of rights to purchase preferred stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of preferred stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock.
Item 2. Properties
The Company's executive offices, consisting of approximately 15,000 sq. ft. of
space, are located in New York, New York and are occupied pursuant to a month to
month lease. The Company is currently negotiating the lease. Rentals under such
month to month lease (including storage facilities) currently are being paid at
the rate of $21,000 per month, plus occupancy costs. Additionally, the Company
leases approximately 1,500 sq. ft. of space in Spokane, Washington which is used
for research and development activities pursuant to a month to month lease.
Rentals under such lease are $2,018 per month.
The Company also occupies approximately 2,000 sq. ft. of space located in
Riverdale, New York, which is used for research and development activities and
manufacturing administration, at a cost of $1,750 per month, which space is
subleased by the Company from Darby Simpson Macfarlane, a director, officer and
principal shareholder of the Company; such rent is equal to Mrs. Macfarlane's
actual lease cost for such premises. The Company paid Mrs. Macfarlane $20,090
for such space in 1999. The Company also maintains approximately 1,000 sq. ft.
of space at 10 Old Jackson Avenue, Hastings-on-Hudson, New York, at the
residence of Mrs. Macfarlane which is used for research and development
activities and administrative offices for extensive overtime hours spent on
management and research and development. The Company paid Mrs. Macfarlane
approximately $10,240 for such space in 1999.
The Company also occupies approximately 1,000 sq. ft. of space located in
Milford, Connecticut which is leased pursuant to a month to month lease at a
cost of $1,670 per month, and used primarily as office space for the Company's
medical marketing, sales and distribution support division.
The Company occupies all of the spaces described above on an exclusive basis
except for the space located at the residence of Mrs. Macfarlane which it shares
with Mrs. Macfarlane.
Item 3. 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.).
25
<PAGE>
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 Trademark)
TLc-BiliTest(Registered Trademark) System; (ii) the market size and revenue
potential of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System; and (iii) the existence and status of negotiations with
potential distributors of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) 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 moved to dismiss the complaint, which motion was fully briefed and
submitted to the court. On March 24, 2000, the defendants' motion to dismiss the
complaint was granted subject to a 30-day period within which the plaintiffs may
refile a complaint. If the plaintiffs do, in fact, refile a complaint within
such 30-day period 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.
Item 4. Submission of Matters to a Vote of Security Holders
On December 20, 1999, at the annual meeting of shareholders held at the
Company's offices in New York, New York, the shareholders (i) elected five
directors of the Company to serve for a term of one year and until their
respective successors shall be elected and shall qualify, (ii) ratified the
appointment of BDO Seidman, LLP as auditors of the Company for the year ending
December 31, 1999 and (iii) approved a proposal to amend the 1992 Plan to
increase the number of shares of Common Stock authorized to be issued thereunder
from 4,500,000 to 5,500,000, an increase of 1,000,000 shares.
The following table sets forth the votes cast for each proposal presented at the
Company's annual meeting:
<TABLE>
<CAPTION>
Election of Directors
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Darby S. Macfarlane 15,101,382 571,853 0 0
David Kenneth Macfarlane 15,110,802 562,433 0 0
Leslie Foglesong 14,989,624 683,611 0 0
Edmund Vimond 14,937,460 735,775 0 0
Edward Mahoney 14,991,364 681,871 0 0
<CAPTION>
Ratification of Appointment of BDO Seidman LLP
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C>
15,531,709 55,756 85,770 0
Amendment of 1992 Plan
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C>
6,260,124 806,044 111,746 8,495,321
</TABLE>
26
<PAGE>
PART II
Item 5. Market For the Company's Common Equity and Related Stockholder Matters
The Company has registered the Common Stock with the Commission under the
provisions of Section 12(g) of the Exchange Act of 1934, as amended (the
"Exchange Act"). Registration under the Exchange Act requires the Company to
comply with certain reporting, proxy solicitation and other requirements of the
Exchange Act.
There can be no assurance that an active public trading market for the Common
Stock will continue. Prior to February 8, 1993, the date on which the Common
Stock was approved for quotation on the Nasdaq Stock Market SmallCap Market
("NASDAQ"), there was no public market for the Common Stock. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not necessarily reflect actual transactions. On March 23, 2000, the last
reported bid price for the Common Stock was $5,875 per share. There were 125
holders of record of the Common Stock as of March 23, 2000, including nominees
for an unknown number of beneficial holders.
The following tables set forth the high and low bid prices for the Common Stock
for each of the periods indicated (after giving retroactive effect to the
February 1998 3 for 2 Stock Split):
Common Stock
Period Price
------ -----
High Low
---- ---
January 1, 1998 to March 31, 1998 17.375 7.172
April 1, 1998 to June 30, 1998 18.000 3.375
July 1, 1998 to September 30, 1998 6.000 2.375
October 1, 1998 to December 31, 1998 8.438 2.563
January 1, 1999 to March 31, 1999 11.500 4.625
April 1, 1999 to June 30, 1999 13.938 7.625
July 1, 1999 to September 30, 1999 8.938 5.125
October 1, 1999 to December 31, 1999 9.125 5.125
Dividend Policy
The Company has not paid, during the two fiscal years ended December 31, 1999,
and has no present intention to declare or pay, cash dividends on the Common
Stock in the foreseeable future. The Company intends to retain any earnings
which it may realize in the foreseeable future to finance its operations. The
Company has outstanding 1,380,000 shares of the Class A Preferred Stock entitled
to an annual non-cumulative dividend of $0.001 per share, when and as declared
by the Board of Directors of the Company, payable quarterly, which dividend must
be paid before any cash dividend may be paid with respect to the Common Stock.
The Company's Class B Preferred Stock is to not entitled to any dividends.
Item 6. Selected Financial Data
The following information has been derived from the Company's consolidated
financial statements. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" elsewhere in this report.
27
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $8,110,200 $7,878,200 $10,752,600 $6,747,500 $3,489,900
Senior Convertible Debentures
including accrued interest 4,661,600 -- -- -- --
Redeemable Preferred Stock 2,942,500 13,800 13,800 13,800 13,800
Stockholders' Equity (Deficiency) (503,700) 6,569,200 9,896,300 5,942,200 2,876,400
Revenues 1,103,200 46,600 11,500 66,600 170,100
Net Loss (12,808,000) (7,284,800) (5,053,100) (4,442,300) (2,494,300)
Net Loss per share - Basic
and diluted (*) (0.93) (0.49) (0.40) (0.51) (0.39)
</TABLE>
(*) Loss per share was retroactively adjusted to reflect the three for two split
of February 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal Year 1999 Compared to Fiscal Year 1998
The Company incurred a net loss of $12,808,000 and $7,284,800, for fiscal years
1999 and 1998, respectively. Revenues of $1,103,200 have been received
principally from sales of ColorMate (Registered Trademark) TLc-BiliTest
(Registered Trademark) Systems and TLc-Lensette (Trademark) Calibration
Standards and other products under the Company's distribution agreement with
Datex Ohmeda, Inc. and its Ohmeda Medical Division. Of the increase in net loss
from 1999 as compared to 1998, $2,740,800 represents non-cash financing costs
computed as original issue discount ("OID") on financing transactions, $495,800
represents non-cash accrued interest on senior convertible debentures and
$140,600 represents an increase in non-cash expenses relating to stock option
grants to non-employees. The resulting $2,146,000 increase in losses from 1999
as compared to 1998 (without consideration of the non-cash OID costs, the
non-cash accrued interest on senior convertible debentures and non-cash expenses
for stock option grants to non-employees), is primarily attributable to an
increased cost of $1,552,700 relating to the Company's medical division sales
force, as the Company continues the implementation of its long-term business
plan to seek commercial applications of its intellectual properties and
technologies in the medical field. The Company had a gross profit in 1999 from
sales of ColorMate (Registered Trademark) TLc-BiliTest (Registered Trademark)
Systems and TLc-Lensette (Trademark) Calibration standards and other products of
$205,100 which was offset by: the increased cost of Sales, Marketing and Trade
show expenses which include the above-mentioned fully implemented sales force at
its medical division of $1,552,700; increases in amortization of patent,
software and ColorMate (Registered Trademark) TLc-BiliTest (Registered
Trademark) System promotional expenses of $363,700 and an increase in stock
administration fees of $88,400 relating primarily to registration costs of the
1999 financing transactions. These increased expenses were partially offset by a
decrease in legal fees of $163,000.
The Company anticipates that it will continue to incur significant 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 anticipates significantly higher
compensation expenses in connection with increased hiring of executives and
staff. The Company will also incur additional expenses implementing additional
testing and clinical trials of its technologies for the possible monitoring of
other chromogenic diseases. The Company also anticipates further 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 June 1999 the Company entered into an agreement for the exclusive
distribution of its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System in the hospital, pediatricians' office and home healthcare
markets in the United States with Datex Ohmeda, Inc. and its Ohmeda Medical
Division. The Company expects to generate profits through its relationship with
Datex Ohmeda, Inc. and its Ohmeda Medical Division 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 expects to receive additional amounts from the
distributor equal to a defined percentage of the distributor's sales of the
products ("Profit Sharing Payments"). The Company
28
<PAGE>
incurred a small loss in 1999 based on the initial transfer price of the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
devices. The loss was offset through the profits generated from the sale of
TLc-Lensette(Trademark) calibration standards, which are initially transferred
at a significant profit. In addition, any Profit Sharing Payments will generate
additional profits to the Company.
The Company anticipates that it will continue to incur net losses for the
foreseeable future as increased expenses are incurred in implementing its
long-range business plan.
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,
in connection with a test project done with the Company. 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
$839,800 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.
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.
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.
Liquidity and Capital Resources
Fiscal Year 1999 Compared to Fiscal Year 1998
Current assets increased to $4,933,700 at December 31, 1999 as compared to
$4,251,200 at December 31, 1998, primarily attributable to increases in accounts
receivable and inventory. The increase of $750,000 in accounts receivable is due
to sales in 1999 of its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System and TLc Lensette(Trademark) Calibration Standards. Although
cash and cash equivalents decreased by $1,139,400, inventories increased by
$1,024,500 at December 31, 1999 as compared to December 31, 1998, due to the
Company's new distribution agreement with Datex-Ohmeda, Inc. and its Ohmeda
Medical Division.
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 1999. The 1999 increase in cash outflows from operating activities
is primarily attributable to the increase in the Company's net loss, partially
offset by an increase in depreciation and amortization expenses, non-cash
compensation costs to consultants and non-cash interest and financing costs.
Cash outflows from investing activities, which are attributable to software
development costs of $81,300, patent costs of $553,000 and purchases of property
and equipment of $91,200, decreased to $725,500 during fiscal year 1999 from
$2,554,200 during fiscal year 1998. The primary reason for this decrease is that
purchases and deposits of ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System units, which represented $1,504,400 of
cash outflows from investing activities during 1998, have been reclassified as
inventory in 1999. Cash flows from financing activities during 1999 principally
represent $9,104,800 of proceeds from the issuance of the Common Stock,
Debentures, Preferred Stock and Warrants, partially offset by payments of
$62,800 to a related party.
The Company's primary source of liquidity in 1999 was the net proceeds from the
private placements of convertible debt and equity securities totaling
$8,727,400. The Company anticipates incurring significant additional
expenditures related to manufacturing expenses, parts order, insurance,
regulatory compliance and staffing as production and distribution continues.
Also, the Company anticipates further legal expenses
29
<PAGE>
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,
revenues from sales of the ColorMate(Registered Trademark) units, payments
received under distribution agreements and/or the proceeds of $3.6 million from
the February 2000 Preferred Stock and Warrant financing and any additional
financing, the Company will have sufficient liquidity at least until December
31, 2000. The Company may seek additional debt or equity financing to further
support and expand its operations. If the Company is not able to attract
additional future financing, 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. The Company does not
believe inflation had a material effect on its financial position or results of
operations.
30
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
None.
Item 8. Financial Statements and Supplemental Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Accountants' Reports......................................................... 32
Consolidated Balance Sheets as of December 31, 1999 and 1998............................. 34
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997.......................................................................... 35
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997....................................................... 36
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997.......................................................................... 37
Notes to Consolidated Financial Statements............................................... 38
</TABLE>
31
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of Chromatics Color Sciences
International, Inc.
We have audited the consolidated balance sheets of Chromatics Color Sciences
International, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chromatics Color
Sciences International, Inc. and subsidiary as of December 31, 1999 and 1998 and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
March 10, 2000
32
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of Chromatics Color Sciences
International, Inc.
We have audited the consolidated statement of operations, changes in
shareholders' equity and cash flows of Chromatics Color Sciences International,
Inc. for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Chromatics Color Sciences International, Inc. and subsidiary for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
WISS & COMPANY, LLP
Livingston, New Jersey
February 17, 1998
33
<PAGE>
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
None
49
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
Certain information concerning directors and executive officers of the Company
is set forth below:
Name Age Position
---- --- --------
Darby Simpson Macfarlane 55 Director, Chairperson of the Board
of Directors, Chief Executive
Officer, Assistant Treasurer
Arthur Guiry+ 60 President
David Kenneth Macfarlane 53 Director, Vice President, Research
and Development
Leslie Foglesong* 44 Director, Secretary and Treasurer
Edmund Vimond*++ 64 Director
Edward Mahoney*++ 49 Director
* Member of the Audit Committee of the Board of Directors.
+ Deceased March 9, 2000.
++ Member of the Compensation Committee of the Board of Directors.
Directors are elected annually by the shareholders and hold office until the
next annual meeting and until their respective successors are elected and
qualified. Executive officers are elected by the Board of Directors, serve at
the direction of the Board of Directors and hold office until their respective
successors are elected and qualified. There is no arrangement or understanding
between any director or executive officer and any other person pursuant to which
such person was or is to be selected as a director or executive officer of the
Company except that the Company has agreed with the placement agent of the
Company's 1995 Private Placement that it will have the option of selecting a
designee of the placement agent to the Company's Board of Directors for a period
of five years following the completion of the 1995 Private Placement. The
Company has agreed to use its best efforts to elect such designee of the
placement agent. To date, the placement agent has not requested that the Company
elect such designee.
Mrs. Macfarlane and Mr. Macfarlane were formerly married to one another. There
are no other family relationships among the directors or executive officers of
the Company.
Set forth below is certain additional information with respect to the directors,
executive officers and certain consultants of the Company.
Mrs. Macfarlane co-founded the Company in March 1984. She has been Chairperson
of the Board, Chief Executive Officer, Assistant Treasurer and a director of the
Company since formation and also served in the capacity of President until April
9, 1995. Prior to such time, Mrs. Macfarlane was the co-founder in 1974 of
Personalized Colors, Inc. Commencing in 1978, Mrs. Macfarlane and Mr. Macfarlane
led and directed the Company's research and development and mass-manufacturing
efforts of the color science technology, instrumentation and cosmetic and
related products now offered by the Company.
Mr. Arthur Guiry died in March, 2000. Mr. Guiry had served as President of the
Company since April 10, 1995.
Mr. Macfarlane co-founded the Company and is also one of the primary inventors
of the patented technologies used in the ColorMate(Registered Trademark) System.
In addition, Mr. Macfarlane developed the manufacturing, technical and
engineering specifications necessary to have miniaturized and mass manufactured
the ColorMate(Registered Trademark) System. Mr. Macfarlane has been Vice
President-Research and Development, and a director of the Company since
formation. Prior to 1984, Mr. Macfarlane held a variety of executive positions
with finance, sales, marketing, research and development and manufacturing
companies in Europe, South Africa and the United States, including International
Technical Research and Development, Ltd., and Trumach, Inc.
50
<PAGE>
Leslie Foglesong has been the Secretary, Treasurer and a director of the Company
since its formation.
Mr. Edmund Vimond has previously provided consulting services to the Company. On
December 1, 1997, Mr. Vimond was appointed to the Company's Board of Directors
and currently acts as Chairman of the Company's Compensation Committee. From
1991 to 1997, Mr. Vimond was the President and Chief Executive Officer of
Ocurest Laboratories, Inc. Mr. Vimond was responsible for managing all functions
of the business, including marketing, sales, contract manufacturing, personnel
and finance and systems. Prior to 1991, Mr. Vimond held positions in various
executive capacities with RJR Nabisco Inc., American Cyanamid Co., Johnson &
Johnson and Warner-Lambert Companies Inc. Since January 1998, Mr. Vimond has
been the principal of Edmund Vimond Associates, a business development
consulting practice. Mr. Vimond received B.S.B.A. and M.B.A. degrees from
Northwestern University.
Edward Mahoney, a certified public accountant, was appointed to the Board of
Directors on January 26, 1998, and currently acts as Chairman of the Company's
Audit Committee. Since January 1998, Mr. Mahoney has owned and operated a
certified public accounting firm and was a tax partner with the accounting firm
of BDO Seidman LLP from 1994 to 1997 and Price Waterhouse from 1973 to 1994. Mr.
Mahoney received a Bachelor of Science in Accounting degree from Brooklyn
College of the City University of New York.
Darby S. Macfarlane and David Kenneth Macfarlane are the founders of the Company
and, as such, may be deemed "promoters" of the Company as those terms are
defined in the rules and regulations promulgated under the Securities Act of
1933, as amended. There is no family relationship among any other directors or
executive officers of the Company.
Medical Advisory Board
The Company recently established a Medical Advisory Board consisting of Dr. Fred
W. Billmeyer, Dr. Ian Holzman and Dr. Jeffrey Maisels, independent
consultants/advisors to the Company.
Dr. Fred W. Billmeyer, Jr., Professor Emeritus at Rensselaer Polytechnic
Institute, a color scientist and recognized expert in the color science field
for more than 40 years, has been a consultant to the Company since 1984 and is a
member of the Company's Medical Advisory Board. Dr. Billmeyer has published
numerous books and articles in the field of color science. The consulting
agreement with Dr. Billmeyer provides that he will provide color consulting
services to the Company at a fee of $125 per hour. Such services include
providing advice and supervisory assistance in connection with any further
research and development, modification, enhancement or marketing activity
relating to the ColorMate(Registered Trademark) System and Intellectual
Properties in specific applications and assisting in obtaining patent protection
for the unpatented Intellectual Properties. In addition, Dr. Billmeyer is
entitled to receive a royalty in the amount of 2% of the selling price less the
cost of manufacture of any device sold by the Company. In 1999, the Company paid
Dr. Billmeyer $4,827.
Dr. Ian Holzman, a physician with the Department of Pediatrics, Division of
Newborn Medicine, Mt. Sinai Medical Center, is a member of the Medical Advisory
Board. Dr. Holzman is presently the Chief of the Division of Newborn Medicine at
Mt. Sinai Medical Center and a member of the Attending Staff at each of Mt.
Sinai Medical Center and City Hospital Center at Elmhurst. In addition, Dr.
Holzman is a Professor of Pediatrics, Obstetrics and Gynecology and Reproductive
Medicine, at Mt. Sinai School of Medicine. Dr. Holzman has published numerous
journal articles, book chapters and medical abstracts in the field of pediatric
treatment and medicine.
Dr. Jeffrey Maisels, a physician with the Department of Pediatrics, William
Beaumont Hospital, is a member of the Medical Advisory Board. Dr. Maisels is
presently the Chief of the Department of Pediatrics at William Beaumont Hospital
and is also a Clinical Professor of Pediatrics at Wayne State University School
of Medicine. Dr. Maisels has published numerous journal articles, book chapters
and medical abstracts in the field of pediatric treatment and medicine including
publications relating to bilirubin infant jaundice and phototherapy.
Consultants
The Company relies on the services of certain other consultants and advisors.
The consultants are not executive officers of the Company but make or are
expected to make significant contributions to the business of the Company.
Mr. Frederick Frank, Vice Chairman of Lehman Brothers, an investment banking
firm, has been an advisor to the Company since December 1, 1997, providing
financial, strategic and business advisory services. The consulting agreement
with Mr. Frank expired December 1, 1998 but was renewed by mutual agreement of
the Company and Mr. Frank.
The Company from time to time also employs certain other consultants and
temporary personnel for various purposes such as FDA and regulatory matters, the
Bilirubin Project and marketing, engineering, research and development
associated with the Intellectual Properties, Beauty-Aid Products, the
ColorMate(Registered Trademark) Bilirubin Device and ColorMate(Registered
Trademark) units. The Company has also retained consultants to provide public
relations, shareholder relations, financial, licensing and investment banking
services. In 1999, these consultants and temporary personnel were paid an
aggregate of $301,000 and were granted options to purchase an aggregate of
90,000 shares of the Company's Common Stock under the 1992 Plan. All consultants
may be reimbursed by the Company for reasonable out-of-pocket
51
<PAGE>
expenses incurred by them in connection with the services each consultant
provides to the Company.
Compliance with Section 16(a) of the Exchange Act
The Company became subject to the reporting requirements of Section 13 of the
Exchange Act on February 5, 1993 and, accordingly, the Company's officers,
directors and greater than 10 percent beneficial owners were subject to the
reporting requirements of Section 16(a) of the Exchange Act during the year
ended December 31, 1993. The Company believes that during the fiscal year ended
December 31, 1999 all filing requirements under Section 16(a) applicable to its
officers, directors and greater than ten percent beneficial owners were complied
with on a timely basis.
Item 11. Executive Compensation
Summary Compensation Table
The following table summarizes all plan and non-plan compensation awarded to,
earned by or paid to the Company's Chief Executive Officer and its three other
executive officers who were serving as such during and at the end of fiscal 1999
for services rendered in all capacities to the Company in the last three fiscal
years.
<TABLE>
<CAPTION>
Long-Term
Compensation
--------------------------
Annual Compensation Awards
---------------------------------------------------- ------- All other
Name and Principal Position Year Salary ($) Bonus ($) Options (#)(1) Compensation
------------------------------- ------------- --------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Darby S. Macfarlane, 1999 175,000 0 0 0
Chief Executive Officer 1998 175,000 0 0 0
1997 175,000 0 0 0
Arthur Guiry, President 1999 200,000 0 0 0
1998 200,000 0 0 0
1997 200,000 0 0 0
David Kenneth Macfarlane, 1999 125,000 0 0 0
Vice President, 1998 125,000 0 0 0
Research Development 1997 125,000 0 0 0
Leslie Foglesong 1999 100,000 10,000 0 0
Secretary and Treasurer 1998 100,000 5,000 100,000 0
1997 100,000 0 0 0
</TABLE>
(1) In February 1998, the Company effected a three-for-two forward stock split.
The number of shares issuable upon the exercise of stock options granted
under the 1992 Plan presented above give effect to the stock split.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Value Table
The following table sets forth information with respect to stock options
exercised during the fiscal year ended December 31, 1999 and the value at
December 31, 1999 of unexercised stock options held by the Chief Executive
Officer and the other executive officers of the Company. The number of shares
presented gives effect to the Stock Split:
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised In-the-
Underlying Unexercised Money Options at
Options at Fiscal Year-End Fiscal Year-End (1)
--------------------------------- --------------------
Shares Acquired on Value Exercisable/ Unexercisable Exercisable/
Name Exercise (#) Realized (#) Unexercisable
- -------------------------- ---------------------- --------------- --------------------------------- --------------------
<S> <C> <C> <C> <C>
Darby S. Macfarlane 0 0 450,000/0 $1,864,350
Arthur Guiry 0 0 105.000/0 $505,365
David Kenneth Macfarlane 0 0 300,000/0 $1,242,900
Leslie Foglesong 0 0 250,000/0 $797,000
</TABLE>
(1) The value of unexercised in-the-money options was calculated by
multiplying the number of underlying shares held by the difference
between the closing price of the Common Stock on December 31, 1999
($7.063 per share, as originally quoted on the Nasdaq SmallCap Market
published in The Wall Street Journal) and the option exercise price,
but after giving effect to the Stock Split.
52
<PAGE>
Compensation of Directors
Directors who are officers of the Company do not receive additional
compensation for serving on the Board of Directors or for their attendance at
Board of Directors' meetings. Edmund Vimond receives a monthly director's fee
of $6,000 and Edward Mahoney receives a monthly director's fee of $4,000. In
addition, Mr. Mahoney received options to purchase 37,500 (on January 26, 1998)
shares of the Company's Common Stock under the 1992 Plan and each of Mssrs.
Mahoney and Vimond received options to purchase 20,000 (on October 30, 1998)
shares of the Company's Common Stock under the 1992 Plan. The stock options
granted to Mr. Vimond and Mr. Mahoney vest in equal installments on the first,
second and third anniversaries of the date of grant and are exercisable at
$9.25 (Mahoney's grant on January 26, 1998) (one-third became exercisable at
January 26, 1999) and $5.375 (grants on October 30, 1998) (one-third became
exercisable at October 30, 1999) per share, respectively. Mr. Vimond also
received 22,500 stock options on December 1, 1997, two-thirds of which became
exercisable on December 1, 1999 and expire on December 1, 2002 and are
exercisable at $9.71 per share. In addition, on July 15, 1997, Mr. Vimond
received 15,000 stock options, two-thirds of which options were fully
exercisable on July 15, 1999, expire on July 15, 2002 and are exercisable at
$5.42 per share.
Employment Agreements
The Company has entered into separate employment agreements with each of Darby
Simpson Macfarlane and David Kenneth Macfarlane, providing for Mrs.
Macfarlane's employment as Chief Executive Officer and for Mr. Macfarlane's
employment as Vice President, Research and Development. The agreements with
Mrs. and Mr. Macfarlane provide for annual base salaries in 1999 of $175,000
and $125,000, respectively, subject to annual increases at the discretion of
the Board of Directors. In addition, Mrs. Macfarlane's agreement provides for a
bonus payment of 33% of the first million of the Company's net recovery in
excess of $2,000,000 from the Avon Litigation. Accordingly, Mrs. Macfarlane was
to receive $361,200, of which $110,900 has been paid. The remaining $250,300 is
currently payable and accrues interest at the rate of 10% per annum. However,
repayment of this amount is subject to Mrs. Macfarlane's agreement to defer
repayment until January, 1999 in connection with the amendment to the Company's
Certificate of Incorporation which amendment modified certain terms of the
Class A Preferred Stock, including the following: (i) extension to December 31,
2000 of the expiration date of the conversion feature and redemption period,
(ii) revision of the market price conversion feature to provide for adjustment
upon the occurrence of certain events involving the Common Stock, and (iii)
revision of the calculation of the earnings goal needed to trigger the
conversion feature by excluding extraordinary items and revenues and earnings
generated by businesses acquired by the Company. In connection with Mrs.
Macfarlane's agreement to defer repayment until January 1, 1999, Mrs.
Macfarlane has also agreed to extend the term of her employment with the
Company until December 31, 2000 with an optional two-year renewal and forego
any discretionary performance bonus under her employment agreement in 1999.
Under the employment agreements, the Company is obligated to provide Mr.
Macfarlane with a $300,000 and Mrs. Macfarlane with a $1,000,000 term life
insurance policy and disability insurance. The Company maintains key-man life
insurance on each of Mrs. and Mr. Macfarlane in the amount of $1,000,000. Mrs.
Macfarlane subsequently extended the repayment date of the amount due to her
from the Company in connection with the Avon litigation until April 2000.
The employment agreements also provide for the payment of termination benefits
by the Company if employment thereunder is terminated after January 1, 2000 (i)
by the Company for any reason other than death or disability as set forth
therein or (ii) by reason of death or disability. If Mr. or Mrs. Macfarlane's
employment is terminated by the Company for any reason the Company is required
by each agreement to pay to the terminated employee an amount equal to (a) the
aggregate base salary payable for the remainder of the employment period of the
agreement and (b) the aggregate base salary payable thereunder for three years,
plus, in each case, an amount not less than any bonus granted by the Board of
Directors of the Company to the employee in the year immediately preceding the
year in which termination occurred. If the employee's employment is terminated
by reason of death or disability, the Company is required to pay to Mrs.
Macfarlane and Mr. Macfarlane, as applicable, an amount equal to three years
aggregate base salary in the case of Mrs. Macfarlane, and two year's base
salary in the case of Mr. Macfarlane, plus in each case an amount not less than
the pro rata portion of any bonus granted to the employee in the year
immediately preceding the year in such termination occurs.
The agreements described above prohibit disclosure of proprietary and
confidential information regarding the Company and its business to anyone
outside the Company both during and subsequent to employment and provide
certain non-competition and non-solicitation restrictions on the employee for
the duration of employment with the Company, and for one year thereafter.
Compensation Committee Interlocks and Insider Participation
There are no reportable compensation committee (Board of Directors) interlocks
or insider participation transactions.
53
<PAGE>
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors is responsible for
establishing compensation policies applicable to the Company's executive
officers; evaluating and recommending to the Board the compensation of the
chief executive officer and other executive officers; and recommending to the
Board individual stock option grants for executive officers from the 1992 Plan.
The following report relates to the Company's compensation policies and the
compensation paid to the chief executive officer for the year ending December
31, 1999.
Compensation Policies: The Company's compensation policies for all employees,
including executive officers, are designed to provide compensation levels that
are competitive with those of small capitalization early stage technology
companies, with whom the Company must compete in the recruitment and retention
of highly qualified, motivated personnel. The Company's executive compensation
program is structured to (1) compensate its executive officers on an annual
basis with a cash salary and discretionary bonus at a sufficient level to
retain and motivate these officers and (2) provide long-term incentives to
those executives through periodic grant of stock options.
The salary component of executive compensation and any bonuses granted in the
Company's discretion, is based on each executive's level of responsibility in
comparison to similar positions in comparable companies. The Company believes a
competitive base salary, and bonus when warranted, is essential to the
development and retention of capable management. Base salaries for executive
officers are reviewed periodically, based on a review of competitive salaries
obtained from published data and other sources, and discretionary performance
bonuses, if any, are used to augment salary in circumstances where special
achievement is to be rewarded.
The long-term incentive component recognizes the importance of stock ownership
by employees and reflects the use of stock options as an integral part of each
executive's compensation. The Company believes the opportunity for stock
appreciation through stock options which vest over time promotes the
relationship between long-term interests of executive officers and
shareholders. The size of specific grants takes into account the executive
officer's salary, number of options previously granted, and overall individual
contributions to the Company.
Chief Executive Officer Compensation: The Company extended the employment
agreement with Mrs. Macfarlane, the Chief Executive Officer, until December 31,
2000 with an optional two-year renewal at an annual base salary of $175,000
until January 1, 2000, in connection with her agreement with the Company, as
recommended by the Compensation Committee, to forego any bonus grant in 1999 in
consideration of the Company agreeing to modify certain terms of the Class A
Preferred Stock owned by Mrs. Macfarlane, including extension of the redemption
date for the Preferred Stock to December 31, 2000. The determination of salary
level was based on the same criteria applicable to base salaries of all
executive officers. Mrs. Macfarlane received no stock option or bonus grant in
1999 and received an annual salary of $175,000 in 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 23, 2000, the beneficial ownership
of the Common Stock: (i) by each stockholder known by the Company to
beneficially own more than 5% of the Common Stock or the Class A Preferred
Stock; (ii) by each director of the Company; (iii) by the Company's Chief
Executive Officer; and (iv) by all executive officers and directors of the
Company as a group. Amounts presented give effect to the February 1998
three-for-two forward stock split (the "Stock Split") (including shares
issuable upon the exercise of stock options and/or warrants). Except as
otherwise indicated below, each named beneficial owner has sole voting and
investment power with respect to the shares of Common Stock or Class A
Preferred Stock listed.
54
<PAGE>
<TABLE>
<CAPTION>
Class A
Name and Address of Preferred Stock(1) Percent Common Stock Number
Beneficial Owner Number of Shares of Class of Shares Percent of Class
- ---------------------------------------- ---------------------- ------------------ ------------------------- ------------------
<S> <C> <C> <C> <C>
Darby Simpson Macfarlane 1,380,000 100% 1,611,895(2) 9.9%
10 Old Jackson Avenue, #28
Hastings-on-Hudson, NY 10706
David Kenneth Macfarlane 1,380,000(3) 100% 1,611,895(4) 9.9%
5 East 80th Street
New York, NY 10021
Leslie Foglesong (5) 265,000 *
116 Lafayette Avenue
Brooklyn, NY 11217
Edmund Vimond 31,666 *
6967 Country Lakes Circles
Sarasota, FL 34243
Edward Mahoney 19,166 *
2044 Palisades Drive
Pacific Palisades, CA 90272
Arthur Guiry 105,000 *
The Willows
11-5 Jackson Avenue
Scarsdale, New York 10583
Janssen-Meyers Associates, L.P. (6) 1,206,934 7.56%
17 State Street
New York, NY 10001
LB I Group Inc. (7) 1,846,922 10.62%
3 World Financial Center
New York, New York 10285
Gary W. Schreiner (8) 1,000,000 6.05%
c/o P.O. Box 400
Sterling, Illinois 61081
All directors and executive officers 1,380,000 100% 2,032,727 11.74%
as a group (6 persons) (9)
</TABLE>
(1) The Class A Preferred Stock is a voting security which votes together with
the Common Stock as a single class and is entitled to one vote per share.
The shares of Class A Preferred Stock are convertible into shares of Common
Stock if (i) the Company's earnings for any two calendar years during the
period ending on December 31, 2000 exceeds $20,000,000 or (ii) the closing
bid price of the Common Stock has been at least $31.11 on 30 consecutive
trading days at any time prior to December 31, 2000. The conversion ratio
is .979 shares of Common Stock for each share of Class A Preferred Stock.
If neither condition to conversion is satisfied by December 31, 2000, the
Class A Preferred Stock will be redeemed by the Company at a price of $.01
per share.
(2) Includes 861,895 issued and outstanding shares of the Common Stock
beneficially owned by Mrs. Macfarlane, 450,000 shares issuable upon the
exercise of options granted to Mrs. Macfarlane and 300,000 shares issuable
upon the exercise of options granted to Mr. Macfarlane which options are
currently exercisable. As a result of a certain voting agreement between
them, Mrs. Macfarlane is entitled to sole voting power and sole power of
disposition over all shares of common stock held or acquired by Mr.
Macfarlane.
(3) Represents the 1,380,000 issued and outstanding shares of the Class A
Preferred Stock owned by Mrs. Macfarlane.
(4) Includes 861,895 issued and outstanding shares of the Common Stock
beneficially owned by Mrs. Macfarlane, 450,000 shares issuable upon the
exercise of options granted to Mrs. Macfarlane and 300,000 shares issuable
upon the exercise of options granted to Mr. Macfarlane which options are
currently exercisable.
(5) Includes 250,000 shares issuable upon the exercise of options which are
currently exercisable.
(6) Based on a representation letter from Janssen-Meyers Associates, L.P. dated
March 19, 1999, and includes 636,250 shares of Common Stock held by Peter
Janssen (an affiliate of Janssen-Meyers Associates, L.P.), 145,750 shares
of Common Stock and 314,347 warrants held by Janssen-Meyers Associates,
L.P. which, in each case, are currently exercisable, 108,647 warrants held
by limited partners of Janssen-Meyers Associates, L.P. and 1,940 warrants
held by Meyers Janssen Securities Corp., which, in each case, are currently
exercisable. Peter Janssen and Bruce Meyers are deemed to be the beneficial
owners of the shares of Common Stock and warrants held by Janssen-Meyers
Associates, L.P.
(7) Represents shares of Common Stock which may be acquired upon the conversion
of convertible Preferred Stock and warrants owned by LB I Group, Inc.
(8) Represents shares of Common Stock which may be acquired upon the conversion
of convertible debentures owned by certain trusts as to which Mr. Schreiner
exercises sole voting and sole dispositive power.
(9) Includes 1,050,832 shares issuable upon the exercise of options which are
currently exercisable.
55
<PAGE>
Item 13. Certain Relationships and Related Transactions
In December 1997, Mrs. Macfarlane agreed to (i) delay payment to January 1999 on
the note she received under her employment agreement in respect of the Avon
Settlement, (ii) extend the term of her employment with the Company until
December 31, 2000, with an optional two-year renewal and (iii) forego any
discretionary performance bonus under her employment agreement for 1999 in
connection with the Company's Board of Directors agreeing to modify certain
features of the Company's Class A Preferred Stock. The note has not yet been
repaid to Mrs. Macfarlane. The changes to the Class A Preferred Stock, approved
by the Company's shareholders on February 13, 1998, provide that, if (i) the
Company's earnings for any two calendar years during the period ending on
December 31, 2000 exceeds $20,000,000 or (ii) the closing bid price of the
Common Stock has been at least $31.11 on 30 consecutive trading days at any time
prior to December 31, 2000, each outstanding share of Preferred Stock shall be
converted into .979 shares of Common Stock, subject to adjustment for
stock-splits, including the Stock Split, stock dividends, reclassification or
other combinations or subdivisions. If neither condition is satisfied by
December 31, 2000, the Preferred Stock shall be redeemed by the Company at a
price of $0.01 per share, plus any declared but unpaid dividends. Mrs.
Macfarlane subsequently extended the repayment date of the amount due to her
from the Company in connection with the Avon litigation until April 2000.
Since August 1990, the Company has occupied office space leased under Darby
Simpson Macfarlane's name. The Company pays $1,750 per month under the lease
(representing the actual lease cost for such premises), which rent increased
from $1,620 in August 1999. For the year ended December 31, 1998 the Company
paid $19,400 in connection with such lease, and for the year ended December 31,
1999 the Company paid $20,090. In addition, the Company also paid Mrs.
Macfarlane approximately $9,600 for the year ended December 31, 1998 and
approximately $10,200 for the year ended December 31, 1999 under a lease for the
use of her residence as offices of the Company, which operates after normal
business hours and on weekends.
In connection with the Avon Settlement and Mrs. Macfarlane's employment
agreement, Mrs. Macfarlane was to receive $361,200 from the proceeds from the
Avon Settlement, of which $110,900 has been paid. The remaining $250,300 is
currently payable and accrues interest at the rate of 10% per annum. See
"Employment Agreements."
Management believes that each of the transactions described above were obtained
on terms at least as favorable as could have been obtained from unaffiliated
third parties.
56
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) and (d)1. Financial Statements
The following Financial Statements of the Company are
included in Part II, Item 8 of this report:
Independent Accountant's Reports
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
(a) and (d)2. Financial Statements Schedules
All schedules have been omitted because they are not applicable, are not
required or because the required information is included in the Financial
Statements or notes thereto.
(b) Reports on Form 8-K:
Form 8-K/A, dated November 19, 1999, amending and restating the text of Item 7
of the Form 8-K and Exhibit 10.1 thereto filed with the Securities and Exchange
Commission on June 18, 1999.
Form 8-K/A, dated November 19, 1999, amending and restating the text of Item 7
of the Form 8-K and Exhibit 10.1 thereto filed with the Securities and Exchange
Commission on November 3, 1998.
(c) The following exhibits are included in this report:
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Form 10-Q filed on August 23, 1999).
3.1.1+ Certificate of Amendment to the Certificate of Incorporation
of the Company.
3.2+ By-Laws of the Company.
4.1 Specimen form of the Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to the
Company's
Registration Statement on Form S-1 (File No. 33-54256),
filed on November 5, 1992, as amended (the "Registration
Statement")).
4.2 Shareholders' Rights Plan, adopted by the Company on
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<S> <C>
December 31, 1998 (incorporated by reference as
Exhibit 1 to the Form 8-A dated January 5, 1999).
4.3 Subscription Agreement, dated April 15, 1999 (incorporated by
reference to Exhibit 4.2 to the Form 8-K dated April 30, 1999).
4.4 Form of 14%Convertible Debentures Due April 15, 2002 (incorporated
by reference to Exhibit 4.3 to the Form 8-K dated April 30, 1999).
4.5 Preferred Stock Purchase Agreement, dated as of June 11,
1999, by and between the Company and LB I Group Inc.
(incorporated by reference to Exhibit 4.1 to the Form 8-K,
filed on July 1, 1999).
4.6 Warrant Agreement, dated as of June 11, 1999, by and between
the Company and LB I Group Inc. (incorporated by reference
to Exhibit 4.2 to the Form 8-K, filed on July 1, 1999).
4.7+ Preferred Stock Purchase Agreement, dated as of February 11, 2000,
by and between the Company and LB I Group Inc.
4.8+ Warrant Agreement, dated as of February 11, 2000, by and between
the Company and LB I Group Inc.
9.1 Voting Proxy dated December 13, 1995, of David Kenneth
Macfarlane to Darby Simpson Macfarlane (incorporated by
reference to Exhibit 2 to Schedule 13D of Darby Macfarlane
and Ken Macfarlane dated February 12, 1996).
9.2 Voting Trust Agreement dated December 13, 1995, between
David Kenneth Macfarlane and Darby Simpson Macfarlane
(incorporated by reference to Exhibit 3 to Schedule 13D of
Darby Macfarlane and Ken Macfarlane dated February 12,
1996).
10.1* Form of Employment Agreement between the Company and Darby
Simpson Macfarlane (incorporated by reference to Exhibit
10.1 to the Registration Statement).
10.2* Form of Employment Agreement between the Company and David
Kenneth Macfarlane (incorporated by reference to Exhibit
10.2 to the Registration Statement).
10.3* Consulting Agreement, dated February 25, 1992, between the
Company and Dr. Fred W. Billmeyer, Jr. (incorporated by
reference to Exhibit 10.4 to the Registration Statement).
10.4 Form of Indemnity Agreement between the Company and its
directors and officers (incorporated by reference to Exhibit
10.6 to the Registration Statement).
10.5 Know-How Agreement, dated September 3, 1992, between the
Company, Darby Simpson Macfarlane and David Kenneth
Macfarlane (incorporated by reference to Exhibit 10.12 to
the Registration Statement).
10.6 Assignment, dated September 3, 1992 from Darby Simpson
Macfarlane to the Company regarding Intellectual Property
(incorporated by reference to Exhibit 10.13 to the
Registration Statement).
10.7** Agreement, dated April 16, 1992, between the Company and IMS
Cosmetics, Inc. (incorporated by reference to Exhibit 10.14
to the Registration Statement).
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<S> <C>
10.8 U.S. Patent No. 4,909,632 relating to Method for Selecting
Personal Compatible Colors (incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994).
10.9 U.S. Patent No. 5,311,293 relating to Method and Instrument
for Selecting Personal Compatible Colors (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10.10 U.S. Patent No. 5,313,267 relating to Method and Instrument
for Selecting Personal Compatible Colors (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10.11 The Australian Patent relating to Method of Selecting
Personal Compatible Color (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994).
10.12 European Community Patent No. 0446512 relating to Method for
Selecting Personal Compatible Colors (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10.13 U.S. Patent No. 5,671,735 relating to Method and Apparatus
for Detecting and Measuring Conditions Affecting Color
(incorporated by reference to Exhibit 10.13 to the Amendment
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.14 Assignment, dated October 30, 1992, between Darby Simpson
Macfarlane and the Company relating to the Avon litigation
(incorporated by reference to Exhibit 10.19 to the
Registration Statement).
10.15 Know-How Assignment, dated October 30, 1992, from Pink &
Peach Computer Corp. to the Company (incorporated by
reference to Exhibit 10.20 to the Registration Statement).
10.16 1992 Stock Option Plan (incorporated by reference to Exhibit
10.1 to the Registration Statement on Form 8-A (File No.
333-51697)).
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<S> <C>
10.17 Consulting Agreement dated January 6, 1995, between the
Company and Janssen-Meyers Associates, L.P. (incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10.18 Warrant Agreement dated January 6, 1995, between the Company
and Janssen-Meyers Associates, L.P. (incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10.19 Warrant Agreement dated March 13, 1995, between the Company
and Janssen-Meyers Associates, L.P. (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10.20 Manufacturing Agreement, dated November 3, 1998, between the
Company and a third party manufacturer (incorporated by
reference as Exhibit 10.1 to the Form 8-K dated November 12,
1998).
10.21 Rights Agreement, dated January 11, 1999, between the
Company and Continental Stock Transfer & Trust Company
(incorporated by reference as Exhibit 1 to the Form 8-A
dated January 5, 1999).
10.22 Subscription Agreement, dated April 15, 1999 (incorporated by
reference to Exhibit 4.2 to the Form 8-K dated April 30, 1999).
10.23 Form of 14%Convertible Debentures Due April 15, 2002 (incorporated
by reference to Exhibit 4.3 to the Form 8-K dated April 30, 1999).
10.24 Preferred Stock Purchase Agreement, dated as of June 11,
1999, by and between the Company and LB I Group Inc.
(incorporated by reference to Exhibit 4.1 to the Form 8-K,
filed on July 1, 1999).
10.25 Warrant Agreement, dated as of February 11, 1999, by and
between the Company and LB I Group Inc. (incorporated by
reference to Exhibit 4.2 to the Form 8-K, filed on July 1,
1999).
10.26 Preferred Stock Purchase Agreement, dated as of February 11,
2000, by and between the Company and LB I Group Inc.
(incorporated by reference to Exhibit 4.7 hereof).
10.27 Warrant Agreement, dated as of Fenruary 11, 2000, by and between
the Company and LB I Group Inc. (incorporated by reference to
Exhibit 4.8 hereof).
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21
to the Company's Post Effective Amendment No. 1 on Form SB-1 to the
Registration Statement filed on January 11, 1994).
23+ Consents of Independent Accountants.
27+ Financial Data Schedule
</TABLE>
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
** Portions subject to confidedential treatment.
+ Filed herewith.
60
<PAGE>
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: March 29, 2000
-----------------------
Darby S. Macfarlane,
Chief Executive Officer
By: /s/ Frank Marchese Date: March 29, 2000
-------------------
Frank Marchese,
Chief Financial Officer
(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: March 29, 2000
-----------------------
Darby S. Macfarlane,
CEO; Chairman of the Board;
Assistant Treasurer; Director
By: /s/ David K. Macfarlane Date: March 29, 2000
-----------------------
David K. Macfarlane,
Vice President, Research & Development;
Director
By: /s/ Leslie Foglesong Date: March 29, 2000
--------------------
Leslie Foglesong,
Secretary; Treasurer; Director
By: /s/ Edmund Vimond Date: March 29, 2000
-----------------
Edmund Vimond,
Director
By: /s/ Edward Mahoney Date: March 29, 2000
------------------
Edward Mahoney,
Director
61
<PAGE>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,790,400 $ 3,929,800
Accounts receivable 842,300 92,300
Inventories 1,171,800 147,300
Prepaid expenses and other current assets 129,200 81,800
------------ ------------
Total Current Assets 4,933,700 4,251,200
PROPERTY AND EQUIPMENT - NET 612,200 301,700
SOFTWARE DEVELOPMENT COSTS - NET 470,500 546,000
PATENT COSTS - NET 984,000 540,300
COLORMATE(REGISTERED TRADEMARK) UNITS - 1,820,100
OTHER AMORTIZABLE ASSETS - NET 455,400 -
OTHER ASSETS 654,400 418,900
------------ ------------
$ 8,110,200 $ 7,878,200
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts payable to related party $ 256,100 $ 318,900
Accounts payable and accrued expenses:
Attorneys and accountants 394,600 673,000
Consultants 119,100 146,500
Trade 240,000 156,800
------------ ------------
Total Current Liabilities 1,009,800 1,295,200
------------ ------------
LONG TERM DEBT:
Senior convertible debentures 4,165,800 -
Accrued interest on senior convertible debentures 495,800 -
------------ ------------
4,661,600 -
------------ ------------
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 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 2,928,700 -
------------ ------------
2,942,500 13,800
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock, par value $.001 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 15,539,117 (1999)
and 15,452,442 (1998) shares 15,500 15,400
Additional paid-in capital 34,062,000 28,327,000
Accumulated deficit (34,581,200) (21,773,200)
------------ ------------
Total Shareholders' Equity (Deficiency) (503,700) 6,569,200
------------ ------------
$ 8,110,200 $ 7,878,200
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
34
<PAGE>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Sales $ 1,103,200 $ - $ -
Lease, license and service contracts - 45,000 10,500
Other - 1,600 1,000
------------- ------------ ------------
1,103,200 46,600 11,500
------------- ------------ ------------
COSTS AND EXPENSES:
Cost of sales 898,100 - -
Sales, marketing and trade show costs 2,511,600 958,900 119,100
Medical regulatory expenses 1,323,300 1,341,500 1,148,600
Research and development 996,300 705,000 435,300
Patent application costs 134,400 221,700 691,200
Compensation costs relating to options
granted to consultants (non cash) 984,000 843,400 582,400
General and administrative:
Compensation - officers and employees 803,900 772,200 729,300
Consultants 301,000 265,600 198,300
Legal fees 793,900 956,900 288,100
Accounting fees 79,100 51,000 35,100
Rent and storage 296,800 266,000 199,900
Insurance 222,600 194,700 220,600
Travel and entertainment 120,000 98,200 17,900
Repairs and maintenance 118,100 87,500 122,100
Depreciation and amortization 494,600 130,900 80,500
Payroll taxes 55,200 56,700 84,900
Stock administrative fees 171,700 83,300 53,300
Employee benefit plan 5,100 133,200 -
Public relations 192,700 299,400 9,700
Other 296,500 210,200 260,400
------------- ------------ ------------
10,798,900 7,676,300 5,276,700
------------- ------------ ------------
OPERATING LOSS (9,695,700) (7,629,700) (5,265,200)
------------- ------------ ------------
INTEREST INCOME (EXPENSE)
Interest income 200,700 372,000 238,900
Interest expense and non-cash financing costs
including $2,740,800 in non-cash OID costs in 1999 (3,313,000) (27,100) (26,800)
------------- ------------ ------------
(3,112,300) 344,900 212,100
------------- ------------ ------------
NET LOSS $ (12,808,000) $ (7,284,800) $ (5,053,100)
============= ============ =============
NET LOSS TO COMMON STOCKHOLDERS:
NET LOSS $ (12,808,000) $ (7,284,800) $ (5,053,100)
DEEMED DIVIDEND FOR CLASS B, SERIES 2
CONVERTIBLE PREFERRED STOCK 1,558,300 - -
------------- ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $ (14,366,300) $ (7,284,800) $ (5,053,100)
============= ============ =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,498,300 14,968,019 12,601,430
============= ============ =============
BASIC AND DILUTED LOSS PER SHARE $ (0.93) $ (0.49) $ (0.40)
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements
35
<PAGE>
<TABLE>
<CAPTION>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock
--------------------------------
Number Additional
of Shares Par Paid - in Accumulated
Outstanding Value Capital Deficit
----------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 10,753,096 $ 10,800 $ 15,366,700 $ (9,435,300)
Year Ended December 31, 1997:
Net Loss - - - (5,053,100)
Exercise of Stock options and
warrants 3,061,763 3,000 8,405,500 -
Compensation cost relating to
options granted to consultants - - 582,400 -
Other equity transactions,
net of costs - - 16,300 -
----------------- ---------- --------------- ----------------
Balances, December 31, 1997 13,814,859 13,800 24,370,900 (14,488,400)
Year Ended December 31, 1998:
Net Loss - - - (7,284,800)
Exercise of Stock options and
warrants 1,637,583 1,600 3,112,700 -
Compensation cost relating to
options granted to consultants - - 843,400 -
----------------- ---------- --------------- ----------------
Balances, December 31, 1998 15,452,442 15,400 28,327,000 (21,773,200)
Year Ended December 31, 1999:
Net Loss - - - (12,808,000)
Exercise of Stock options and
warrants 86,675 100 377,300 -
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) 2,357,000
Deemed dividend on Class B,
convertible preferred stock (1,558,300)
Compensation cost relating to
options granted to consultants - - 984,000 -
----------------- ---------- --------------- ----------------
Balances, December 31, 1999 15,539,117 $ 15,500 $ 34,062,000 $ (34,581,200)
================= ========== =============== ================
</TABLE>
See accompanying notes to consolidated financial statements
36
<PAGE>
<TABLE>
<CAPTION>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (12,808,000) $ (7,284,800) $ (5,053,100)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 494,600 130,900 80,500
Provisions for losses on accounts receivable - - (10,000)
Provisions for slow moving inventories - - 75,000
Compensation cost relating to options granted to consultants 984,000 843,400 582,400
Non-cash financing costs 2,740,800 - -
Changes in operating assets and liabilities:
Accounts receivable (750,000) 100 5,000
Inventories (293,400) 800 300
Prepaid expenses and other assets (47,400) (5,400) 12,800
Other assets (49,700) 6,600 (8,600)
Accrued interest on senior convertible debentures 495,800 - -
Accounts payable and accrued expenses (222,600) 431,700 95,200
---------------- --------------- --------------
Net cash flows from operating activities (9,455,900) (5,876,700) (4,220,500)
---------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs (81,300) (421,800) (124,200)
Capitalized patent costs (553,000) (540,300) -
Purchase of property and equipment (91,200) (87,700) (169,000)
Purchase of ColorMate(Registered Trademark) Units
and deposits thereon - (1,504,400) -
---------------- --------------- --------------
Net cash flows from investing activities (725,500) (2,554,200) (293,200)
---------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net
of related costs 377,400 3,114,300 8,424,800
Proceeds (payments) of amounts payable to related party (62,800) 25,700 (32,800)
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 - (4,700) (5,300)
---------------- --------------- --------------
Net cash flows from financing activities 9,042,000 3,135,300 8,386,700
---------------- --------------- --------------
NET CHANGE IN CASH AND EQUIVALENTS (1,139,400) (5,295,600) 3,873,000
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,929,800 9,225,400 5,352,400
---------------- --------------- --------------
CASH AND EQUIVALENTS, END OF PERIOD $ 2,790,400 $ 3,929,800 $ 9,225,400
================ =============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 88,900 $ 1,400 $ 33,700
================ =============== ==============
Reclassification of ColorMate(Registered Trademark) Units $ 1,820,100
================
</TABLE>
See accompanying notes to consolidated financial statements
37
<PAGE>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Nature of Business and Summary of Significant Accounting Policies:
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.
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 transactions have been eliminated in consolidation.
Patent Application Costs - Patent application costs had been expensed through
1997 because the Company was unable to determine the future recoverability of
such costs. In the first quarter of 1998, the Company was able to determine
future recoverability of such costs, due to marketing plans and potential
business proposals. Accordingly, the Company began capitalizing certain patent
application costs, commencing January 1, 1998, and is amortizing such costs over
the remaining patent lives, generally 10 to 15 years. Accumulated patent
amortization costs as of December 31, 1999 is $109,300. The Company will assess
the continuing carrying value of these assets when events and circumstances
warrant.
Revenue recognition - The Company records revenue from the sale of ColorMate
(Registered Trademark) TLc-BiliTest (Registered Trademark) Systems and
TLc-Lensette (Trademark) Calibration Standards at the time of shipment at the
minimum transfer price provided in the distribution agreement. The Company
expects to receive additional amounts from the distributor equal to a defined
percentage of the distributors' sales price of the above products. The Company
will record revenue from the additional amounts upon receipt from the
distributor.
Inventories - Inventories, consisting primarily of component parts and finished
goods, are stated at the lower of first-in, first-out cost or market.
Property and Equipment and Depreciation - Property and equipment are stated at
cost. Depreciation is computed using principally the straight-line method over
estimated useful lives of 5 to 7 years. Accumulated depreciation was $460,600
and $312,000 in 1999 and 1998, respectfully. The Company continually evaluates
the life and carrying amount of such equipment in light of current conditions.
No writedowns have been required through December 31, 1999.
Software Development Costs - Once technological feasibility was established, the
costs of developing software to be marketed as part of a product was
capitalized. Capitalization ceased in 1999 when the products became available
for sale. The costs are amortized on the basis of estimated future revenues with
annual minimum charges, which is similar to the straight line basis over the
estimated remaining useful life (three years). Accumulated amortization of
Software development costs at December 31, 1999 is $157,000.
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<PAGE>
Long-lived assets - Long-lived assets, such as intangible assets and property
and equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. No impairment losses have been necessary through
December 31, 1999.
Reclassification - Certain amounts previously reported have been reclassified to
conform to current year presentation.
Cash Equivalents - The Company considers certificates of deposit, money market
funds and all other highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Financial Instruments - Financial instruments include cash and equivalents,
accounts receivable, other assets, accounts payable, accrued expenses and long
term debt. The amounts reported for financial instruments are considered to be
reasonable approximations of their fair values. The fair value estimates
presented herein were based on market information available to management as of
December 31, 1999.
Concentration of Credit Risk/Major Customers, Supplier and Manufacturer - The
Company maintains its cash balances with financial institutions insured by the
Federal Deposit Insurance Corporation to a maximum of $100,000. The Company's
balances exceed such amount. The Company generated approximately 98% of its
revenues from one customer in 1999 (see Note 4).
The Company is dependent upon one supplier for a major part of its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System and
one company to manufacture the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. The loss of these companies would
materially adversely affect the Company.
Loss Per Share - The Company follows SFAS No. 128, "Earnings Per Share," ("EPS")
which requires a presentation of basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS assumes conversion of convertible debt, preferred stock and the
issuance of common stock for all other potentially dilutive equivalent shares
outstanding. All of these equivalents were anti-dilutive for all periods
presented.
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," ("FAS 123") encourages, but does not
require, companies to record compensation cost at fair value for stock-based
employee compensation plans. The Company has chosen to continue to account for
stock-based compensation for employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. Accordingly, compensation
cost for options granted by the Company is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The fair value of option
grants is discussed in Note 7.
Income Taxes - Deferred tax assets and liabilities reflect the net tax effects
of temporary differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts for income tax purposes. A
valuation allowance is provided for the net deferred tax assets if it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Research and Development - These costs are expensed as they are incurred.
39
<PAGE>
Recent Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement will be adopted in the Company's 2001 fiscal year.
While management is still reviewing the statement, it believes the adoption of
this statement will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
Note 2 -- Management's Plans to Overcome Operating Difficulties:
Since 1989, the Company has incurred losses from operations and net cash
outflows from operations, and has owned ColorMate(Registered Trademark) System
units since June 1991 whose ultimate recoverability depends upon the Company's
future marketing success. The Company expects to license its patents and
proprietary technology, rent or sell its equipment and market its related
services and products to ultimately overcome these difficulties. In the event
the ColorMate(Registered Trademark) System units and related proprietary
technology are not successfully leased/licensed and/or the products are not
successfully marketed in the future, the principal effect may be a substantial
write-down of the book value of such units and continued significant operating
losses.
On July 30, 1997, the Company was granted clearance by the FDA for commercial
marketing of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System for the non-invasive monitoring of newborn bilirubinemia
(infant jaundice) by health care professionals in hospitals, pediatricians'
offices or by home healthcare agencies.
The Company anticipates incurring significant additional expenditures related to
manufacturing expenses, parts order, insurance, regulatory compliance and staff
as production and distribution continues. 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 in February 2000, (See Note 9), revenues from future sales of the
ColorMate(Registered Trademark) units, and payments received under the
distribution agreement, the Company will have sufficient liquidity at least
until December 31, 2000.
If the Company is able to profitably market its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, Intellectual Properties,
ColorMate(Registered Trademark) units, new cosmetics line and 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) System units for all
applications will be marketed interchangeably, as the only difference between
the different models are design, 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, generate
significant revenue from operations and/or successfully market its products and
technologies, at such point in time, it may have to significantly curtail
operations.
Note 3 -- Related Party Transactions, Commitments and Contingencies:
Related Party Transactions - In connection with the Avon Settlement in an
earlier year and her employment agreement, Mrs. Macfarlane, the Company's CEO
and a principal shareholder, was to receive a bonus of $361,200, of which
$110,900 had been paid. The remaining $250,300 accrues interest at the rate of
10% per annum. In December 1997, Mrs. Macfarlane agreed to delay demand for
payment until January 1999, and further extended this repayment to April 2000.
At December 31, 1999, $256,100, including interest, remained due.
40
<PAGE>
Lease Agreements - The Company leases office and warehouse space. Most of the
leases are on a month to month basis. Total rent and storage expense was
$296,800, $266,000 and $199,900 in 1999, 1998 and 1997, respectively.
Approximately $31,000 per year related to rent paid to Mrs. Macfarlane under
month to month lease agreements. Such rent is equal to Mrs. Macfarlane's actual
cost for such premises.
Retirement Plan - In 1997, the Company adopted a defined contribution plan which
provided for discretionary Company contributions for qualified employees. The
expense relating to this plan was $0, $93,200 and $0 in 1999, 1998 and 1997,
respectively.
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 Trademark)
TLc-BiliTest(Registered Trademark) System; (ii) the market size and revenue
potential of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System; and (iii) the existence and status of negotiations with
potential distributors of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) 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 moved to dismiss the complaint, which motion was fully briefed and
was pending before the court. In March 2000, the defendant's motion to dismiss
the complaint was granted subject to a 30-day period within which the plaintiffs
may refile the complaint. If the Plaintiffs do, in fact refile a complaint, 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.
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<PAGE>
Note 4 -- ColorMate(Registered Trademark) Units:
ColorMate (Registered Trademark) TLc-BiliTest (Registered Trademark) Systems:
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 Trademark) TLc-BiliTest(Registered Trademark)
System ( "Systems") for non-invasive 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 Trademark)
TLc-BiliTest (Registered Trademark) 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
Trademark)TLc-BiliTest (Registered Trademark) System and the
TLc-Lensette(Trademark) Calibration Standard. Sales under the agreement
commenced in July 1999.
The agreement called for the Company to provide a certain number of Systems to
DO at no cost until sold to serve as demo units or promotional units to assist
in the sales and marketing of the Systems. The Company maintains title of
certain of these Systems, while DO obtained ownership of the other Systems. The
Company has classified $329,000 in property and equipment, representing the cost
of the Systems for which it maintains title, and has classified $506,000 in
other amortizable assets, representing the cost of the remaining Systems
(intangible asset associated with obtaining the agreement with DO). The amount
classified in other amortizable assets is being amortized over the life of the
DO Agreement, 5 years. All remaining amounts previously classified as
ColorMate(Registered Trademark) Units have been classified as inventory, fixed
assets, other assets or other amortizable assets. The fixed assets and other
amortizable assets are being depreciated over a five - year period.
In 1999, the Company recorded sales from both the ColorMate (Registered
Trademark) TLc BiliTest (Registered Trademark) System and the TLc-Lensette
(Trademark) Calibration Standards. The sales were recorded at the initial
minimum transfer price as defined in the distribution agreement. The Company
incurred a small loss on the initial sales of the Systems. The Company expects
to receive additional amounts from the distributor equal to a defined percentage
of the distributors' sale of the above products ("profit sharing payments"). The
Company expects the initial loss on the sale to be more than offset through the
expected profits generated from the sales of TLc - Lensette(Trademark)
Calibration Standards and the profit sharing payments.
ColorMate(Registered Trademark) Systems:
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 (consisting of sensors,
miniature printers, cables, power supplies and certain other
42
<PAGE>
items) from the existing ColorMate(Registered Trademark) units for use in the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System. The
costs (which are not expected to be material) incurred in extracting the
components from the existing ColorMate(Registered Trademark) units for use in
the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
will be expensed as incurred and the value currently assigned to the existing
ColorMate(Registered Trademark) units ($500 per unit) will, upon extraction of
the component parts for current use, be reclassified to inventory as the current
replacement cost of these components exceeds the book value of the
ColorMate(Registered Trademark) units. Management believes the cost of the
recovered components will be realized from future sales.
The cost of the above units has been classified as other assets in the
accompanying consolidated balance sheets.
Note 5 -- Income Taxes:
The Company has a deferred tax asset at December 31, 1999 and 1998 of
approximately $15,000,000 and $10,000,000, respectively. These amounts relate
primarily to net operating loss and tax credit carryforwards. These assets have
been offset by valuation allowances since their realizability can not be
determined. At December 31, 1999, the Company had net operating loss
carryforwards of approximately $38,000,000 for Federal income tax purposes which
expire through December 31, 2019. In addition, the Company had research and
development tax credit carryforwards of approximately $75,000 at December 31,
1999 available to offset future Federal income taxes. The utilization of such
loss and tax credit carryforwards may be limited due to changes in control.
Included in the net operating loss carryforwards is approximately $5,700,000
relating to the exercise of stock options. The benefits, if any, from the
utilization of this amount will be credited to additional paid-in capital.
Note 6 -- Senior Convertible Debentures:
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 (except for 20%, which was immediately convertible). 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 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 Debentures
resulted in an original issue discount charge of approximately $3.6 million
(representing the intrinsic value of the below-market conversion price) which
will be amortized over one year. Through December 31, 1999 the Company has
amortized $2.7 million.
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<PAGE>
Note 7 -- Common Stock and Stock Options:
Stock Split - In February 1998, the Company effected a three-for-two split (the
"Stock Split"). All share and per share data included in this report have been
restated to reflect the stock split.
Stock Option Plan - The Company has a Stock Option Plan which currently provides
for options to purchase up to 5,500,000 shares of Common Stock. The Plan
provides for the granting of incentive stock options to all employees and
non-incentive stock options to all employees and certain consultants at an
exercise price equal to at least the fair market value of a share of Common
Stock at the date of grant for incentive options (other than for the holders of
more than 10% of the outstanding Common Stock which must be at least 110% of the
fair market value on the date of grant) and at least 85% of the fair market
value on the date of grant for non-incentive options. Stock options are
generally exercisable in 33-1/3% annual increments commencing one year after the
date of grant and generally expire five years after the date of grant.
The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999, no dividend yield, expected
volatility of 76%, 60% and 46%, risk free interest rates of 5% to 7% and
expected lives of approximately 2.5 years. The grant date fair market value for
options granted in 1999, 1998 and 1997 was $2.23, $2.26 and $6.46, respectively.
If compensation cost for the Company's stock option plan had been determined in
accordance with SFAS No. 123, net loss would have been increased in 1997, 1998
and 1999 by approximately $425,000, $470,000 and $121,000, respectively and loss
per share would have been increased by $.05, $.03 and $.01, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------------
Weighted
average
remaining
Number Outstanding contractual Weighted Weighted average
as of 12/31/99 life (years) average price Number exercisable exercise price
-------------- ------------ ------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Range of
Exercise Prices:
$1.02 - $2.92 1,128,748 1.64 $2.82 1,128,748 $2.82
$2.96 - $5.42 1,219,499 3.45 5.20 595,249 5.16
$7.00 - $8.25 523,000 3.10 7.75 201,833 7.76
$9.25 - $10.00 275,250 3.17 9.44 137,667 9.48
------- ---- ---- ------- ----
3,146,497 2.72 $5.14 2,063,497 $4.42
========= ==== ===== ========= =====
</TABLE>
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<PAGE>
Transactions under the stock option plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
------ --------------
<S> <C> <C>
Shares under option at December 31, 1996 1,972,500 2.64
Granted (at $5.00 to $10.00 per share) 791,250 7.04
Exercised (671,502) 2.34
Shares under option at December 31, 1997 2,092,248 4.40
Granted (at $4.88 to $9.25 per share) 1,432,500 6.40
Exercised (165,700) 3.85
Canceled (at $7.46 to $8.25 per share) (247,500) 7.82
Shares under option at December 31, 1998 3,111,548 5.08
Granted (at $4.68 to $9.375 per share) 160,000 6.20
Exercised (62,551) 5.39
Canceled (at $1.50 to $5.42 per share) (62,500) 4.47
Shares under option at December 31, 1999 3,146,497 5.14
========= ====
Options exercisable at December
1997 1,201,082
1998 1,470,715
1999 2,063,497
</TABLE>
The Company granted options to consultants and certain other professionals who
provide services to the Company. These options have been valued in accordance
with FAS 123 and are being expensed over the vesting period of the options. The
amounts expensed in 1997, 1998 and 1999 amounted to $582,400, $843,400 and
$984,000, respectively. The activity for these options is included in the table
above.
At December 31, 1999 warrants to purchase 454,148 shares of common stock at
$1.67 per share were outstanding. These warrants, issued to a placement agent in
previous years in connection with equity financings, expire as follows: (i)
100,174 warrants issued on January 6, 1995 expire January 6, 2002; (ii) 408
warrants issued on March 13, 1995 expire March 13, 2002; (iii) 93,628 warrants
issued on May 4, 1995 expire May 4, 2002; and (iv) 259,938 warrants issued on
June 8, 1995 expire June 8, 2002. At December 31, 1998, warrants to purchase
478,273 shares of Common Stock at an exercise price of $1.67 were outstanding.
In addition, 270,690 and 304,372 warrants at an exercise price of $6.99,
expiring June 2004 and February 2005, respectively, were issued in connection
with financing transactions in June 1999 and February 2000 (See Notes 8 and 9).
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<PAGE>
Note 8 -- Preferred Stock:
Class A:
The Company's shares of Class A Convertible Preferred Stock are entitled to
non-cumulative dividends, if declared, at $.001 per annum. In February 1998, the
shareholders approved an amendment to the Class A Convertible Preferred Stock to
provide that in the event either the Company's earnings before interest, income
taxes and extraordinary items exceed $20,000,000 for two consecutive calendar
years, or the closing bid price exceeds $31.11 for 30 consecutive trading days
at any time through December 31, 2000, each share of Class A Preferred Stock
shall be convertible into .979 shares of Common Stock. Such shares shall
otherwise be called for redemption during 120 days following December 31, 2000
at $.01 per share plus any declared but unpaid dividends.
In addition, the shareholders approved an amendment to the Company's Certificate
of Incorporation to (1) 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, and (2) revise the calculation of the
earnings goal needed to trigger the conversion feature of the Class A
Convertible Preferred Stock by deleting the exclusion therefrom of extraordinary
items and revenues and earnings generated by businesses acquired by the Company.
Class B:
The Company also has authorized 10,000,000 shares of Class B Preferred Stock
which may be issued with such rights and preferences as the Board of Directors
may determine upon issuance.
Class B Series 1 Preferred stock:
In January 1999, the Company amended its Certificate of Incorporation to fix
the relative rights, preferences and limitations with respect to the Class B
Preferred Stock pursuant to the Shareholders' Rights Plan (the "Plan") adopted
in December 1998 by the Board of Directors. Under the Plan, each shareholder
will receive a dividend of one right for each share of the Company's outstanding
common stock (a "Right"). Subject to the terms of the rights agreement between
the Company and its transfer agent (the "Rights Agreement"), each Right will
entitle the holder to purchase one one-hundredth of a share of the Company's new
Class B Series 1 Preferred Stock at an initial exercise price of $28. Until the
Rights become exercisable, they will be represented by, and trade with, the
outstanding common stock; the Company does not anticipate issuing separate
certificates for the Rights at this time.
Initially, the Rights are attached to the Company's common stock and are not
exercisable. They become detached from the Common Stock, and become immediately
exercisable, (i) following expiration of the Board of Directors' right to redeem
the Rights during the 10 day window period (the "Window Period"), or any
extension of the Window Period, after any person or group (other than the
exempted shareholder) becomes the beneficial owner of 20 percent or more of the
Company's common stock (other than acquisitions which are approved in advance by
the Board of Directors), or (ii) ten days after any person or group announces a
tender or exchange offer that would result in that same beneficial ownership
level (other than pursuant to certain permitted offers).
The distribution of Rights was made on January 11, 1999 to shareholders of
record of common stock on that date, and shares of common stock that are newly
issued after that date will also carry Rights until the Rights become detached
from the common stock. The Rights will expire on January 11, 2009. The Rights
distribution is not taxable to shareholders. The Company may redeem the Rights
for $0.001 each at any time during the Window Period, or any extension thereof,
after a buyer acquires a 20 percent position in the Company, and under certain
other circumstances.
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<PAGE>
Class B series 2 convertible preferred stock:
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 $6.29 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 $6.29 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 $9.44 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 $6.99 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 $13.98.
The Company also agreed to issue and sell an additional 40,000 shares of
convertible preferred stock and warrants to purchase 304,372 shares of the
Company's Common Stock to the same investor at a second closing( see Note 9).
The private placement has resulted in a deemed dividend charge of approximately
$3.2 million, resulting from a below market conversion price of preferred stock
($1,154,000), a $15 per share redemption premium and other costs ($800,000) and
the fair value (using the Black Scholes method) of warrants issued in connection
with the private placement ($1,275,000). Of this amount, approximately $1.6
million has been charged through December 1999 and $1.6 million will be charged
over the redemption period.
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Note 9 -- Subsequent Events:
On February 11, 2000, the Company completed the second closing of a private
placement of 40,000 shares of convertible preferred stock and warrants to
purchase 254,372 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 $6.29 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 $6.29 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 August 11, 2000 if the average closing bid price of the Company's Common
Stock for ten consecutive trading days equals or exceeds $9.44 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 February 11, 2000 the Company also issued an
aggregate of 254,372 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 $6.99 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 August 11, 2000 if the average closing bid price of the Company's
Common Stock measured over twenty consecutive trading days equals or exceeds
$13.98.
The private placement will result in a deemed dividend charge of approximately
$2.5 million, resulting from a below market conversion price of preferred stock
($445,000), a $15 per share redemption premium and other costs ($990,000) and
the fair value (using the Black Scholes method) of warrants issued in connection
with the private placement ($1,050,000). Of this amount, approximately $.5
million will be charged immediately and $2.0 million will be charged over the
redemption period.
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EXHIBIT 3.1.1
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 4 thereof to
read in full as follows:
"4. Class B Series 3 Preferred Stock:
(1) The Corporation has authorized the creation of a series of Class B
Preferred Stock to be designated "Class B Series 3 Convertible Preferred Stock"
(the "Series 3 Preferred Stock").
(2) The number of shares constituting the Series 3 Preferred Stock
shall be fixed at 40,000. The Series 3 Preferred Stock shall have no par value.
(3) The shares of Series 3 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
Series 3 Preferred Stock (collectively, the "Junior Securities"),
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(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 Series
3 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
Series 3 Preferred Stock (collectively, the "Senior Securities").
(4) The holders of shares of Series 3 Preferred Stock shall not be
entitled to any voting rights other than those provided by law. However, so long
as any shares of Series 3 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 Series 3 Preferred Stock then
outstanding, (a) alter or change adversely the absolute or relative powers,
preferences or rights given to the Series 3 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 Series 3 Preferred Stock, (d) amend its Certificate of
Incorporation, bylaws or other charter documents so as to affect adversely any
rights of any holders of Series 3 Preferred Stock, (e) increase the authorized
number of shares of Series 3 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
Series 3 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 Series 3 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 Series 3 Preferred Stock an amount in cash equal to
$100.00 per share of Series 3 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 Series 3
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 Series 3 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 Series 3
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.
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(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 Series 3 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 Series 3 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 Series 3 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 issuance of the shares
of Series 3 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 Series 3 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 Series 3 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 issuance of the shares of Series 3
Preferred Stock (the "Extended Redemption Date"), all rights of the holders of
the shares of Series 3 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 Series 3 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 Series 3 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 Series 3 Preferred Stock then outstanding, on the
Extended Redemption Date all of the outstanding shares of Series 3 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 Series 3 Preferred
Stock, which shall be paid at the rate of $8.00 per share per annum (computed on
the basis of the actual
3
<PAGE>
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 Series 3 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 Series 3 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 Series 3 Preferred
Stock being redeemed.
(8) (a) Subject to the provision for adjustment set forth below, each
share of the Series 3 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 Series 3 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 the lower of (i) $6.67 and (ii) 90% of 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 issuance (the "Issue
Date"). 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 Series 3 Preferred Stock, free from any
preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Series 3 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 Series 3
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 Series 3 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 Series 3 Preferred Stock may be effected by any
holder thereof upon the surrender to the Corporation at the offices of the
Corporation of certificates representing Series 3 Preferred Stock to be
converted, accompanied by a written notice stating that such holder elects to
convert all or a specified portion of such Series 3 Preferred Stock in
accordance with the provisions of this Section 8 and
4
<PAGE>
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 Series 3 Preferred Stock
pursuant hereto. As promptly as practicable, and in any event within two
business days after the surrender of such certificates representing Series 3
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 Series 3 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
Series 3 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
Series 3 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 Series 3 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 Series 3 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 Series 3 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 Series 3 Preferred
Stock pursuant to this Section 8(c)(ii) and the Corporation fails for any reason
to pay the redemption price referenced above within
5
<PAGE>
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 Series 3 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 rights and privileges of the
holders of Series 3 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 Series 3 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 Series 3
6
<PAGE>
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 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 Series 3 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
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<PAGE>
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 Series 3
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.
(e) (i) Unless sooner redeemed or converted in accordance with the
provisions of Section 7 hereof or this Section 8 the outstanding shares of
Series 3 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
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(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 Series 3 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 Series 3
Preferred Stock shall be sent by or on behalf of the Corporation, postage
prepaid, to the holders of record of outstanding shares of Series 3 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 Series 3 Preferred Stock pursuant to the
Conversion Ratio, all rights of the holders of the shares of Series 3 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 Series 3 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 Series 3 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 Series 3 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 Series 3 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
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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
Series 3 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
Series 3 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.
Signed on February 10, 2000 ____________________
Darby S. Macfarlane
Chairperson of the Board
and Chief Executive Officer
<PAGE>
EXHIBIT 3.2
BY-LAWS
of
CHROMATICS INTERNATIONAL, INC.
----------------
ARTICLE I
OFFICES
Section 1. Principal Office
The principal office of the Corporation shall be in the city,
incorporated village or town and the county within the State of New York as is
designated in the Certificate of Incorporation.
Section 2. Additional Offices
The Corporation may also have offices and places of business
at such other places, within or without the State of New York, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Time and Place
Meetings of the shareholders of the Corporation may be held at
such time and place within or without the State of New York as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting
The annual meeting of the shareholders shall be held in each
year on the anniversary of the date of filing of the Certificate of
Incorporation, and the shareholders shall
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then elect a Board of Directors and transact such other business as may properly
be brought before the meeting.
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Section 3. Notice of Annual Meeting
Written notice of the place, date and hour of the annual
meeting of shareholders shall be given personally or by mail to each shareholder
entitled to vote thereat not less than ten (10) nor more than fifty (50) days
prior to the meeting.
Section 4. Special Meetings
[Repealed.]
Section 5. Notice of Special Meeting
[Repealed.]
Section 6. Quorum
Except as otherwise provided by law or by the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
Corporation issued and outstanding and entitled to vote thereat shall be
necessary to and shall constitute a quorum for the transaction of business at
all meetings of the shareholders; provided, however, that when a specified item
of business is required to be voted on by a class or series, voting as a class,
the holders of a majority of the shares of such class or series issued and
outstanding and entitled to vote thereat shall constitute a quorum for the
transaction of such specified item of business. If a quorum shall not be present
at any meeting of the shareholders, the shareholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, until a quorum shall be present. At any such
adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 7. Voting
(a) At any meeting of the shareholders every shareholder
having the right to vote shall be entitled to vote in person or by proxy. Each
shareholder shall have one (1) vote for each share of stock having voting power
which is registered in his name on the books of the Corporation. Except where
another date shall have been fixed as a record date for the determination of its
shareholders entitled to vote, no share of stock shall be voted at any election
of Directors which shall have been transferred on the books of the Corporation
within twenty (20) days next preceding such election of Directors.
Section 4. Vacancies
Except as otherwise provided by the Certificate of
Incorporation, if any vacancies occur in the Board of Directors by reason of the
death, resignation, retirement, disqualification or
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removal from office of any Director with cause, or if any new directorships are
created, all of the Directors then in office, although less than a quorum, may,
by majority vote, choose a successor or successors, or fill the newly created
directorships, and the Directors so chosen shall hold office until the next
annual meeting of the shareholders and until their successors shall be duly
elected and qualified, unless sooner displaced; provided, however, that if in
the event of any such vacancy, the Directors remaining in office shall be
unable, by majority vote, to fill such vacancy within thirty (30) days of the
occurrence thereof, the President or the Secretary may call a special meeting of
the shareholders at which such vacancy shall be filled. In the event of any
vacancy created by removal from office of any Director without cause, such
special meeting of the shareholders shall be so called within thirty (30) days
of the occurrence thereof, at which meeting such vacancy may be filled.
ARTICLE IV
MEETINGS OF THE BOARD
Section 1. Place
Except as otherwise provided by the Certificate of
Incorporation, and subject to the provisions of Section 6 of this Article IV,
the Board of Directors of the Corporation may hold meetings, both regular and
special, either within or without the State of New York as may be determined by
the Board of Directors. Any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of the Board of Directors or such
committee by means of a conference, telephone or similar communications
equipment allowing all persons participating in the meeting to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.
Section 2. Regular Meetings
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
Section 3. Special Meetings
Special meetings of the Board of Directors may be called by
the Chairman of the Board, if any, or by the President on two (2) days' notice
to each Director, either personally or by mail or by telegram; special meetings
shall be called by the Chairman, President or Secretary in like manner and on
like notice on the written request of one (1) Director.
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Section 4. Quorum; Voting
At all meetings of the Board of Directors a majority of the
entire Board shall be necessary to constitute a quorum for the transaction of
business, and the vote of a majority of the Directors present at the time of the
vote if a quorum is present shall be the act of the Board of Directors, except
as may be otherwise specifically provided by law. If a quorum shall not be
present at any meeting of the Board of Directors, the Directors present thereat
may adjourn the meeting from time to time until a quorum shall be present.
Notice of any such adjournment shall be given to any Directors who were not
present and, unless announced at the meeting, to the other Directors.
Section 5. Compensation
Directors, as such, shall not receive any stated salary for
their services, but, by resolution of the Board of Directors, a fixed fee and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of the Board; provided, however, that nothing herein contained
shall be construed to preclude any Director from serving the Corporation in any
other capacity and receiving compensation therefor.
Section 6. Written Consents
Unless otherwise restricted by the Certificate of
Incorporation, any action required to be taken by the Board of Directors may be
taken without a meeting if all members of the Board of Directors consent in
writing to the adoption of a resolution authorizing the action. The resolution
and written consents thereto by the members of the Board of Directors shall be
filed with the minutes of the proceedings of the Board of Directors.
ARTICLE V
NOTICES
Section 1. Form; Delivery
Notices to Directors and shareholders shall be in writing and
may be delivered personally or by mail or telegram. Notice by mail shall be
deemed to be given at the time when deposited in the post office or a letter
box, in a post-paid sealed wrapper, and addressed to Directors or shareholders
at their addresses appearing on the records of the Corporation.
Section 2. Waiver
Whenever a notice is required to be given by any statute, the
Certificate of Incorporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons
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entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to such notice. In addition, any shareholder attending a
meeting of shareholders in person or by proxy without protesting prior to the
conclusion of the meeting the lack of notice thereof to him, and any Director
attending a meeting of the Board of Directors without protesting prior to the
meeting or at its commencement such lack of notice, shall be conclusively deemed
to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Officers
The officers of the Corporation shall be a President, one or
more Vice-Presidents, a Secretary, a Treasurer, and such other officers
including a Chairman of the Board as may be determined by the Board of
Directors. Any two (2) or more offices may be held by the same person, except
the offices of President and Secretary; provided, however, that if all of the
issued and outstanding stock of the Corporation is owned by one (1) person, such
person may hold all or any combination of offices.
Section 2. Authority and Duties
All officers, as between themselves and the Corporation, shall
have such authority and perform such duties in the management of the Corporation
as may be provided in these By- Laws, or, to the extent not so provided, by the
Board of Directors.
Section 3. Term of Office; Removal
All officers shall be elected by the Board of Directors and
each shall hold office until the meeting of the Board of Directors following the
next annual meeting of shareholders, and until his successor has been elected or
appointed and qualified.
Section 4. Compensation
The compensation of all officers of the Corporation shall be
fixed by the Board of Directors, and the compensation of agents shall either be
so fixed or shall be fixed by officers thereunto duly authorized.
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Section 5. Vacancies
If an office becomes vacant for any reason, the Board of
Directors shall fill the vacancy. Any officer so appointed or elected by the
Board of Directors shall serve only until the unexpired term of his predecessor
shall have expired unless re-elected by the Board of Directors.
Section 6. The President
The President shall be the Chief Executive Officer of the
Corporation; in the absence of the Chairman of the Board, or if there be no
Chairman, he shall preside at all meetings of the shareholders and Directors; he
shall be ex-officio a member of all standing committees, shall have general and
active management and control of the business and affairs of the Corporation,
subject to the control of the Board of Directors, and shall see that all orders
and resolutions of the Board of Directors are carried into effect.
Section 7. The Vice-President
The Vice-President or, if there be more than one, the Vice-Presidents,
in the order of their seniority or in any other order determined by the Board of
Directors, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President, and shall generally assist the
President and perform such other duties as the Board of Directors or the
President shall prescribe.
Section 8. The Secretary
The Secretary shall attend all meetings of the Board of Directors and
all meetings of the shareholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the shareholders and special meetings of the Board of
Directors and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he shall act. He shall keep
in safe custody the seal of the Corporation and, when authorized by the Board,
affix the same to any instrument requiring it and, when so affixed, it shall be
attested by his signature or by the signature of the Treasurer or an Assistant
Treasurer or Assistant Secretary. He shall keep in safe custody the certificate
books and shareholder records and such other books and records as the Board may
direct and shall perform all other duties incident to the office of the
Secretary.
Section 9. The Assistant Secretary
During the absence or disability of the Secretary, any Assistant
Secretary, or if there be more than one, the one so designated by the Secretary
or by the Board of Directors, shall have all the powers and functions of the
Secretary.
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Section 10. The Treasurer
The Treasurer shall have the care and custody of the corporate funds,
and other valuable effects, including securities, and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the President and Directors, at the
regular meeting of the Board of Directors, or whenever they may require it, an
account of all his transactions as Treasurer and of the financial condition of
the Corporation.
Section 11. The Assistant Treasurer
During the absence or disability of the Treasurer, any Assistant
Treasurer, or if there be more than one, the one so designated by the Treasurer
or by the Board of Directors, shall have all the powers and functions of the
Treasurer.
Section 12. Bonds
In case the Board of Directors shall so require, any officer or agent
of the Corporation shall give the Corporation a bond for such term, in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
ARTICLE VII
SHARE CERTIFICATES
Section 1. Form; Signature
The certificates for shares of the Corporation shall be in such form as
shall be determined by the Board of Directors and shall be numbered
consecutively and entered in the books of the Corporation as they are issued.
Each certificate shall exhibit the registered holder's name and the number and
class of shares, and shall be signed by the Chairman or a Vice-Chairman of the
Board of Directors, if there be any, or the President or a Vice-President and
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, and shall bear the seal of the Corporation or a facsimile thereof.
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Section 2. Lost Certificates
The Board of Directors may direct a new share certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such lost
or destroyed certificate or certificates, or his legal representative, to give
the Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the certificate
alleged to have been lost or destroyed.
Section 3. Registration of Transfer
Upon surrender to the Corporation or any transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation or such transfer agent to issue a new certificate to the
person entitled thereto, cancel the old certificate and record the transaction
upon its books.
Section 4. Registered Shareholders
Except as otherwise provided by law, the Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends or other distributions, and to vote as such
owner, and to hold liable for calls and assessments a person registered on its
books as the owner of shares, and shall not be bound to recognize any equitable
or legal claim to or interest in such share or shares on the part of any other
person, whether or not it has actual or other notice thereof, except as
otherwise provided by the laws of the State of New York.
Section 5. Record Date
For the purpose of determining the shareholders entitled to notice of
or to vote at any meeting of shareholders or any adjournment thereof, or to
express consent to or dissent from any proposal without a meeting, or for the
purpose of determining shareholders entitled to receive payment of any dividend
or the allotment of any rights, or for the purpose of any other action affecting
the interests of shareholders, the Board of Directors may fix, in advance, a
record date. Such date shall not be more than fifty (50) nor less than ten (10)
days before the date of any such meeting, nor more than fifty (50) days prior to
any other action.
In each such case, except as otherwise provided by law, only such
persons as shall be shareholders of record on the date so fixed shall be
entitled to notice of, and to vote at, such meeting and any adjournment thereof,
or to express such consent or dissent, or to receive
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payment of such dividend, or such allotment of rights, or otherwise to be
recognized as shareholders for the related purpose, notwithstanding any
registration of transfer of shares on the books of the Corporation after any
such record date so fixed.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Fiscal Year
The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors.
Section 2. Dividends
Dividends upon the capital stock of the Corporation may be declared by
the Board of Directors at any regular or special meeting and may be paid in
cash, in property, or in shares of the capital stock, subject to the provisions
of the Certificate of Incorporation and the law.
Section 3. Reserves
Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purposes as the Board of Directors shall deem conducive to the interest of the
Corporation, and the Board of Directors may modify or abolish any such reserve
in the manner in which it was created.
Section 4. Checks
All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
Section 5. Seal
The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its organization and the words "Corporate Seal New
York." The seal may be used by causing it or a facsimile thereof to be impressed
or affixed or otherwise reproduced.
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ARTICLE IX
AMENDMENTS
Section 1. Adoption; Amendment; Repeal
By-Laws of the Corporation may be adopted, amended or repealed
by vote of the holders of the shares at the time entitled to vote in the
election of any Directors. By-Laws of the Corporation may also be adopted,
amended or repealed by the Board of Directors, but any By- Law adopted by the
Board of Directors, may be amended or repealed by the shareholders entitled to
vote thereon as herein provided.
Section 2. Amendments Affecting Election of Directors; Notice
If any By-Law regulating an impending election of Directors is
adopted, amended or repealed by the Board, there shall be set forth in the
notice of the next meeting of shareholders for the election of Directors the
By-Law so adopted, amended or repealed, together with a concise statement of the
changes made.
ARTICLE X
INDEMNIFICATION
A. The Corporation shall indemnify and advance the expenses of
each person to the full extent permitted by the New York Business Corporation
Law (the "BCL") as the same now exists or may hereafter be amended.
B. The indemnification and advancement of expenses granted
pursuant to this Article X shall not be exclusive of any other rights to which a
Director or officer seeking indemnification or advancement of expenses may be
entitled, when authorized by (i) a resolution of shareholders, (ii) a resolution
of Directors, or (iii) an agreement providing for such indemnification, provided
that no indemnification may be made to or on behalf of any Director or officer
if a judgment or other final adjudication adverse to the Director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled. Nothing contained in this
Article X shall affect any rights to indemnification to which corporate
personnel other than Directors and officers may be entitled by contract or
otherwise under law.
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C. No amendment, modification or rescission of this Article X
shall be effective to limit any person's right to indemnification with respect
to any alleged cause of action that accrues or other incident or matter that
occurs prior to the date on which such modification, amendment or rescission is
adopted.
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EXHIBIT 4.7
PREFERRED STOCK PURCHASE AGREEMENT
This Preferred Stock Purchase Agreement (the "Agreement") is made and
entered into as of the 11th day of February 2000, by and between CHROMATICS
COLOR SCIENCES INTERNATIONAL, INC., a New York corporation ("Seller"), and LB
I GROUP INC. (Lehman Brothers Group Inc.), a Delaware corporation ("Purchaser").
In consideration of the mutual promises and covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. BASIC TRANSACTION
1.1 Authorization of the Securities. Seller has authorized the
issuance and sale to Purchaser of an aggregate of up to 40,000 shares (the
"Shares") of its Class B Series 3 Convertible Preferred Stock, no par value (the
"Preferred Stock"), having all of the powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of such preferences and rights set forth in the
Certificate of Amendment to the Certificate of Incorporation of Seller (the
"Certificate of Amendment") attached hereto as Exhibit A, for a purchase price
of $100.00 per share of Preferred Stock (the "Purchase Price"). In connection
with the consummation of the sale of the Shares pursuant to this Agreement,
Seller shall issue to Purchaser warrants ("Warrants") to purchase the number of
shares of Seller's common stock, $.001 par value ("Common Stock"), as set forth
in, and subject to the terms and conditions of, the Warrant Agreement, by and
among Seller and Purchaser (the "Warrant Agreement") in the form attached hereto
as Exhibit B (the Shares and the Warrants are hereafter collectively referred to
as the "Securities").
1.2 Issuance of the Securities. Subject to the terms and
conditions hereof and the Warrant Agreement and in reliance upon the
representations, warranties, covenants and agreements contained herein and
therein, Seller will issue, sell and deliver the Securities to Purchaser, and
Purchaser will purchase the Securities from Seller, at the Closing (as
hereinafter defined). At the Closing Purchaser shall purchase the number of
Shares and be issued the number of Warrants set forth opposite its name on
Schedule 1.2 annexed hereto for the aggregate Purchase Price set forth next to
Purchaser's name on Schedule 1.2 annexed hereto.
2. CLOSING
2.1 Time and Place. The closing of the transaction
contemplated by Section 1.2 above shall take place in the following manner:
<PAGE>
(a)(i) The closing of the purchase and sale of the Securities
set forth on Schedule 1.2 to be effected at the closing (the "Closing") shall
take place on February 11, 2000, at 5:00 P.M. at the offices of Patterson,
Belknap, Webb & Tyler LLP, 1133 Avenue of the Americas, New York, New York
10036, or at such other time and location as the parties hereto may otherwise
agree.
(ii) At the Closing, Seller shall deliver to Purchaser a
certificate representing the Shares to be purchased by Purchaser at the Closing,
duly executed on behalf of Seller and registered in the name of Purchaser in the
denomination set forth on Schedule 1.2 and a Warrant Certificate in the form of
Exhibit A to the Warrant Agreement duly executed on behalf of Seller and
registered in the name of Purchaser in the denomination set forth on Schedule
1.2. Delivery of such certificates to Purchaser shall be made against receipt by
Seller from Purchaser of the aggregate Purchase Price, which shall be reduced by
(a) $200,000.00 in respect of the broker fee payable to Purchaser pursuant to
Section 7.11 hereof and (b) $190,000.00 in respect of the Registration Delay
Payments owed to Purchaser pursuant to Section 6.1(d) of the Preferred Stock
Purchase Agreement, dated as of June 11, 1999, between Purchaser and Seller,
executed in connection with the first closing (the "First Closing"), and which
shall be paid by Purchaser at the Closing by wire transfer of immediately
available funds in such amount to an account designated by Seller at least three
business days prior to the Closing.
(iii) The obligation of Purchaser hereunder to acquire and pay
for the Securities is subject to the satisfaction (or waiver by Purchaser) at or
before the Closing of each of the following conditions:
(A) The representations and warranties of Seller contained
herein shall be true and correct in all material respects as of the date when
made and as of the date of the Closing as though made on and as of such date and
Purchaser shall have received a certificate, dated the date of the Closing and
signed by the Chief Executive Officer of Seller, to such effect.
(B) Seller shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by this
Agreement, the Certificate of Amendment and the Warrant Agreement to be
performed, satisfied or complied with by Seller at or prior to the date of the
Closing and Purchaser shall have received a certificate, dated the date of the
Closing and signed by the Chief Executive Officer of Seller, to such effect.
(C) No suit, action or other proceeding shall have been
commenced (and be pending) by any governmental authority or self-regulatory
agency which seeks to restrain or prohibit or questions the validity or legality
of the transactions contemplated by this Agreement, the Certificate of Amendment
and the Warrant Agreement, nor shall any such suit, action or proceeding be
threatened.
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(D) The trading in the Common Stock shall not have been
suspended for a continuous period in excess of two (2) full trading days, and
such shares shall have been, and on the date of the Closing will be, listed for
trading on the Nasdaq SmallCap Market.
2.2 Additional Closing Deliveries.
(a) Seller will deliver the following to Purchaser at the
Closing:
(i) A copy of the Certificate of Amendment, duly
certified by the Secretary of State of the
State of New York;
(ii) A counterpart copy of the Warrant Agreement
duly executed on behalf of Seller;
(iii) A certificate of the Secretary of Seller,
dated the date of the Closing, certifying
that attached thereto is a true and complete
copy of (a) Seller's bylaws, as amended and
in effect on the date of such certificate,
(b) Seller's Certificate of Incorporation,
as amended and in effect on the date of such
certificate and (c) a resolution adopted by
Seller's Board of Directors authorizing the
execution, delivery and performance of this
Agreement and the Warrant Agreement and the
filing of the Certificate of Amendment, and
that such resolution has not been modified,
rescinded or amended and is in full force
and effect; and
(iv) A certificate signed by the Chief Financial
Officer of Seller setting forth the adjusted
Conversion Price and the adjusted Exercise
Price of the shares of Class B Series 2
Preferred Stock and Warrants, respectively,
issued to Purchaser at the First Closing.
(b) Purchaser will deliver to Seller at the Closing a
counterpart copy of the Warrant Agreement duly
executed by Purchaser.
(c) The deliveries referred to in clauses (a) and (b) of
this Section 2.2 shall take place simultaneously with
one another, and are conditions precedent to the
effectiveness of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF SELLER.
In order to induce Purchaser to enter into this Agreement and
purchase the Securities, Seller represents and warrants to Purchaser as follows:
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3.1 Organization, Good Standing and Corporate Power. Seller is
a corporation duly organized, validly existing and in good standing under the
laws of the State of New York, with all requisite corporate power and authority
to own its properties and to conduct its business as presently conducted. Seller
is qualified to do business and is in good standing (or has active status) in
each jurisdiction in which the failure to be so qualified is reasonably likely
to have a Material Adverse Effect (as hereinafter defined). Seller has all
requisite corporate power and authority to enter into this Agreement and to
perform its obligations hereunder, including, without limitation, the issuance
and sale of the Securities.
3.2 Due Authorization; Enforceability; No Conflicts. Seller
has taken all corporate and stockholder action necessary to authorize the
execution, delivery and performance by it of this Agreement. Assuming the due
execution and delivery of this Agreement by Purchaser, this Agreement
constitutes a valid and binding obligation of Seller, enforceable against Seller
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to the enforcement of
creditors' rights generally, the availability of equitable remedies and to
general equity principles. The execution, delivery and performance by Seller of
this Agreement and compliance by Seller with the terms hereof will not violate,
conflict with or cause an event of default under Seller's Certificate of
Incorporation, the Certificate of Amendment or Seller's Bylaws, or any
resolutions of Seller's Board of Directors or stockholders or any agreement,
instrument, judgment, order, law, rule or regulation applicable to Seller or by
which Seller is bound or to which any of Seller's properties are subject, except
where such violation, conflict or event of default would not result in a
material adverse effect on Seller's business, financial condition, results of
operations or properties (a "Material Adverse Effect"). The Shares, upon
issuance in accordance with the terms of this Agreement, and the Warrants, upon
issuance in accordance with the terms of the Warrant Agreement, are and will
continue upon issuance to be duly authorized and reserved, validly issued,
fully-paid and nonassessable and free of any liens, claims or encumbrances and
rights of first refusal ("Encumbrances") other than the terms and provisions of
the Certificate of Amendment, the Warrant Agreement and restrictions imposed by
applicable federal and state securities laws.
3.3 Capitalization. The authorized capital stock of Seller
consists of (a) 1,400,000 shares of Class A preferred stock, par value $.01 per
share (the "Class A Preferred Stock") , of which 1,380,000 shares are issued and
outstanding, (b) 10,000,000 shares of Class B preferred stock, no par value, of
which (x) 500,000 shares have been designated Class B Series 1 Preferred Stock,
par value $.001 per share, no shares of which are issued and outstanding, (y)
80,000 shares have been designated Class B Series 2 Preferred Stock, par value
$.001 per share, of which 40,000 shares are issued and outstanding, and (z)
40,000 shares have been designated as Preferred Stock, all of such Preferred
Stock will be outstanding upon the issuance of the Shares to be sold to
Purchaser hereunder and (c) 50,000,000 shares of Common Stock, of which
15,535,481 shares are issued and outstanding. Except with respect to the
Securities or as set forth on Schedule 3.3 annexed hereto, there are no
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outstanding subscriptions, rights, options, warrants, conversion rights,
agreements or other claims for the purchase or acquisition from Seller of any
shares of its capital stock or obligating Seller to issue, repurchase, register
or otherwise acquire, any shares of its capital stock or any securities
convertible into, exercisable or exchangeable for, or otherwise entitling the
holder to acquire, any shares of capital stock of Seller.
3.4 Reports and Financial Statements. Seller has previously
furnished Purchaser with true and complete copies, as amended or supplemented,
of its (i) Annual Report on Form 10-K for the year ended December 31, 1998 as
filed with the Securities and Exchange Commission ("SEC"), (ii) proxy statements
relating to all meetings of its shareholders (whether annual or special) since
January 1, 1998 and (iii) all other reports or registration statements filed by
Seller with the SEC since January 1, 1998 (such reports, registration statements
and other filings, together with any amendments or supplements thereto, are
collectively referred to as the "Seller Commission Filings"). Seller Commission
Filings constituted all of the documents required to be filed by Seller with the
SEC since January 1, 1998. As of their respective dates, such Seller Commission
Filings (as amended or supplemented) complied in all material respects with the
requirements of the Securities Act and the Securities Exchange Act of 1934 and
the rules and regulations of the SEC promulgated thereunder, and did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and any unaudited interim financial
statements of Seller included in such Seller Commission Filings comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, and have been
prepared in accordance with United States generally accepted accounting
principles (except as may be indicated therein or in the notes thereto and, in
the case of the quarterly financial statements, as permitted by Form 10-Q of the
Securities Exchange Act of 1934) and fairly present the financial position of
Seller at the dates thereof and the results of its operations and its cash flows
for the periods then ended.
3.5 Absence of Certain Changes or Events. Except as publicly
disclosed prior to the date of this Agreement or as otherwise contemplated by
this Agreement, since December 31, 1998, there has not been any material adverse
change or material adverse development in the financial condition or in the
results of operations or the business, properties, assets or liabilities of
Seller or, in so far as can reasonably be foreseen, prospects of Seller.
3.6 Information in the Registration Statement. None of the
information relating to Seller, its officers or directors, supplied by Seller
for inclusion or incorporation by reference in the registration statement to be
filed with the SEC by Seller pursuant to Section 6.1 hereof (the "Registration
Statement") or any amendments or supplements thereto, will, at the time it
becomes effective under the Securities Act and at the effective date, contain
any untrue statement of material fact or omit to state any
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material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If at any time prior to the effective date any event with
respect to Seller, its officers or directors should occur which is required to
be described in an amendment, or a supplement to, the Registration Statement,
such event shall be so described and such description in such amendment or
supplement of such information will not contain any statement which, at the time
and in light of circumstances under which it is made, is false or misleading
with respect to any material fact or omits to state any material fact required
to be stated therein or in the Registration Statement or necessary to make the
statements therein or in the Registration Statement not false or misleading.
3.7 Compliance With Laws. The conduct of the business of
Seller complies in all material respects with all statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable thereto. Seller has
not received notice of any alleged material violation of any statute, law,
regulation, ordinance, rule, judgment, order or decree from any governmental
authority applicable to Seller or any of its assets or properties which has not
been satisfactorily disposed of.
3.8 Consents. No consent or waiver of, order or approval by,
or filing with any governmental authority or other third party is required in
connection with Seller's execution, delivery and performance of this Agreement,
including the issuance of the Shares to Purchaser hereunder except as otherwise
contemplated by Section 6.1 hereof.
3.9 Litigation Proceedings. Except as set forth on Schedule
3.9 annexed hereto, there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of Seller, threatened against or
affecting Seller or any of its properties before or by any court, governmental
or administrative agency or regulatory authority (federal, state, county, local
or foreign) which (i) adversely affects or challenges the legality, validity or
enforceability of any of this Agreement, the Certificate of Amendment or the
Warrant Agreement and (ii) could reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect.
3.10 No Default or Violation. Seller (i) is not in default
under or in violation of any indenture, loan or other credit agreement or any
other agreement or instrument to which it is a party or by which it or any of
its properties is bound, (ii) is not in violation of any order of any court,
arbitrator or governmental body applicable to it, (iii) is not in violation of
any statute, rule or regulation of any governmental authority to which it is
subject or (iv) is not in default under or in violation of its Certificate of
Incorporation, Bylaws or other organizational documents, respectively, except in
each case for defaults and violations which individually or in the aggregate
will not have a Material Adverse Effect. The business of Seller is not being
conducted, and shall not be conducted in violation of any law, ordinance, rule
or regulation of any governmental entity, except where such violations have not
resulted or would not reasonably result, individually or in the aggregate, in a
Material Adverse Effect. Seller is not in breach of
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any agreement where such breach, individually or in the aggregate, would have a
Material Adverse Effect.
3.11 Private Offering. Neither Seller nor any person acting on
its behalf has taken or will take any action which might subject the offering,
issuance or sale of the Securities to Purchaser hereunder to the registration
requirements of the Securities Act. The offer, sale and issuance of the
Securities to Purchaser will not be integrated with any other offer, sale and
issuance of Seller's securities (past, current, or future) under the Securities
Act or any regulations of any exchange or automated quotation system on which
any of the securities of Seller are listed or designated or for purposes of any
stockholder approval provision applicable to Seller or its securities. Subject
to the accuracy and completeness of the representations and warranties of
Purchaser contained in Article IV hereof, the offer, sale and issuance by Seller
to Purchaser of the Securities hereunder is exempt from the registration
requirements of the Securities Act.
3.12 Investment Company. Seller is not, and is not controlled
by or under common control with an affiliate of an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
3.13 Solicitation Materials. Seller has not (i) distributed
any offering materials in connection with the offering and sale of the
Securities to Purchaser hereunder or (ii) solicited any offer to buy or sell the
Securities hereunder by means of any form of general solicitation or
advertising.
3.14 Form S-3 Eligibility. Seller is, as of the date of the
Closing, eligible to register securities for resale with the SEC under Form S-3
promulgated under the Securities Act.
3.15 Listing and Maintenance Requirements Compliance. Seller
has not in the two years preceding the date hereof received written notice from
any stock exchange or market on which the Common Stock is or has been listed (or
on which it has been quoted) to the effect that Seller is not in compliance with
the listing or maintenance requirements of such exchange or market.
3.16 Registration Rights; Rights of Participation. Except as
set forth on Schedule 3.16 annexed hereto, Seller has not granted or agreed to
grant to any person any rights (including "piggy-back" registration rights) to
have any securities of Seller registered with the SEC or any other governmental
authority which has not been satisfied, and no person, including, but not
limited to, current or former stockholders of Seller, underwriters, brokers or
agents, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by this Agreement, the Certificate of Amendment or the Warrant
Agreement.
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3.17 Firpta. Seller is not a "United States real property
holding corporation" within the meaning of Section 847(c)(2) of the Internal
Revenue Code of 1986, as amended.
3.18 Datex-Ohmeda Agreement. Seller has signed an agreement
with Datex-Ohmeda, Inc. for the distribution and marketing of Seller's
ColorMate(R)TLc- BiliTest(R)System and such agreement is still in full force and
effect as of the date hereof.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
In order to induce Seller to enter into this Agreement and
issue the Securities, Purchaser represents and warrants to Seller as follows:
4.1 Organization, Good Standing and Corporate Power. Purchaser
is a corporation duly formed, validly existing and in good standing under the
laws of the State of its organization, with all requisite corporate power and
authority to own its properties, conduct its business, enter into this Agreement
and perform its obligations hereunder.
4.2 Due Authorization; Enforceability; No Conflicts. Purchaser
has taken all corporate action necessary to authorize the execution, delivery
and performance by it of this Agreement. Assuming the due execution and delivery
of this Agreement by Seller, this Agreement constitutes a valid and binding
obligation of Purchaser, enforceable against Purchaser in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to the enforcement of creditors' rights
generally, the availability of equitable remedies and general equity principles.
The execution, delivery and performance by Purchaser of this Agreement and
compliance by Purchaser with the terms hereof will not violate, conflict with or
cause an event of default under Purchaser's Certificate of Incorporation or any
other agreement, instrument, judgment, order, law, rule or regulation by which
Purchaser is bound or to which any properties of Purchaser are subject.
4.3 Accredited Investor. Purchaser represents that it is an
"accredited investor" as that term is defined in Rule 501(a) under the
Securities Act.
4.4 Suitability as an Investor. Purchaser represents that it
can bear the economic risk of its investment in the Securities of Seller and is
investing in its own name and for its own account.
4.5 Investment. Purchaser is acquiring the Securities for
investment for its own account and not with a present view to, or for resale in
connection with, any distribution thereof. Purchaser understands that the Shares
and the shares of Common Stock issuable upon conversion thereof have not been
registered under the
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Securities Act or applicable state securities laws by reason of certain
exemptions from the registration provisions thereof that depend upon, among
other things, the truth and accuracy of Purchaser's representations and
warranties herein; provided, however, that by making the representations herein,
Purchaser does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the Securities Act.
4.6 Restricted Transferability. Purchaser acknowledges that
the Shares and the shares of Common Stock issuable upon conversion thereof are
being offered and sold hereunder in a private placement that is exempt from the
registration requirements of the Securities Act and that certificates for such
Shares will bear the legend referred to in Section 6.2 below.
4.7 Risk of Investment. Purchaser recognizes, acknowledges and
warrants that it has such knowledge and experience in business and financial
affairs as to be capable of evaluating the merits and risks of the investment in
the Securities of Seller contemplated hereby and is aware of the speculative
nature of and risks of loss associated with such investment. Purchaser
recognizes, acknowledges and warrants that Seller has made available to it, at a
reasonable time prior to the Closing under this Agreement, the opportunity to
ask questions and receive answers concerning the terms and conditions of the
Securities and to obtain any additional information which Seller possesses which
Purchaser judges necessary to evaluate its investment in the Securities. The
financial situation of Purchaser enables it to bear the risks of this investment
in the Securities and, at the present time, Purchaser is able to afford a
complete loss of such investment.
5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
(a) The representations and warranties of Seller set forth in
Section 3 shall survive one year from the date of the Closing. The
representations and warranties of Purchaser set forth in Section 4 shall survive
one year from the date of the Closing.
(b) Indemnification. In consideration of Purchaser's execution
and delivery of this Agreement and acquiring the Securities hereunder and in
addition to all of Seller's other obligations under this Agreement, the
Certificate of Amendment and the Warrant Agreement, Seller shall defend,
protect, indemnify and hold harmless Purchaser, its past and present affiliates
and their successors and assigns (in accordance with the provisions of Section
7.5 hereof), each other holder of the Securities and all of their stockholders,
officers, directors, employees and direct or indirect investors and any of the
foregoing person's agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "Indemnitees") from and against any and all
actions, causes of action, suits, claims, losses, proceedings, costs (as
incurred),
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penalties, fees (including reasonable legal fees and expenses), liabilities and
damages, and expenses in connection therewith (including costs, fees and
expenses incurred by an Indemnitee in connection with any action, suit or
proceeding to which the Indemnitee is not a named party if such costs, fees or
expenses relate to, or are incurred in connection with, a request made by or on
behalf of Seller), and including interest, penalties and attorneys' fees and
disbursements (the "Indemnified Liabilities"), incurred by any Indemnitee as a
result of, or arising out of, or relating to (a) any material misrepresentation
or breach of any representation or warranty made by Seller in this Agreement,
the Certificate of Amendment or the Warrant Agreement, or any other certificate,
instrument or document contemplated hereby or thereby, (b) any material breach
of any covenant, agreement or obligation of Seller contained in this Agreement,
the Certificate of Amendment or the Warrant Agreement, or any other certificate,
instrument or document contemplated hereby or thereby or (c) any cause of
action, suit or claim brought or made, other than by Seller, against such
Indemnitee and arising out of or resulting from the execution, delivery,
performance or enforcement of this Agreement, the Certificate of Amendment or
the Warrant Agreement; provided, however, that in the absence of fraud the
aggregate amount of claims for which Seller may be liable under this Section
5(b) shall not exceed the Purchase Price received by the Seller for the
Securities. The indemnification obligations of Seller under this paragraph shall
be in addition to any liability which Seller may otherwise have, shall extend
upon the same terms and conditions to any affiliate of Purchaser and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of Purchaser and any such affiliate, and shall be binding upon and inure to
the benefit of any successors, assigns, heirs and personal representatives of
Seller, Purchaser and any such affiliate and any such person. Seller also agrees
that neither Purchaser nor any such affiliates, partners, directors, agents,
employees or controlling person shall have any liability to Seller or any person
asserting claims on behalf of or in right of Seller in connection with or as a
result of the consummation of this Agreement, the Certificate of Amendment or
the Warrant Agreement except to the extent that any losses, claims, damages,
liabilities or expenses incurred by Seller result from the gross negligence or
willful misconduct of Purchaser or such entity in connection with the
transactions contemplated by this Agreement, the Certificate of Amendment or the
Warrant Agreement. To the extent that the foregoing undertaking by Seller may be
unenforceable for any reason, Seller shall make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.
(c) Purchaser agrees to indemnify and hold Seller harmless
from and against all damages, losses or expenses (including, but not limited to,
reasonable attorneys' fees) incurred, suffered or paid, directly or indirectly,
by Seller arising out of the failure of any representation and warranty made by
Purchaser in this Agreement to be true and correct in all material respects as
of the Closing; provided, however, that the aggregate amount of claims for which
Purchaser may be liable under this Section 5(c) shall not exceed the Purchase
Price paid for the Securities.
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6. SECURITIES ACT MATTERS
6.1 Securities Act Registration
(a) Seller shall, at Seller's expense, register
under the Securities Act the shares of Common Stock issuable upon conversion of
the Shares and exercise of the Warrants (collectively, the "Registrable
Securities") and in that connection shall file, by no later than February 22,
2000 (the "Filing Date"), a registration statement with respect to the
Registrable Securities with the SEC (the "Registration Statement"). Seller shall
use its commercially reasonable best efforts to cause the Registration Statement
to be declared effective under the Securities Act as promptly as possible after
the filing thereof, but in any event on or prior the that date which is forty
(40) days from the Filing Date (the "Effectiveness Date"). The number of shares
of Common Stock included in the Registration Statement shall at all times be at
least equal to 100% of the sum of the number of shares that are then issuable
upon conversion of the Shares and exercise of the Warrants, and shall include
any additional Registrable Securities issuable to Purchaser in connection with
the First Closing which were not included on the registration statements filed
in connection with the First Closing, without regard to any limitation on
Purchaser's ability to convert the Shares or exercise the Warrants. Notice of
effectiveness of the Registration Statement shall be furnished promptly to
Purchaser. Seller shall use its commercially reasonable best efforts to maintain
the effectiveness of the Registration Statement and from time to time will amend
or supplement such Registration Statement and the prospectus contained therein
as and to the extent necessary to comply with the Securities Act to permit the
sale of the Registrable Securities by Purchaser. Seller shall use its
commercially reasonable best efforts to maintain the effectiveness of the
Registration Statement with respect to the Registrable Securities until all of
the Registrable Shares have been sold by Purchaser pursuant thereto or such date
as all of the Registrable Securities may be sold by Purchaser without
registration.
(b) As a condition to the inclusion of the
Registrable Securities in the Registration Statement, Purchaser will furnish to
Seller such information with respect to Purchaser as is required to be disclosed
in the Registration Statement (and the prospectus included therein) by the
applicable rules, regulations and guidelines of the SEC.
(c) In connection with the registration of
Registrable Securities under the Securities Act, Seller shall:
(i) prepare and file with the SEC a
Registration Statement on the appropriate form with respect to such Registrable
Securities and use its commercially reasonable best efforts to cause such
Registration Statement to become effective as soon as practicable after such
filing;
(ii) prepare and file with the SEC such
amendments and supplements (including post-effective amendments and supplements)
to the
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Registration Statement covering such Registrable Securities and the prospectus
used in connection therewith as may be necessary to keep such Registration
Statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by such
Registration Statement until such time as all of the Registrable Securities
registered thereunder have been disposed of in accordance with the intended
method of disposition by Purchaser;
(iii) furnish to Purchaser of such
Registrable Securities registered under the Securities Act such number of copies
of a prospectus and preliminary prospectus in conformity with the requirements
of the Securities Act, and such other documents as Purchaser may reasonably
request, in order to facilitate the public sale or other disposition of such
Registrable Securities;
(iv) notify Purchaser of such Registrable
Securities if, at any time when a prospectus relating to such Registrable
Securities is required to be delivered under the Securities Act, any event shall
have occurred as a result of which the prospectus then in use with respect to
such Registrable Securities would include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances under
which made or for any other reason it shall be necessary to amend or supplement
such prospectus in order to comply with the Securities Act, and prepare and
furnish to Purchaser a reasonable number of copies of a supplement to or an
amendment of such prospectus which will correct such statement or omission or
effect such compliance;
(v) use its commercially reasonable best
efforts to register or qualify such Registrable Securities under such other
securities or blue sky laws of such jurisdictions as Purchaser shall reasonably
request, to keep such registrations and qualifications in effect for so long as
the Registration Statement referred to in paragraph 6.1(c)(i) above remains in
effect, and to do any and all other acts and things which may be necessary or
desirable to enable Purchaser to consummate the public sale or other disposition
in each such jurisdiction of such Registrable Securities owned by Purchaser;
provided, however, that Seller will not be required to (A) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this paragraph 6.1(c)(v) or (B) consent to general service of process in
any such jurisdiction;
(vi) keep the Purchaser informed of
Seller's best estimate of the earliest date on which such Registration Statement
or any post-effective amendment or supplement thereto will become effective and
promptly notify Purchaser of the following: (A) when such Registration Statement
or any post-effective amendment or supplement thereto becomes effective or is
approved, (B) of the issuance by any competent authority of any stop order
suspending the effectiveness or qualification of such Registration Statement or
the prospectus then in use or the initiation or threat of any proceeding for
that purpose, and (C) of the suspension of the
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qualification of any Registrable Securities included in such registration
statement for sale in any jurisdiction;
(vii) cooperate with Purchaser, give
Purchaser and its counsel and accountants, such access to its books and records
and such opportunities to discuss the business of Seller with its officers and
independent public accountants as shall be necessary to enable them to conduct a
reasonable investigation within the meaning of the Securities Act; and
(viii) pay all costs and expenses incident
to the performance and compliance by Seller with the provisions of this Section
6.1, including without limitation, (A) all registration and filing fees, (B) all
printing expenses, (C) all fees and disbursements of counsel and independent
public accountants for Seller, including, without limitation, the entire expense
of any special audits required by the rules and regulations of the SEC, (D) all
blue sky fees and expenses (including fees and expenses of counsel in connection
with blue sky surveys) and (E) the cost of distributing prospectuses in
preliminary and final form as well as any supplements thereto; expressly
excluding, however, commissions relating to the Registrable Securities sold and
the fees and expenses of counsel for Purchaser. Seller shall (i) not later that
the third business day following the Closing prepare and file with Nasdaq an
additional shares listing application covering the shares of Common Stock
issuable upon conversion of the Shares and exercise of the Warrants, (ii) take
all steps after the Closing necessary to cause such Securities to be approved
for listing on Nasdaq (as well as on any other national securities exchange or
market on which the Common Stock is then listed) as soon as possible thereafter,
and (iii) provide to Purchaser evidence of such listing. Seller shall maintain
the listing of its Common Stock on such exchange.
(d) If (i) the Registration Statement is not (A)
filed with the SEC on or before the Filing Date or (B) declared effective by the
SEC on or before the Effectiveness Date, (ii) on any day after the Registration
Statement has been declared effective by the SEC (A) sales of the Registrable
Securities required to be included on the Registration Statement cannot be made
pursuant to the Registration Statement (including, without limitation, because
of a failure to keep the Registration Statement effective, to disclose such
information as is necessary for sales to be made pursuant to the Registration
Statement, or to register sufficient shares of Common Stock) or (B) the Common
Stock is not listed or included for quotation on the Nasdaq Stock Market (Nasdaq
SmallCap or Nasdaq National Market), after being so listed or included for
quotation, due to events or circumstances within the control of Seller and such
condition continues unremedied for fifteen (15) days or (iii) Seller shall
otherwise fail to file the Registration Statement (each such event specified in
(i), (ii) and (iii) above, an "Event"), then, as partial relief for the damages
to Purchaser by reason of any such delay in or reduction of its ability to sell
the Registrable Securities (which remedy shall not be exclusive of any other
remedies available at law or in equity): (y) Seller shall pay to Purchaser an
amount in cash (a "Registration Delay Payment") equal to two percent
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(2%) of the product of (I) the number of Shares held by Purchaser and (II) $100,
multiplied by the sum of: (i) the number of months (prorated for partial months)
after the end of the Effectiveness Date and prior to the date the Registration
Statement is declared effective by the SEC; provided, however, that there shall
be excluded from such period any delays which are solely attributable to changes
required by Purchaser in the Registration Statement with respect to information
relating to Purchaser, (ii) the number of months (prorated for partial months)
that sales cannot be made pursuant to the Registration Statement after the
Registration Statement has been declared effective and (iii) the number of
months (prorated for partial months) that the Common Stock is not listed or
included for quotation on the Nasdaq or that trading thereon is halted after the
Registration Statement has been declared effective; and (z) the Conversion Price
(as defined in the Certificate of Amendment) of the Shares and the Exercise
Price (as defined in the Warrant Agreement) shall be decreased 2% on the date of
such Event and shall be decreased an additional 2% as of each monthly
anniversary of the date of such Event. Seller shall pay any required
Registration Delay Payment to Purchaser in cash on the last business day of each
month during which an Event has occurred and is continuing. In the event Seller
fails to make a Registration Delay Payment in a timely manner, such Registration
Delay Payment shall bear interest at the rate of 2.0% per month (prorated for
partial months) until paid in full.
(e) (i) Seller will indemnify and hold
harmless Purchaser and each person, if any, who Controls (as defined below)
Purchaser from and against any and all losses, claims, damages, liabilities and
legal and other expenses (including costs of investigation) caused by any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Securities were registered
under the Securities Act, any prospectus or preliminary prospectus contained
therein or any amendment or supplement thereto, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which made, except to the extent that such losses, claims,
damages, liabilities or expenses are caused by any such untrue statement or
omission or alleged untrue statement or omission included in reliance upon and
in conformity with information furnished to Seller in writing by such seller
expressly for use therein. As used in this paragraph 6.1(e)(i) and in paragraph
6.1(e)(ii) below, a person "Controls" another person if such first person
possesses, directly or indirectly, the power to direct or cause the direction of
the management and policies of such second person, whether through the ownership
of voting securities, by contract, or otherwise.
(ii) It shall be a condition to the
obligation of Seller to effect a registration of Registrable Securities under
the Securities Act pursuant hereto that Purchaser indemnify and hold harmless
Seller and each person, if any, who Controls Seller to the same extent as the
indemnity from Seller in the foregoing paragraph, but only with reference to
information included in reliance upon and in conformity with information
furnished to Seller in writing by Purchaser expressly for use in the
Registration Statement, any prospectus or preliminary prospectus contained
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therein or any amendment or supplement thereto; provided, however, that in the
absence of fraud the aggregate amount of claims for which Purchaser may be
liable under this paragraph 6.1(e)(ii) shall not exceed the Purchase Price paid
by Purchaser for the Securities.
(iii) In case any claim shall be made or any
proceeding (including any governmental investigation) shall be instituted
involving any indemnified party in respect of which indemnity may be sought
pursuant to this paragraph (e), such indemnified party shall promptly notify the
indemnifying party in writing of the same; provided that failure to notify the
indemnifying party shall not relieve it from any liability it may have to an
indemnified party otherwise than under this paragraph (e). The indemnifying
party, upon request of the indemnified party or parties, shall retain one
counsel reasonably satisfactory to the indemnified party or parties to represent
the indemnified party or parties in such proceeding and shall pay the reasonable
fees and disbursements of such counsel. In any such claim or proceeding, any
indemnified party shall have the right to retain its own counsel, but the fees
and disbursements of such counsel shall be at the expense of such indemnified
party unless (A) the indemnifying party shall have failed to retain counsel for
the indemnified party as aforesaid, (B) the indemnifying party and such
indemnified party shall have mutually agreed to the retention of such counsel or
(C) representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate in the opinion of counsel to such
indemnified party due to actual or potential conflicts of interest between such
indemnified party and any other party represented by such counsel in such
proceeding; provided that Seller shall not be liable for the fees and
disbursements of more than one counsel for all indemnified parties. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
6.2 Restrictive Legend. Purchaser acknowledges and agrees that
each certificate representing the Shares and any shares of Common Stock issuable
upon conversion thereof will (unless the securities evidenced by such
certificate shall have been registered under the Securities Act) be stamped or
otherwise imprinted with a legend in substantially the following form (in
addition to any additional legend required under applicable state securities
laws):
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "SECURITIES LAWS") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED
OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
SECURITIES LAWS COVERING SUCH SECURITIES OR THE ISSUER RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES, REASONABLY SATISFACTORY TO THE
ISSUER, TO THE
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EFFECT THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH SECURITIES LAWS."
Neither the Securities nor any shares of Common Stock issuable
upon conversion or exercise thereof shall contain the legend set forth above (or
any other legend) (i) at any time while a registration statement is effective
under the Securities Act covering such security, (ii) if in the written opinion
of counsel to Seller experienced in the area of United States securities laws
(the form and substance of which opinion shall be customary for opinions of
counsel in comparable transactions), such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the SEC) or (iii) if
such Securities may be sold pursuant to Rule 144(k). Seller agrees that it will
provide Purchaser, upon request, with a certificate or certificates representing
such Securities, free from such legend at such time as such legend is no longer
required hereunder. If such certificate or certificates had previously been
issued with such a legend or any other legend, Seller shall, upon request,
receive such certificate or certificates free of any legend. Seller may not make
any notation on its records or give instruction to any transfer agent of Seller
which enlarge the restrictions set forth above.
6.3 Restriction on Conversion by Purchaser. Notwithstanding
anything herein, or in the Certificate of Amendment or the Warrant Agreement to
the contrary, in no event shall Purchaser have the right to (i) convert the
Shares or (ii) exercise the Warrants if, as a result of such conversion or
exercise, the aggregate number of shares of Common Stock beneficially owned by
such Purchaser and its affiliates would exceed 9.99% of the outstanding shares
of the Common Stock following such exercise. For purposes of this Section 6.3,
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act. The provisions of this Section 6.3 may be waived by Purchaser as
to itself (and solely as to itself) upon not less than 65 days prior written
notice to Seller, and the provisions of this Section 6.3 shall continue to apply
until such 65th day (or later, if stated in the notice of waiver). Nothing in
this Section 6.3 shall be deemed to limit or otherwise affect Seller's right to
compel the involuntary conversion of the Shares or the involuntary exercise of
the Warrants in accordance with the provisions of the Certificate of Amendment
and the Warrant Agreement.
7. MISCELLANEOUS
7.1 Expenses. Except as otherwise expressly set forth
herein, each party will pay all of its own expenses in connection with the
negotiation of this Agreement, the performance of its obligations hereunder and
the consummation of the transactions contemplated hereby.
7.2 Further Assurance. Purchaser and Seller covenant
and agree to take any and all such further action and to execute, acknowledge
and deliver such instruments, documents and agreements as any other party hereto
may
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reasonably request to effectuate, consummate or confirm the transactions
contemplated hereby.
7.3 Amendment and Waiver. This Agreement may be
amended only in a writing signed by all parties hereto. Any provision of this
Agreement may be waived by the party entitled to the benefit thereof only in a
writing executed by the party against whom such waiver is sought to be enforced;
provided, however, that, with the exception of any waiver that would have an
adverse affect on the economic terms of the Securities, the holders of a
majority of the Shares may waive any provision for the benefit of holders of
such Shares, which waiver shall be binding on all holders of Shares. No waiver
shall be deemed a waiver of any other provision of this Agreement, and no waiver
of a breach hereunder shall be deemed a waiver of any other or subsequent breach
of this Agreement.
7.4 Notice. All notices, demands and other
communications to be given or delivered hereunder shall be in writing and
will be deemed to have been given if personally delivered, sent by overnight
courier or telecopied (in each such case delivery will be effective upon
receipt) or mailed by certified mail, postage prepaid, return receipt requested
(delivery will be effective three days after the date of mailing) to the
addresses indicated below or to such other addresses as the parties may specify
on notice as herein provided:
If to Purchaser:
LB I Group Inc.
3 World Financial Center
New York, New York 10285
Attention: Mr. Kevin Genirs
Telecopier: (212) 526-2198
If to Seller:
Chromatics Color Sciences International, Inc.
5 East 80th Street
New York, New York 10021-0109
Attention: Ms. Darby S. Macfarlane
Chairman and Chief Executive Officer
Telecopier: (212) 717-6675
With a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, New York 10036
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Attention: Jeffrey E. LaGueux, Esq.
Telecopier: (212) 336-2222
7.5 Binding Agreement; Assignment. This Agreement and all of
the provisions hereof will be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Purchaser
will not be entitled to assign any of its rights and obligations hereunder to
any third party without the prior written consent of Seller which may be granted
or withheld in the sole and absolute discretion of Seller.
7.6 Severability. Whenever possible, each provision of this
Agreement will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
7.7 Captions. The captions used in this Agreement are for
convenience of reference only and do not constitute a part of this Agreement and
will not be deemed to limit, characterize or in any way affect any provision of
this Agreement and all provisions of this Agreement will be enforced and
construed as if no captions had been used in this Agreement.
7.8 Counterparts. This Agreement may be executed in one or
more counterparts, each of which need not contain signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument. Signatures may be exchanged by telecopy, with original signatures to
follow. Each party to this Agreement agrees that it will be bound by its own
telecopied signature and that it accepts the telecopied signatures of the other
parties to this Agreement.
7.9 Governing Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of
New York, without reference to the choice of law provisions thereof.
7.10 Seniority; Exclusivity. Except for the shares of Class A
Preferred Stock, no class of equity securities of Seller will be senior to the
Preferred Stock in right of dividends or other payment, whether upon
liquidation, dissolution or otherwise. Seller shall not issue and sell any
Preferred Stock, other than to Purchaser pursuant to this Agreement, without the
prior written consent of Purchaser.
7.11 Broker Fees. Except for the fees payable by Seller to
Lehman Brothers International, no fees or commissions or similar payments with
respect to the transactions contemplated by this Agreement, the Warrant
Agreement or the Certificate of Amendment have been paid or will be payable by
Seller to any broker, financial
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advisor, finder, investment banker, or bank. Purchaser shall have no obligation
with respect to any fees or with respect to any claims made by or on behalf of
other persons for fees of a type contemplated in this Section 7.11 that may be
due in connection with the transactions contemplated by this Agreement, the
Warrant Agreement or the Certificate of Amendment. As compensation for
Purchaser's services in connection with the financing contemplated herein,
Seller will pay to Purchaser at the Closing (i) a fee equal to 7% of the
Purchase Price of the Shares sold, which fee shall be payable in cash or, at
Seller's option, (ii) a fee equal to 5% of the Purchase Price of the Shares sold
plus 50,000 warrants, such warrants having the same terms and conditions as the
Warrants to be issued pursuant to the Warrant Agreement. In addition, Seller
will reimburse upon demand for Purchaser's reasonable expenses (including
reasonable fees and expenses of counsel) incurred in connection with the
financing contemplated herein, subject to a maximum reimbursement of $10,000.
7.12 Press Releases. From and after the date of the Closing,
Seller and Purchaser shall consult with each other in issuing any press releases
or otherwise making public statements with respect to the transactions
contemplated hereby and neither party shall issue any such press release or
otherwise make any such public statement without the prior written consent of
the other, which consent shall not be unreasonably withheld or delayed, except
that no prior consent shall be required if such disclosure is required by law
(or recommended by corporate counsel to fulfill the disclosure obligations of
the disclosing party), in which such case the disclosing party shall provide the
other party with prior notice of such public statement.
7.13 No Third-Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have caused this
Preferred Stock Purchase Agreement to be executed and delivered on their behalf
as of the day and year first above written.
CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
By: ______________________________
Darby S. Macfarlane
Chairman and Chief Executive
Officer
LB I GROUP INC.
By:_______________________________
Name: Steven Weinstein
Title: Senior Vice President
<PAGE>
Exhibits and Schedules
Exhibit A Certificate of Designation
Exhibit B Warrant Agreement
Schedule 1.2 Allocation of Shares and Warrants
Schedule 3.3 Outstanding Options and Other
Dilutive Securities
Schedule 3.9 Litigation
Schedule 3.16 Registration Rights
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SCHEDULE 1.2
Name of Purchaser Number of Number of Purchase
- ----------------- --------- --------- --------
Shares Warrants Price
--------- --------- --------
LB I Group Inc.
3 World Financial Center 40,000 254,372 $4,000,000
New York, New York 10285
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Schedule 3.3 Capital Stock
Seller maintains a stock option plan entitled "1992 Stock Option Plan".
Seller may grant up to 5,500,000 shares of Common Stock pursuant to the 1992
Stock Option Plan, as amended. The 1992 Stock Option Plan permits grants to
employees, consultants and certain other professionals who provide services to
Seller. As of December 31, 1999, options for 3,146,499 shares of Common Stock
were issued and outstanding.
At February 11, 2000, warrants to purchase 451,965 shares of Common
Stock at $1.67 per share were outstanding. These warrants, issued to a placement
agent in previous years in connection with equity financings, expire as follows:
(i) 124,299 warrants issued on January 6, 1995 expire January 6, 2002; 408
warrants issued on March 13, 1995 expire March 13, 2002; (iii) 93,628 warrants
issued on May 4, 1995 expire on May 4, 2002; and (iv) 259,938 warrants issued on
June 8, 1995 expire on June 8, 2002.
On December 31, 1998, Seller's Board of Directors adopted a
Shareholders' Rights Plan (the "Plan"). Under the Plan, each shareholder will
receive a dividend of one right for each share of Seller's outstanding Common
Stock (a "Right") subject to the terms of the rights agreement between Seller
and its transfer agent. Each Right will entitle the holder to purchase one
one-hundredth of a share of Seller's Class B Series 1 Preferred Stock at an
initial exercise price of $28.00 per share. If a person (other than an existing
shareholder or pursuant to any pre-approved acquisition) becomes a 20% owner in
Seller, all Rights holders, other than such person, will be entitled to purchase
shares of Seller's stock at a discount price. If Seller is acquired in a merger
after such an acquisition, all Rights holders except the buyer will be entitled
to purchase stock in the buyer at the discount. The distribution of Rights was
made on January 11, 1999 to shareholders of record of Common Stock on that date
and shares of Common Stock that are newly issued after that date will also carry
Rights until the Rights become detached from the common stock. The Rights will
expire on January 11, 2009.
The Class A Preferred Stock has voting rights equivalent to each share
of Common Stock and is convertible into 0.979 shares of Common Stock if (i)
Seller's earnings (pre-tax income before interest expense) for any two
consecutive calender years ending on December 31, 2000 exceed $20,000,000 or
(ii) the closing bid price of the Common Stock has been at least $31.11 on 30
consecutive trading days at any time ending on December 31, 2000. Such shares of
Class A Preferred Stock shall otherwise be called for redemption during 120 days
following December 31, 2000 at $.01 per share plus any declared but unpaid
dividends.
On April 15, 1999, Seller issued an aggregate of $5,000,000 14% senior
convertible debentures due April 15, 2002 in a private placement. The
outstanding principal amount of the debentures, together with accrued interest
thereon, is convertible into shares of Common Stock of Seller, at a conversion
price of $5.00,
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subject to the anti-dilution provisions stated therein. Pursuant to the
terms of the private placement, Seller was required to file a registration
statement for all shares of Common Stock of Seller issuable upon conversion of
the outstanding principal amount of and accrued interest on the debentures. Such
registration statement was filed on July 1, 1999 and declared effective on
January 28, 2000 with respect to the shares of Common Stock of Seller issuable
upon conversion of the outstanding principal amount of the debentures. Seller
will file an amendment to such registration statement covering the shares of
Common Stock of Seller issuable upon conversion of the accrued interest on the
debentures and use its best efforts to cause such registration statement to be
effective.
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Schedule 3.16 Registration Rights
On April 15, 1999, Seller issued an aggregate of $5,000,000 14% senior
convertible debentures due April 15, 2002 in a private placement. The
outstanding principal amount of the debentures, together with accrued interest
thereon, is convertible into shares of Common Stock of Seller. Pursuant to the
terms of the private placement, Seller was required to file a registration
statement for all shares of Common Stock of Seller issuable upon conversion of
the outstanding principal amount of and accrued interest on the debentures. Such
registration statement was filed on July 1, 1999 and declared effective on
January 28, 2000 with respect to the shares of Common Stock of Seller issuable
upon conversion of the outstanding principal amount of the debentures. Seller
will file an amendment to such registration statement covering the shares of
Common Stock of Seller issuable upon conversion of the accrued interest on the
debentures and use its best efforts to cause such registration statement to be
effective.
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Exhibit A
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 4 thereof to
read in full as follows:
"4. Class B Series 3 Preferred Stock:
8.The Corporation has authorized the creation of a series of Class B Preferred
Stock to be designated "Class B Series 3 Convertible Preferred Stock" (the
"Series 3 Preferred Stock").
9.The number of shares constituting the Series 3 Preferred Stock shall be fixed
at 40,000. The Series 3 Preferred Stock shall have no par value.
10.The shares of Series 3 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,
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<PAGE>
the terms of which specifically provide that shares of such class or series
shall rank junior to shares of Series 3 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 such class or series shall rank on a parity with the
shares of Series 3 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 Series 3 Preferred Stock (collectively, the "Senior Securities").
11.The holders of shares of Series 3 Preferred Stock shall not be entitled to
any voting rights other than those provided by law. However, so long as any
shares of Series 3 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 Series 3 Preferred Stock then
outstanding, (a) alter or change adversely the absolute or relative powers,
preferences or rights given to the Series 3 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 Series 3 Preferred Stock, (d) amend its Certificate of
Incorporation, bylaws or other charter documents so as to affect adversely any
rights of any holders of Series 3 Preferred Stock, (e) increase the authorized
number of shares of Series 3 Preferred Stock or (f) enter into any agreement
with respect to the foregoing.
12.Except as set forth in Section 7 hereof, the holders of shares of Series 3
Preferred Stock shall not be entitled to receive dividends with respect thereto.
13.(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 Series 3
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 Series 3 Preferred Stock an amount in cash equal to $100.00 per share of
Series 3 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 Series 3 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 Series 3 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 Series 3 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.
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<PAGE>
(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 Series 3 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 Series 3 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 Series 3 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.
14.(a) On the third anniversary of the date of issuance of the shares of Series
3 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 Series 3 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 Series 3 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 issuance of the shares of Series 3
Preferred Stock (the "Extended Redemption Date"), all rights of the holders of
the shares of Series 3 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 Series 3 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 Series 3 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 Series 3 Preferred Stock then outstanding, on the
Extended Redemption Date all of the outstanding shares of Series 3 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 Series 3 Preferred
Stock, which shall be paid at the rate of $8.00 per share per annum (computed on
the basis of the actual
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<PAGE>
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 Series 3 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 Series 3 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 Series 3 Preferred
Stock being redeemed.
15.(a) Subject to the provision for adjustment set forth below, each share of
the Series 3 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 Series 3 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 the lower of (i) $6.67 and (ii) 90% of 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 issuance (the "Issue
Date"). 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 Series 3 Preferred Stock, free from any
preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Series 3 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 Series 3
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 Series 3 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 Series 3 Preferred Stock may be effected by any
holder thereof upon the surrender to the Corporation at the offices of the
Corporation of certificates representing Series 3 Preferred Stock to be
converted, accompanied by a written notice stating that such holder elects to
convert all or a specified portion of such Series 3 Preferred Stock in
accordance with the provisions of this Section 8 and
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<PAGE>
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 Series 3 Preferred Stock
pursuant hereto. As promptly as practicable, and in any event within two
business days after the surrender of such certificates representing Series 3
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 Series 3 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
Series 3 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
Series 3 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 Series 3 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 Series 3 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 Series 3 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 Series 3 Preferred
Stock pursuant to this Section 8(c)(ii) and the Corporation fails for any reason
to pay the redemption price referenced above within
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<PAGE>
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 Series 3 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 rights and privileges of the
holders of Series 3 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 Series 3
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<PAGE>
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 Series 3 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 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 Series 3 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
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<PAGE>
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 Series 3
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.
(e) (i) Unless sooner redeemed or converted in accordance with the
provisions of Section 7 hereof or this Section 8 the outstanding shares of
Series 3 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
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<PAGE>
(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 Series 3 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 Series 3
Preferred Stock shall be sent by or on behalf of the Corporation, postage
prepaid, to the holders of record of outstanding shares of Series 3 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 Series 3 Preferred Stock pursuant to the
Conversion Ratio, all rights of the holders of the shares of Series 3 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 Series 3 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 Series 3 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 Series 3 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 Series 3 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
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<PAGE>
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.
16.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 Series 3 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 Series 3 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.
Signed on February 10, 2000 ____________________
Darby S. Macfarlane
Chairperson of the Board
and Chief Executive Officer
<PAGE>
Exhibit B
WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of February 11, 2000, by and
between CHROMATICS COLOR SCIENCES INTERNATIONAL, INC., a New York
corporation (the "Issuer"), and LB I GROUP INC. (Lehman Brothers Group Inc.), a
Delaware corporation (the "Warrant Holder").
W I T N E S S E T H
-------------------
WHEREAS, the Issuer and the Warrant Holder are parties to the
Preferred Stock Purchase Agreement, dated as of the date hereof (as the same may
be amended, supplemented or otherwise modified from time to time, the "Stock
Purchase Agreement"), pursuant to which the Warrant Holder agreed to purchase
shares of Class B Series 3 Convertible Preferred Stock (the "Preferred Stock")
from the Issuer; and
WHEREAS, in order to induce the Warrant Holder to purchase the
Preferred Stock from the Issuer pursuant to the Stock Purchase Agreement, the
Issuer has agreed to execute and deliver this Warrant Agreement and to issue to
the Warrant Holder the Warrants hereinafter described;
NOW, THEREFORE, in consideration of the premises the parties
hereto agree as follows:
17. Definitions. Capitalized terms used herein which are
defined in the Stock Purchase Agreement and are not otherwise defined herein
shall have the respective meanings given thereto in the Stock Purchase Agreement
(regardless of whether such Stock Purchase Agreement shall still be in effect);
and the following terms used herein shall have the meanings indicated below,
unless the context otherwise requires:
"Affiliate" shall have the meaning set forth in Rule 144
adopted by the Commission pursuant to the Securities Act.
"Business Day" shall mean any day except Saturday, Sunday and
any day which shall be a legal holiday or a day on which banks in New
York, New York are not authorized to conduct business or are required
to be closed.
"Capital Stock" shall have the meaning specified in Section
2(d) hereof.
"Commission" shall mean the Securities and Exchange Commission
or any entity succeeding to any or all of its functions.
"Common Stock" shall mean the common stock, $.001 par value,
of the Issuer.
<PAGE>
"Contractual Obligation" shall mean, as to any Person, any
provision of any security issued by such Person or of any agreement,
instrument or other undertaking to which such Person is a party or by
which it or any of its property is bound.
"Convertible Securities" shall mean any stock or other
securities convertible into or exchangeable for shares of Common Stock.
"Current Market Price Per Share" shall have the meaning
specified in Section 7 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any successor federal statute.
"Exercise Price" shall mean the exercise price of a Warrant,
which shall be $6.99 per Warrant Share, subject to adjustment as
provided in Section 11 hereof.
"Expiration Date" shall mean the five (5) year anniversary of
the date of the Closing or, if such day is not a Business Day, the next
succeeding Business Day.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Management Option Plan" shall mean the Issuer's 1992 Stock
Option Plan, as in effect on the date hereof, which plan provides for
the issuance, upon exercise of the options granted pursuant thereto of
up to 5,500,000 shares of Common Stock in the aggregate to the
employees of and certain consultants to the Issuer to be designated by
the Issuer's Board of Directors.
"Management Options" shall mean options granted or issued by
the Issuer pursuant to the Management Option Plan.
"Person" shall mean any natural person, corporation,
partnership, limited liability company, trust or other entity.
"Preferred Stock" shall mean the Class B Series 3 Preferred
Stock, no par value, of the Issuer.
"Requirement of Law" shall mean as to any Person, the
Certificate of Incorporation and By-Laws or other organizational or
governing documents of such Person, and any law, treaty, rule or
regulation or determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its
property is subject.
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<PAGE>
"Rights" shall mean any rights to subscribe for or to
purchase, or any options or warrants for the purchase of, shares of
Common Stock or Convertible Securities. The term "Rights" shall
include, without limitation, the Warrants and the Management Options.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any successor federal statute.
"Total Warrants" shall mean 254,372, which is the maximum
number of Warrants contemplated under the Stock Purchase Agreement to
be issued in connection with the sale of Preferred Stock.
"Trading Day" shall mean a day on which the securities market
on which the Common Stock is listed is open for trading.
"Warrant" shall mean a warrant issued pursuant to this Warrant
Agreement as contemplated under the Stock Purchase Agreement entitling
the record holder thereof to purchase from the Issuer at the Warrant
Office one share of Common Stock (subject to adjustment as provided in
Section 11 hereof) at the Exercise Price at any time before 5:00 P.M.
local time on the Expiration Date.
"Warrant Certificate" shall mean a certificate evidencing one
or more Warrants, substantially in the form of Exhibit A hereto, with
such changes therein as may be required to reflect any adjustments made
pursuant to Section 11 hereof.
"Warrant Office" shall mean the office or agency of the Issuer
at which the Warrant Register shall be maintained and where the
Warrants may be presented for exercise, exchange, substitution and
transfer, which office or agency will be the office of the Issuer at 5
East 80th Street, New York, New York 10021 which office or agency may
be changed by the Issuer pursuant to notice in writing to the Persons
named in the Warrant Register as the holders of the Warrants.
"Warrant Register" shall mean the register, substantially in
the form of Exhibit B hereto, maintained by the Issuer at the Warrant
Office.
"Warrant Shares" shall mean the shares of Common Stock
issuable or issued upon exercise of all or any of the Warrants as the
number and/or type of such shares may be adjusted from time to time
pursuant to Section 11 hereof.
18. Representations and Warranties. The Issuer hereby represents and
warrants to the Warrant Holder as follows:
18.1 The Issuer is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of New York
has the corporate power and
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<PAGE>
authority to execute and deliver this Warrant Agreement and the Warrant
Certificate, to issue the Warrants and to perform its obligations under
this Warrant Agreement and the Warrant Certificate.
18.2 The execution, delivery and performance by the Issuer of
this Warrant Agreement and the Warrant Certificate, the issuance of the
Warrants and the issuance of the Warrant Shares upon exercise of the
Warrants have been duly authorized by all necessary corporate action on
the part of the Issuer and do not and will not violate, or result in a
breach of, or constitute a default under, or require any consent under,
or result in the creation of a lien upon the assets of the Issuer
pursuant to, any Requirement of Law or any Contractual Obligation
binding upon the Issuer.
18.3 This Warrant Agreement has been duly executed and
delivered by the Issuer and constitutes a legal, valid, binding and
enforceable obligation of the Issuer, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally
and except as equitable remedies may be limited by general principles
of equity. When the Warrants and Warrant Certificates have been issued
as contemplated hereby, (i) the Warrants and the Warrant Certificates
will constitute legal, valid, binding and enforceable obligations of
the Issuer, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and except as equitable remedies may be
limited by general principles of equity (whether such remedies are
sought in a proceeding at law or in equity) and (ii) the Warrant
Shares, when issued upon exercise of the Warrants in accordance with
the terms hereof, will be duly authorized, validly issued, fully paid
and nonassessable shares of the Common Stock.
18.4 As of the date of the Closing immediately after giving
effect to the purchase and sale of the Preferred Stock and Warrants on
that date (i) the Issuer's capital stock (the "Capital Stock") consists
of (a) 1,400,000 shares of Class A preferred stock, par value $.01 per
share, of which 1,380,000 shares are issued and outstanding, (b)
10,000,000 shares of Class B preferred stock, no par value, of which
(x) 500,000 shares have been designated Class B Series 1 Preferred
Stock, par value $.001 per share, of which no shares are issued and
outstanding, (y) 80,000 shares have been designated Class B Series 2
Preferred Stock, par value $.001 per share, of which 40,000 shares are
issued and outstanding, and (z) 40,000 shares have been designated as
Preferred Stock, all of such Preferred Stock will be issued and
outstanding upon the consummation of the Closing and (c) 50,000,000
shares of Common Stock, of which 15,535,481 shares are issued and
outstanding. All issued and outstanding shares of Capital Stock are
validly authorized and issued, fully paid and nonassessable and were
issued in accordance with the registration or qualification provisions
of the Securities Act or pursuant to valid exemptions therefrom.
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<PAGE>
19. Issuance of Warrants. The Issuer hereby agrees to issue and deliver
to the Warrant Holder on the date of the Closing Warrants evidencing rights to
purchase 6.3593 shares of Common Stock, subject to adjustment as provided in
Section 11 hereof, for each share of Preferred Stock purchased by the Warrant
Holder pursuant to the Stock Purchase Agreement on the date of the Closing and
at any time on or before 5:00 P.M., New York City time, on the Expiration Date
at a price per share equal to the Exercise Price. On the date of the Closing
simultaneously with the purchase of the Preferred Stock by the Warrant Holder
pursuant to the Stock Purchase Agreement, the Issuer shall deliver to the
Warrant Holder a Warrant Certificate evidencing the Warrants which the Warrant
Holder is entitled to receive at the Closing in accordance with the terms
hereof.
20. Registration, Transfer and Exchange of Certificates.
20.1 The Issuer shall maintain at the Warrant Office the
Warrant Register for registration of the Warrants and Warrant
Certificates and transfers thereof. On the date hereof the Issuer shall
register the outstanding Warrants and Warrant Certificates in the name
of the Warrant Holder. The Issuer may deem and treat the registered
holder(s) of the Warrant Certificates as the absolute owner(s) thereof
and the Warrants represented thereby (notwithstanding any notation of
ownership or other writing on the Warrant Certificates made by any
Person) for the purpose of any exercise thereof or any distribution to
the holder(s) thereof, and for all other purposes, and the Issuer shall
not be affected by any notice to the contrary.
20.2 Subject to Section 13 hereof, the Issuer shall register
the transfer of any outstanding Warrants in the Warrant Register upon
surrender of the Warrant Certificate(s) evidencing such warrants to the
Issuer at the Warrant Office, accompanied (if so required by it) by a
written instrument or instruments of transfer in form satisfactory to
it, duly executed by the registered holder or holders thereof or by the
duly appointed legal representative thereof. Upon any such registration
of transfer, new Warrant Certificate(s) evidencing such transferred
Warrants shall be issued to the transferee(s) and the surrendered
Warrant Certificate(s) shall be canceled. If less than all the Warrants
evidenced by Warrant Certificate(s) surrendered for transfer are to be
transferred, new Warrant Certificate(s) shall be issued to the holder
surrendering such Warrant Certificate(s) evidencing such remaining
number of Warrants.
20.3 Warrant Certificates may be exchanged at the option of
the holder(s) thereof, when surrendered to the Issuer at the Warrant
Office, for another Warrant Certificate or other Warrant Certificates
of like tenor and representing in the aggregate a like number of
Warrants. Warrant Certificates surrendered for exchange shall be
canceled.
20.4 No charge shall be made for any such transfer or exchange
except for any tax or other governmental charge imposed in connection
therewith. Except as provided in Section 13(b) hereof, each Warrant
Certificate issued upon transfer or
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<PAGE>
exchange shall bear the legend set forth in Section 13(b) hereof if the
Warrant Certificate presented for transfer or exchange bore such
legend.
21. Mutilated or Missing Warrant Certificates. If any Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Issuer shall
issue, in exchange and substitution for and upon cancellation of the mutilated
Warrant Certificate, or in lieu of and substitution for the Warrant Certificate
lost, stolen or destroyed, a new Warrant Certificate of like tenor and
representing an equivalent number of Warrants, but only upon receipt of evidence
satisfactory to the Issuer of such loss, theft or destruction of such Warrant
Certificate and, if reasonably requested, indemnity satisfactory to it. No
service charge shall be made for any such substitution, but all expenses and
reasonable charges associated with procuring such indemnity and all stamp, tax
and other governmental duties that may be imposed in relation thereto shall be
borne by the holder of such Warrant Certificate. Each Warrant Certificate issued
in any such substitution shall bear the legend set forth in Section 13(b) hereof
if the Warrant Certificate for which such substitution was made bore such
legend.
22. Duration and Exercise of Warrants.
22.1 The Warrants evidenced by a Warrant Certificate shall be
exercisable in whole or in part by the registered holder thereof on any
Business Day at any time from and after the date of the Closing and
prior to 5:00 P.M. in New York City on the Expiration Date.
22.2 Subject to the provisions of this Warrant Agreement, upon
presentation of the Warrant Certificate evidencing the Warrants to be
exercised, with the form of election to purchase on the reverse thereof
duly completed and signed by the registered holder or holders thereof,
to the Issuer at the Warrant Office, and upon payment of the aggregate
Exercise Price for the number of Warrant Shares in respect of which
such Warrants are being exercised in lawful money of the United States
of America, the Issuer shall issue and cause to be delivered to or upon
the written order of the registered holder(s) of such Warrants and in
such name or names as such registered holder(s) may designate, a
certificate for the Warrant Shares issued upon such exercise of such
Warrants. Any Person(s) so designated to be named therein shall be
deemed to have become holder(s) of record of such Warrant Shares as of
the date of exercise of such Warrants. Certificates for the Warrant
Shares so purchased, representing the aggregate number of shares
specified in the Warrant Certificate, shall be delivered to the
registered holder within a reasonable time, not exceeding three (3)
Business Days, after this Warrant shall have been so exercised. The
certificates so delivered shall be in such denominations as may be
requested by the registered holder and shall be registered in the name
of the registered holder or such other name as shall be designated by
such registered holder.
22.3 If less than all of the Warrants evidenced by a Warrant
Certificate are exercised at any time, a new Warrant Certificate or
Certificates shall be issued for
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<PAGE>
the remaining number of Warrants evidenced by such Warrant Certificate.
Each new Warrant Certificate so issued shall bear the legend set forth
in Section 13(b) hereof if the Warrant Certificate presented in
connection with partial exercise thereof bore such legend. All Warrant
Certificates surrendered upon exercise of Warrants shall be canceled.
22.4 Notwithstanding the foregoing, at any time after the
six-month anniversary of the date hereof, the Issuer may, at its sole
option, compel the involuntary conversion of all, but not less than
all, of the outstanding Warrants into Warrant Shares at the Exercise
Price in the event that (i) the Current Market Price Per Share (as
hereinafter defined) is equal to or in excess of two hundred percent
(200%) of the Exercise Price per Warrant Share for a period of at least
twenty consecutive Trading Days, (ii) the Warrant Shares have been
registered under the Securities Act pursuant to Section 6.1 of the
Stock Purchase Agreement and such registration has been declared
effective by the Commission and is effective on such date and (iii) the
Issuer has a sufficient number of authorized shares of Common Stock
reserved for issuance upon conversion of the Warrants. In the event
that the Issuer elects to compel such involuntary conversion of all
outstanding Warrants, it shall promptly notify the Warrant Holder of
such election at least ten (10) days in advance of the date set forth
in such conversion notice whereupon the Warrants shall be deemed
converted into shares of Common Stock as of the date set forth in the
Issuer's conversion notice.
22.5 In lieu of physical delivery of the Warrants, provided
that Issuer's transfer agent is participating in The Depository Trust
Company ("DTC") Shares Fast Automated Securities Transfer ("FAST")
program, upon request of the Warrant Holder and in compliance with the
provisions hereof, the Issuer shall use its best efforts to cause its
transfer agent to electronically transmit the Warrant Shares to the
Warrant Holder by crediting the account of the Warrant Holder's prime
broker with DTC through its Deposit Withdrawal Agent Commission system.
The time period for delivery described herein shall apply to the
electronic transmittals described herein.
23. No Fractional Shares. The Issuer shall not be required to issue
fractional shares of Common Stock upon exercise of the Warrants but may pay for
any such fraction of a share an amount in cash equal to the Current Market Price
per Share of Common Stock of such share multiplied by such fraction. The
"Current Market Price Per Share" on any date shall be deemed to be, for any day,
the last bid 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 of the Common Stock in the over-the-counter market.
7
<PAGE>
24. Payment of Taxes. The Issuer will pay all taxes (other than any
applicable income or similar taxes payable by the holders of the Warrants or
Warrant Shares) attributable to the initial issuance of Warrant Shares upon the
exercise of the Warrants; provided that the Issuer shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issue of
any Warrant Certificate or any certificate for Warrant Shares in a name other
than that of the registered holder of a Warrant Certificate surrendered upon the
exercise of a Warrant, and the Issuer shall not be required to issue or deliver
such certificates unless or until the Person or Persons requesting the issuance
thereof shall have paid to the Issuer the amount of such tax or shall have
established to the satisfaction of the Issuer that such tax has been paid.
25. Reservation and Issuance of Warrant Shares.
25.1 The Issuer will at all times have authorized, and reserve
and keep available for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon the exercise of the Warrants,
the number of shares of Common Stock deliverable upon exercise of all
outstanding Warrants.
25.2 Before taking any action which would cause an adjustment
pursuant to Section 11 hereof reducing the Exercise Price below the
then par value (if any) of the Warrant Shares issuable upon exercise of
the Warrants, the Issuer will take any corporate action which may be
necessary in order that the Issuer may validly and legally issue fully
paid and nonassessable Warrant Shares at the Exercise Price as so
adjusted.
25.3 The Issuer covenants that all Warrant Shares will, upon
issuance in accordance with the terms of this Warrant Agreement, be
duly and validly issued, fully paid and nonassessable and free from all
taxes with respect to the issuance thereof and from all liens, charges
and security interests created (whether by affirmative action or
inaction) by the Issuer and shall not have any legends or restrictions
on resale, except as required by Section 13(b) hereof.
(d) The Issuer shall promptly secure the listing of the shares
of Common Stock issuable upon exercise of the Warrants upon the
national securities exchange or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official
notice of issuance upon exercise of the Warrants) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon
the exercise of the Warrants.
26. Obtaining of Governmental Approvals and Stock Exchange Listings.
The Issuer will, at its own expense, (a) obtain and keep effective any and all
permits, consents and approvals of governmental agencies and authorities which
may from time to time be required of the Issuer in order to satisfy its
obligations hereunder and (b) take all action which may be necessary so that the
Warrant Shares, immediately upon their issuance
8
<PAGE>
upon the exercise of the Warrants, will be listed on each securities exchange or
over-the- counter market, if any, on which the Common Stock is then listed if
such listing is permitted by applicable law, regulation or rule.
27. Adjustment of Exercise Price and Number of Warrant Shares
Purchasable. Prior to the Expiration Date, the Exercise Price and the number of
Warrant Shares purchasable upon the exercise of each Warrant are subject to
adjustment from time to time upon the occurrence of any of the events enumerated
in this Section 11.
27.1 In the event that the Issuer shall at any time after the
date of this Agreement (i) declare a dividend on the Common Stock in
Common Stock, Convertible Securities or other Rights, (ii) split or
subdivide the outstanding Common Stock, (iii) combine the outstanding
Common Stock into a smaller number of shares, or (iv) issue by
reclassification of its Common Stock any shares of Common Stock,
Convertible Securities or other Rights, then, in each such event, the
number of Warrant Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the holder shall be
entitled to receive the kind and number of such shares or other
securities of the Issuer which the holder would have owned or have been
entitled to receive after the happening of any of the events described
above, had such Warrant been exercised immediately prior to the
happening of such event (or any record date with respect thereto). Such
adjustment shall be made whenever any of the events listed above shall
occur. An adjustment made pursuant to this paragraph (a) shall become
effective immediately after the effective date of the event retroactive
to the record date, if any, for the event.
27.2 If at any time, as a result of an adjustment made
pursuant to this Section 11, the holder of any Warrant thereafter
exercised shall become entitled to receive any shares of the Issuer
other than shares of Common Stock, thereafter the number of such other
shares so receivable upon exercise of any Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant
Shares contained in this Section 11, and the provisions of this
Agreement with respect to the Warrant Shares shall apply on like terms
to such other shares.
27.3 Whenever the number of Warrant Shares purchasable upon
the exercise of each warrant is adjusted pursuant to Section 11(a)
hereof, the Exercise Price per Warrant Share payable upon exercise of
each Warrant shall be adjusted by multiplying such Exercise Price
immediately prior to such adjustment by a fraction, the numerator of
which shall be the number of Warrant Shares purchasable upon the
exercise of each Warrant immediately prior to such adjustment, and the
denominator of which shall be the number of Warrant Shares purchasable
immediately after such adjustment; provided, however, that in no event
shall the Exercise Price be adjusted to an amount which is less than
the par value of the Common Stock.
9
<PAGE>
27.4 In the event of any capital reorganization of the Issuer,
or of any reclassification of the Common Stock (other than a
reclassification referred to in Section 11(a)(iv) above), or in case of
the consolidation of the Issuer with or the merger of the Issuer with
or into any other corporation or of the sale of the properties and
assets of the Issuer as, or substantially as, an entirety to any other
Person, each Warrant shall, after such capital reorganization,
reclassification of Common Stock, consolidation, merger or sale, and in
lieu of being exercisable for Warrant Shares, be exercisable, upon the
terms and conditions specified in this Warrant Agreement, for the
number of shares of stock or other securities or assets to which a
holder of the number of Warrant Shares purchasable (at the time of such
capital reorganization, reclassification of Common Stock,
consolidation, merger or sale) upon exercise of such Warrant would have
been entitled upon such capital reorganization, reclassification of
Common Stock, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this Section 11 with respect to
the rights thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as nearly as they may
reasonably be, to any shares of stock or other securities or assets
thereafter deliverable on the exercise of the Warrants. The Issuer
shall not effect any such consolidation, merger or sale, unless prior
to or simultaneously with the consummation thereof the successor
corporation (if other than the Issuer) resulting from such
consolidation or merger or the corporation purchasing such assets or
the appropriate corporation or entity shall assume, by written
instrument, the obligation to deliver to the holder of each Warrant the
shares of stock, securities or assets to which, in accordance with the
foregoing provisions, such holder may be entitled and all other
obligations of the Issuer under this Warrant Agreement. The provisions
of this paragraph (d) shall apply to successive reorganizations,
reclassifications, consolidations, mergers and sales.
27.5 Except with respect to Excluded Securities (as defined
below), in case the Issuer shall issue any shares of Common Stock or
Convertible Securities after the date hereof at a price per share (or
having a conversion or exercise price per share) of less than the
Exercise Price per Warrant Share, the Exercise Price per Warrant Share
shall be appropriately adjusted by decreasing (but not increasing) the
Exercise Price per Warrant Share to such lower price per share. An
adjustment made pursuant to clause (a) shall be made 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 (e), the consideration receivable
by the Issuer in connection with the issuance of additional shares of
Common Stock or of Convertible Securities after the date hereof shall
be deemed to be equal to (X) in the case the consideration received by
the Issuer 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 Convertible
Securities plus the minimum aggregate amount, if any, payable upon
conversion, exchange or exercise of any such Convertible Securities,
and (Y) in the case the consideration received by the Issuer is other
than
10
<PAGE>
cash, the fair market value of the consideration received by the Issuer
as determined by the good faith judgment of the Board of Directors of
the Issuer; provided, however, that in the event the Warrant Holder
disagrees in good faith with the determination of the Board of
Directors of the Issuer, 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 Warrant Holder; and
provided, further, that the Issuer, 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. The issuance or reissuance of any shares of
Common Stock or Convertible Securities (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 Exercise Price per
Warrant Share pursuant to clause (a), shall not be deemed to constitute
an issuance of Common Stock or Convertible Securities by the Issuer
pursuant to which this clause (e) applies. Upon the expiration or
termination of any unconverted, unexchanged or unexercised Convertible
Securities for which an adjustment has been made pursuant to this
clause (e), the adjustments shall forthwith be reversed to effect such
Exercise Price per Warrant Share as would have been in effect at the
time of such expiration or termination had such Convertible Securities,
to the extent outstanding immediately prior to such expiration or
termination, had never been issued. For purposes of this clause (e),
"Excluded Securities" shall mean: (i) shares of Common Stock issuable
upon conversion of the Preferred Stock; (ii) shares of Common Stock
issuable or issued to employees of and consultants to the Issuer
pursuant to the Management Option Plan; (iii) any capital stock issued
as a stock dividend or upon any stock split or other subdivision or
combination of shares of the Issuer's capital stock; (iv) shares of
Common Stock issuable upon conversion of any Convertible Securities
issued prior to the date hereof and outstanding on the date hereof, (v)
shares of Common Stock issuable upon conversion of the Issuer's Class A
Convertible Preferred Stock outstanding on the date hereof or (vi)
Common Stock issued upon the conversion or exercise of Convertible
Securities issued after the date hereof as to which an adjustment to
the Exercise Price per Warrant Share has been made pursuant to this
clause (e) upon the issuance of such Convertible Securities.
27.6 Irrespective of any adjustments in the Exercise Price or
the number or kind of shares purchasable upon exercise of the Warrants,
Warrant Certificates theretofore or thereafter issued may continue to
express the same Exercise Price per share and number and kind of shares
as are stated on the Warrant Certificates initially issuable pursuant
to this Agreement.
27.7 If any question shall at any time arise with respect to
the adjusted Exercise Price or Warrant Shares issuable upon exercise,
such question shall be determined by the independent auditors of the
Issuer and such determination shall
11
<PAGE>
be binding upon the Issuer and the holders of the Warrants and the
Warrant Shares.
28. Notices to the Warrant Holder. Upon any adjustment of the Exercise
Price or number of Warrant Shares issuable upon exercise pursuant to Section 11
hereof the Issuer shall promptly, but in any event within ten Business Days
thereafter, cause to be given to the Warrant Holder, at its address appearing on
the Warrant Register by first- class mail, postage prepaid, a certificate signed
by its chief financial officer setting forth the Exercise Price as so adjusted
and/or the number of shares of Common Stock issuable upon the exercise of each
Warrant as so adjusted and describing in reasonable detail the facts accounting
for such adjustment and the method of calculation used. Where appropriate, such
certificate may be given in advance and included as a part of the notice
required to be mailed under the other provisions of this Section 12.
In the event:
28.1 the Issuer shall authorize issuance to all holders of
Common Stock of rights or warrants to subscribe for or purchase Capital
Stock of the Issuer or of any other subscription rights or warrants; or
28.2 the Issuer shall authorize a dividend or other
distribution to all holders of Common Stock payable in evidences of its
indebtedness, cash or assets; or
28.3 of any consolidation or merger to which the Issuer is a
party and for which approval of any stockholders of the Issuer is
required, or of the conveyance or transfer of the properties and assets
of the Issuer substantially as an entirety, or of any capital
reorganization or reclassification or change of the Common Stock (other
than a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or
combination); or
28.4 of the voluntary or involuntary dissolution, liquidation
or winding up of the Issuer; or
28.5 the Issuer shall authorize any other action which would
require an adjustment of the Exercise Price or number of Warrant Shares
issuable upon exercise pursuant to Section 11 hereof;
then the Issuer shall cause to be given to the Warrant Holder at its address
appearing on the Warrant Register, at least twenty (20) Business Days prior to
the applicable record date hereinafter specified (or as expeditiously as
possible after the occurrence of any involuntary dissolution, liquidation or
winding up referred to in clause (d) above), by first-class mail, postage
prepaid, a written notice stating (i) the date as of which the holders of record
of Common Stock to be entitled to receive any such rights, warrants or
distribution are to be determined, or (ii) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up is expected to become effective
12
<PAGE>
(or has become effective, in the case of any involuntary dissolution,
liquidation or winding up), and the date as of which it is expected that holders
of record of Common Stock shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up. The failure to give the notice required by this Section 12 or any defect
therein shall not affect the legality or validity of any distribution, right,
warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up, or the vote upon any action.
29. Restrictions on Transfer.
29.1 The Warrant Holder represents that it is not acquiring
the Warrants (and upon any exercise of the Warrants, each holder
represents that it will not be acquiring the Warrant Shares) with a
view to any distribution or public offering within the meaning of the
Securities Act but subject to any requirement of law that the
disposition of its property shall at all times be within its control.
The Warrant Holder acknowledges that the Warrant Shares issuable upon
exercise of the Warrants have not as of the date hereof been registered
under the Securities Act and agrees that it will not sell or otherwise
transfer any of its Warrant Shares except upon the terms and conditions
specified herein.
29.2 (i) The Warrant Holder agrees, and each subsequent
transferee described in paragraph (ii) below shall agree, that it will
not transfer any Warrant Shares except pursuant to an exemption from,
or otherwise in a transaction not subject to, the registration
requirements of the Securities Act (as confirmed in an opinion of
counsel reasonably acceptable to the Issuer to the transferor to the
effect that the proposed transfer may be effected without registration
under the Securities Act) or pursuant to an effective registration
statement under the Securities Act.
(ii) Each Warrant Certificate and each certificate for the
Warrant Shares (unless the legal opinion delivered in connection
therewith is to the effect that the first paragraph of such legend is
not required in order to ensure compliance with the Securities Act)
shall include a legend in substantially the following form:
THE WARRANTS AND UNDERLYING SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER, AN EXEMPTION FROM, OR
OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF SUCH ACT.
IN ADDITION, THE WARRANTS AND UNDERLYING SHARES MAY BE TRANSFERRED ONLY
IN COMPLIANCE WITH THE CONDITIONS SPECIFIED
13
<PAGE>
IN THE WARRANT AGREEMENT, DATED AS OF JUNE 11, 1999, BETWEEN THE ISSUER
AND THE INITIAL HOLDER OF THE WARRANTS NAMED THEREIN, A COMPLETE AND
CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL
OFFICE OF THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON
WRITTEN REQUEST AND WITHOUT CHARGE.
30. Amendments and Waivers. Any provision of this Warrant
Agreement may be amended, supplemented, waived, discharged or terminated by a
written instrument signed by the Issuer and the holders of a majority of the
then outstanding Warrants.
31. Notices.
31.1 Any notice or demand to be given or made by the holders
of the Warrants or the Warrant Shares to the Issuer pursuant to this
Warrant Agreement shall be sufficiently given or made if personally
delivered, sent by overnight courier or telecopied (in each such case
delivery will be effective upon receipt) or mailed by certified mail,
postage prepaid, return receipt requested (delivery will be effective
three days after the date of mailing) addressed to the Issuer at the
Warrant Office.
31.2 Any notice to be given by the Issuer to the Warrant
Holder shall be sufficiently given if personally delivered, sent by
overnight courier or telecopied (in each such case delivery will be
effective upon receipt) or mailed by certified mail, postage prepaid,
return receipt requested (delivery will be effective three days after
the date of mailing) addressed to such holder as such holder's name and
address shall appear on the Warrant Register.
32. Binding Effect; Third Party Rights. This Warrant Agreement
shall be binding upon and inure to the sole and exclusive benefit of
the Issuer, its successors and assigns, the Warrant Holder, the
registered holders from time to time of the Warrants and the Warrant
Shares.
33. Termination. This Warrant Agreement shall terminate and be
of no further force and effect at 5:00 P.M. New York City time on the
Expiration Date or the date on which none of the Warrants shall be
outstanding (whether by reason of the involuntary conversion thereof or
the expiration thereof by the Issuer).
34. Counterparts. This Warrant Agreement may be executed in
two or more separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
14
<PAGE>
35. Governing Law. This Warrant Agreement and each Warrant
Certificate shall be governed by and construed in accordance with the
laws of the State of New York without regard to the choice of law
provisions thereof.
36. Benefits of this Warrant Agreement. Nothing in this
Warrant Agreement shall be construed to give to any Person other than
the Issuer and the registered holders of the Warrants and the Warrant
Shares any legal or equitable right, remedy or claim under this Warrant
Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed and delivered by their proper and duly authorized
officers, as of the date and year first above written.
CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
By:_____________________________
Darby S. Macfarlane
Chairman and Chief Executive
Officer
LB I GROUP INC.
By:_____________________________
Name:
Title:
16
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS AND UNDERLYING SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR STATE SECURITIES LAWS AND
MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, THE WARRANTS AND
UNDERLYING SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS
SPECIFIED IN THE WARRANT AGREEMENT, DATED AS OF JUNE 11, 1999, BETWEEN THE
ISSUER AND THE INITIAL HOLDER OF THE WARRANTS NAMED THEREIN, A COMPLETE AND
CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF
THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
WARRANT CERTIFICATE
Evidencing Warrants
to Purchase Common Stock of
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
No. ___-___ Warrants
This Warrant Certificate certifies that __________________________
_________________________________________, or registered assigns, is the
registered holder of ____ Warrants (the "Warrants") to purchase Common Stock,
$.001 par value (the "Common Stock"), of CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC., a New York corporation (the "Issuer"). Each Warrant
entitles the holder, but only subject to the conditions set forth herein and
in the Warrant Agreement referred to below, to purchase from the Issuer at any
time prior to 5:00 P.M., New York City time at the Warrant Office, on February
11, 2005 or, if such day is not a Business Day, the next succeeding Business
Day (the "Expiration Date"), one fully paid and nonassessable share of the
Common Stock of the Issuer (the "Warrant Shares") at a price (the "Exercise
Price") of $______ per Warrant Share payable in lawful money of the United
States of America, upon surrender of this Warrant Certificate, execution of
the annexed Form of Election to Purchase and payment of the Exercise Price at
the principal place of business of the Issuer (the "Warrant Office"). The
Exercise Price and number
<PAGE>
of Warrant Shares purchasable upon exercise of the Warrants are subject
to adjustment upon the occurrence of certain events as set forth in the
Warrant Agreement referred to below.
The Issuer may deem and treat the registered holder(s) of the Warrants
evidenced hereby as the absolute owner(s) thereof (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof and of any distribution to the holder(s) hereof, and
for all other purposes, and the Issuer shall not be affected by any notice to
the contrary.
Warrant Certificates, when surrendered at the Warrant Office by the
registered holder hereof in person or by a legal representative duly
authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of
like tenor evidencing in the aggregate a like number of Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the Warrant Office, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued in exchange for this Warrant Certificate to the
transferee(s) and, if less than all the Warrants evidenced hereby are to be
transferred, to the registered holder hereof, subject to the limitations
provided in the Warrant Agreement, without charge except for any tax or other
governmental charge imposed in connection therewith.
This Warrant Certificate is one of the Warrant Certificates referred to
in the Warrant Agreement, dated as of February 11, 2000, by and between the
Issuer and the Warrant Holder named therein (the "Warrant Agreement"). Said
Warrant Agreement is hereby incorporated by reference in and made a part of
this Warrant Certificate and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Issuer and the holders.
[The remainder of this page intentionally left blank]
2
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Warrant Certificate to
be signed by its duly authorized officers and has caused its corporate seal to
be affixed hereunto.
CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
By:
-------------------
Name:
Title:
(CORPORATE SEAL)
ATTEST:
---------------------
Name:
Title:
3
<PAGE>
ANNEX TO
WARRANT CERTIFICATE
[FORM OF ELECTION TO PURCHASE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase Warrant Shares and
herewith tenders payment for such Warrant Shares to the order of the Issuer in
the amount of $__________ in accordance with the terms hereof. The undersigned
requests that a certificate for such Warrant Shares be registered in the name
of __________________________ whose address is _______________ and that such
certificate be delivered to ________________ whose address is
____________________. If said number of Warrant Shares is less than all of the
Warrant Shares purchasable hereunder, the undersigned requests that a new
Warrant Certificate representing the remaining balance of the Warrant Shares
be registered n the name of _______________ whose address is
_______________________ and that such Warrant Certificate be delivered to
_______________________ whose address is _______________________________.
Signature:
----------------------------
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate)
Date:________________________
<PAGE>
EXHIBIT B
TO WARRANT AGREEMENT
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Warrant No. Holder Shares Underlying Warrant
- ---------- ------ -------------------------
A-101 LB I Group Inc. 220,690
3 World Financial Center
New York, New York 10285
A-102 LB I Group Inc. 50,000
3 World Financial Center
New York, New York 10285
A-103 LB I Group Inc. 254,372
3 World Financial Center
New York, New York 10285
A-104 LB I Group Inc. 50,000
3 World Financial Center
New York, New York 10285
<PAGE>
Exhibit 4.8
WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of February 11, 2000, by and
between CHROMATICS COLOR SCIENCES INTERNATIONAL, INC., a New York
corporation (the "Issuer"), and LB I GROUP INC. (Lehman Brothers Group Inc.), a
Delaware corporation (the "Warrant Holder").
W I T N E S S E T H
-------------------
WHEREAS, the Issuer and the Warrant Holder are parties to the
Preferred Stock Purchase Agreement, dated as of the date hereof (as the same may
be amended, supplemented or otherwise modified from time to time, the "Stock
Purchase Agreement"), pursuant to which the Warrant Holder agreed to purchase
shares of Class B Series 3 Convertible Preferred Stock (the "Preferred Stock")
from the Issuer; and
WHEREAS, in order to induce the Warrant Holder to purchase the
Preferred Stock from the Issuer pursuant to the Stock Purchase Agreement, the
Issuer has agreed to execute and deliver this Warrant Agreement and to issue to
the Warrant Holder the Warrants hereinafter described;
NOW, THEREFORE, in consideration of the premises the parties
hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used herein which
are defined in the Stock Purchase Agreement and are not otherwise defined herein
shall have the respective meanings given thereto in the Stock Purchase Agreement
(regardless of whether such Stock Purchase Agreement shall still be in effect);
and the following terms used herein shall have the meanings indicated below,
unless the context otherwise requires:
"Affiliate" shall have the meaning set forth in Rule 144
adopted by the Commission pursuant to the Securities Act.
"Business Day" shall mean any day except Saturday, Sunday and
any day which shall be a legal holiday or a day on which banks in New
York, New York are not authorized to conduct business or are required
to be closed.
"Capital Stock" shall have the meaning specified in Section
2(d) hereof.
"Commission" shall mean the Securities and Exchange Commission
or any entity succeeding to any or all of its functions.
<PAGE>
"Common Stock" shall mean the common stock, $.001 par value,
of the Issuer.
"Contractual Obligation" shall mean, as to any Person, any
provision of any security issued by such Person or of any agreement,
instrument or other undertaking to which such Person is a party or by
which it or any of its property is bound.
"Convertible Securities" shall mean any stock or other
securities convertible into or exchangeable for shares of Common Stock.
"Current Market Price Per Share" shall have the meaning
specified in Section 7 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any successor federal statute.
"Exercise Price" shall mean the exercise price of a Warrant,
which shall be $6.99 per Warrant Share, subject to adjustment as
provided in Section 11 hereof.
"Expiration Date" shall mean the five (5) year anniversary of
the date of the Closing or, if such day is not a Business Day, the next
succeeding Business Day.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Management Option Plan" shall mean the Issuer's 1992 Stock
Option Plan, as in effect on the date hereof, which plan provides for
the issuance, upon exercise of the options granted pursuant thereto of
up to 5,500,000 shares of Common Stock in the aggregate to the
employees of and certain consultants to the Issuer to be designated by
the Issuer's Board of Directors.
"Management Options" shall mean options granted or issued by
the Issuer pursuant to the Management Option Plan.
"Person" shall mean any natural person, corporation,
partnership, limited liability company, trust or other entity.
"Preferred Stock" shall mean the Class B Series 3 Preferred
Stock, no par value, of the Issuer.
"Requirement of Law" shall mean as to any Person, the
Certificate of Incorporation and By-Laws or other organizational or
governing documents of such Person, and any law, treaty, rule or
regulation or determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon
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such Person or any of its property or to which such Person or any of
its property is subject.
"Rights" shall mean any rights to subscribe for or to
purchase, or any options or warrants for the purchase of, shares of
Common Stock or Convertible Securities. The term "Rights" shall
include, without limitation, the Warrants and the Management Options.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any successor federal statute.
"Total Warrants" shall mean 254,372, which is the maximum
number of Warrants contemplated under the Stock Purchase Agreement to
be issued in connection with the sale of Preferred Stock.
"Trading Day" shall mean a day on which the securities market
on which the Common Stock is listed is open for trading.
"Warrant" shall mean a warrant issued pursuant to this Warrant
Agreement as contemplated under the Stock Purchase Agreement entitling
the record holder thereof to purchase from the Issuer at the Warrant
Office one share of Common Stock (subject to adjustment as provided in
Section 11 hereof) at the Exercise Price at any time before 5:00 P.M.
local time on the Expiration Date.
"Warrant Certificate" shall mean a certificate evidencing one
or more Warrants, substantially in the form of Exhibit A hereto, with
such changes therein as may be required to reflect any adjustments made
pursuant to Section 11 hereof.
"Warrant Office" shall mean the office or agency of the Issuer
at which the Warrant Register shall be maintained and where the
Warrants may be presented for exercise, exchange, substitution and
transfer, which office or agency will be the office of the Issuer at 5
East 80th Street, New York, New York 10021 which office or agency may
be changed by the Issuer pursuant to notice in writing to the Persons
named in the Warrant Register as the holders of the Warrants.
"Warrant Register" shall mean the register, substantially in
the form of Exhibit B hereto, maintained by the Issuer at the Warrant
Office.
"Warrant Shares" shall mean the shares of Common Stock
issuable or issued upon exercise of all or any of the Warrants as the
number and/or type of such shares may be adjusted from time to time
pursuant to Section 11 hereof.
SECTION 2. Representations and Warranties. The Issuer hereby represents
and warrants to the Warrant Holder as follows:
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(a) The Issuer is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of New York
has the corporate power and authority to execute and deliver this
Warrant Agreement and the Warrant Certificate, to issue the Warrants
and to perform its obligations under this Warrant Agreement and the
Warrant Certificate.
(b) The execution, delivery and performance by the Issuer of
this Warrant Agreement and the Warrant Certificate, the issuance of the
Warrants and the issuance of the Warrant Shares upon exercise of the
Warrants have been duly authorized by all necessary corporate action on
the part of the Issuer and do not and will not violate, or result in a
breach of, or constitute a default under, or require any consent under,
or result in the creation of a lien upon the assets of the Issuer
pursuant to, any Requirement of Law or any Contractual Obligation
binding upon the Issuer.
(c) This Warrant Agreement has been duly executed and
delivered by the Issuer and constitutes a legal, valid, binding and
enforceable obligation of the Issuer, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally
and except as equitable remedies may be limited by general principles
of equity. When the Warrants and Warrant Certificates have been issued
as contemplated hereby, (i) the Warrants and the Warrant Certificates
will constitute legal, valid, binding and enforceable obligations of
the Issuer, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and except as equitable remedies may be
limited by general principles of equity (whether such remedies are
sought in a proceeding at law or in equity) and (ii) the Warrant
Shares, when issued upon exercise of the Warrants in accordance with
the terms hereof, will be duly authorized, validly issued, fully paid
and nonassessable shares of the Common Stock.
(d) As of the date of the Closing immediately after giving
effect to the purchase and sale of the Preferred Stock and Warrants on
that date (i) the Issuer's capital stock (the "Capital Stock") consists
of (a) 1,400,000 shares of Class A preferred stock, par value $.01 per
share, of which 1,380,000 shares are issued and outstanding, (b)
10,000,000 shares of Class B preferred stock, no par value, of which
(x) 500,000 shares have been designated Class B Series 1 Preferred
Stock, par value $.001 per share, of which no shares are issued and
outstanding, (y) 80,000 shares have been designated Class B Series 2
Preferred Stock, par value $.001 per share, of which 40,000 shares are
issued and outstanding, and (z) 40,000 shares have been designated as
Preferred Stock, all of such Preferred Stock will be issued and
outstanding upon the consummation of the Closing and (c) 50,000,000
shares of Common Stock, of which 15,535,481 shares are issued and
outstanding. All issued and outstanding shares of Capital Stock are
validly authorized and issued, fully paid and nonassessable and were
issued in
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accordance with the registration or qualification provisions of the
Securities Act or pursuant to valid exemptions therefrom.
SECTION 3. Issuance of Warrants. The Issuer hereby agrees to issue and
deliver to the Warrant Holder on the date of the Closing Warrants evidencing
rights to purchase 6.3593 shares of Common Stock, subject to adjustment as
provided in Section 11 hereof, for each share of Preferred Stock purchased by
the Warrant Holder pursuant to the Stock Purchase Agreement on the date of the
Closing and at any time on or before 5:00 P.M., New York City time, on the
Expiration Date at a price per share equal to the Exercise Price. On the date of
the Closing simultaneously with the purchase of the Preferred Stock by the
Warrant Holder pursuant to the Stock Purchase Agreement, the Issuer shall
deliver to the Warrant Holder a Warrant Certificate evidencing the Warrants
which the Warrant Holder is entitled to receive at the Closing in accordance
with the terms hereof.
SECTION 4. Registration, Transfer and Exchange of Certificates.
(a) The Issuer shall maintain at the Warrant Office the
Warrant Register for registration of the Warrants and Warrant
Certificates and transfers thereof. On the date hereof the Issuer shall
register the outstanding Warrants and Warrant Certificates in the name
of the Warrant Holder. The Issuer may deem and treat the registered
holder(s) of the Warrant Certificates as the absolute owner(s) thereof
and the Warrants represented thereby (notwithstanding any notation of
ownership or other writing on the Warrant Certificates made by any
Person) for the purpose of any exercise thereof or any distribution to
the holder(s) thereof, and for all other purposes, and the Issuer shall
not be affected by any notice to the contrary.
(b) Subject to Section 13 hereof, the Issuer shall register
the transfer of any outstanding Warrants in the Warrant Register upon
surrender of the Warrant Certificate(s) evidencing such warrants to the
Issuer at the Warrant Office, accompanied (if so required by it) by a
written instrument or instruments of transfer in form satisfactory to
it, duly executed by the registered holder or holders thereof or by the
duly appointed legal representative thereof. Upon any such registration
of transfer, new Warrant Certificate(s) evidencing such transferred
Warrants shall be issued to the transferee(s) and the surrendered
Warrant Certificate(s) shall be canceled. If less than all the Warrants
evidenced by Warrant Certificate(s) surrendered for transfer are to be
transferred, new Warrant Certificate(s) shall be issued to the holder
surrendering such Warrant Certificate(s) evidencing such remaining
number of Warrants.
(c) Warrant Certificates may be exchanged at the option of the
holder(s) thereof, when surrendered to the Issuer at the Warrant
Office, for another Warrant Certificate or other Warrant Certificates
of like tenor and representing in the aggregate a like number of
Warrants. Warrant Certificates surrendered for exchange shall be
canceled.
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(d) No charge shall be made for any such transfer or exchange
except for any tax or other governmental charge imposed in connection
therewith. Except as provided in Section 13(b) hereof, each Warrant
Certificate issued upon transfer or exchange shall bear the legend set
forth in Section 13(b) hereof if the Warrant Certificate presented for
transfer or exchange bore such legend.
SECTION 5. Mutilated or Missing Warrant Certificates. If any Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Issuer shall
issue, in exchange and substitution for and upon cancellation of the mutilated
Warrant Certificate, or in lieu of and substitution for the Warrant Certificate
lost, stolen or destroyed, a new Warrant Certificate of like tenor and
representing an equivalent number of Warrants, but only upon receipt of evidence
satisfactory to the Issuer of such loss, theft or destruction of such Warrant
Certificate and, if reasonably requested, indemnity satisfactory to it. No
service charge shall be made for any such substitution, but all expenses and
reasonable charges associated with procuring such indemnity and all stamp, tax
and other governmental duties that may be imposed in relation thereto shall be
borne by the holder of such Warrant Certificate. Each Warrant Certificate issued
in any such substitution shall bear the legend set forth in Section 13(b) hereof
if the Warrant Certificate for which such substitution was made bore such
legend.
SECTION 6. Duration and Exercise of Warrants.
(a) The Warrants evidenced by a Warrant Certificate shall be
exercisable in whole or in part by the registered holder thereof on any
Business Day at any time from and after the date of the Closing and
prior to 5:00 P.M. in New York City on the Expiration Date.
(b) Subject to the provisions of this Warrant Agreement, upon
presentation of the Warrant Certificate evidencing the Warrants to be
exercised, with the form of election to purchase on the reverse thereof
duly completed and signed by the registered holder or holders thereof,
to the Issuer at the Warrant Office, and upon payment of the aggregate
Exercise Price for the number of Warrant Shares in respect of which
such Warrants are being exercised in lawful money of the United States
of America, the Issuer shall issue and cause to be delivered to or upon
the written order of the registered holder(s) of such Warrants and in
such name or names as such registered holder(s) may designate, a
certificate for the Warrant Shares issued upon such exercise of such
Warrants. Any Person(s) so designated to be named therein shall be
deemed to have become holder(s) of record of such Warrant Shares as of
the date of exercise of such Warrants. Certificates for the Warrant
Shares so purchased, representing the aggregate number of shares
specified in the Warrant Certificate, shall be delivered to the
registered holder within a reasonable time, not exceeding three (3)
Business Days, after this Warrant shall have been so exercised. The
certificates so delivered shall be in such denominations as may be
requested by the registered holder and shall be registered in the name
of the registered holder or such other name as shall
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be designated by such registered holder.
(c) If less than all of the Warrants evidenced by a Warrant
Certificate are exercised at any time, a new Warrant Certificate or
Certificates shall be issued for the remaining number of Warrants
evidenced by such Warrant Certificate. Each new Warrant Certificate so
issued shall bear the legend set forth in Section 13(b) hereof if the
Warrant Certificate presented in connection with partial exercise
thereof bore such legend. All Warrant Certificates surrendered upon
exercise of Warrants shall be canceled.
(d) Notwithstanding the foregoing, at any time after the
six-month anniversary of the date hereof, the Issuer may, at its sole
option, compel the involuntary conversion of all, but not less than
all, of the outstanding Warrants into Warrant Shares at the Exercise
Price in the event that (i) the Current Market Price Per Share (as
hereinafter defined) is equal to or in excess of two hundred percent
(200%) of the Exercise Price per Warrant Share for a period of at least
twenty consecutive Trading Days, (ii) the Warrant Shares have been
registered under the Securities Act pursuant to Section 6.1 of the
Stock Purchase Agreement and such registration has been declared
effective by the Commission and is effective on such date and (iii) the
Issuer has a sufficient number of authorized shares of Common Stock
reserved for issuance upon conversion of the Warrants. In the event
that the Issuer elects to compel such involuntary conversion of all
outstanding Warrants, it shall promptly notify the Warrant Holder of
such election at least ten (10) days in advance of the date set forth
in such conversion notice whereupon the Warrants shall be deemed
converted into shares of Common Stock as of the date set forth in the
Issuer's conversion notice.
(e) In lieu of physical delivery of the Warrants, provided
that Issuer's transfer agent is participating in The Depository Trust
Company ("DTC") Shares Fast Automated Securities Transfer ("FAST")
program, upon request of the Warrant Holder and in compliance with the
provisions hereof, the Issuer shall use its best efforts to cause its
transfer agent to electronically transmit the Warrant Shares to the
Warrant Holder by crediting the account of the Warrant Holder's prime
broker with DTC through its Deposit Withdrawal Agent Commission system.
The time period for delivery described herein shall apply to the
electronic transmittals described herein.
SECTION 7. No Fractional Shares. The Issuer shall not be required to
issue fractional shares of Common Stock upon exercise of the Warrants but may
pay for any such fraction of a share an amount in cash equal to the Current
Market Price per Share of Common Stock of such share multiplied by such
fraction. The "Current Market Price Per Share" on any date shall be deemed to
be, for any day, the last bid 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,
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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 of the Common Stock in the
over-the-counter market.
SECTION 8. Payment of Taxes. The Issuer will pay all taxes (other than
any applicable income or similar taxes payable by the holders of the Warrants or
Warrant Shares) attributable to the initial issuance of Warrant Shares upon the
exercise of the Warrants; provided that the Issuer shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issue of
any Warrant Certificate or any certificate for Warrant Shares in a name other
than that of the registered holder of a Warrant Certificate surrendered upon the
exercise of a Warrant, and the Issuer shall not be required to issue or deliver
such certificates unless or until the Person or Persons requesting the issuance
thereof shall have paid to the Issuer the amount of such tax or shall have
established to the satisfaction of the Issuer that such tax has been paid.
SECTION 9. Reservation and Issuance of Warrant Shares.
(a) The Issuer will at all times have authorized, and reserve
and keep available for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon the exercise of the Warrants,
the number of shares of Common Stock deliverable upon exercise of all
outstanding Warrants.
(b) Before taking any action which would cause an adjustment
pursuant to Section 11 hereof reducing the Exercise Price below the
then par value (if any) of the Warrant Shares issuable upon exercise of
the Warrants, the Issuer will take any corporate action which may be
necessary in order that the Issuer may validly and legally issue fully
paid and nonassessable Warrant Shares at the Exercise Price as so
adjusted.
(c) The Issuer covenants that all Warrant Shares will, upon
issuance in accordance with the terms of this Warrant Agreement, be
duly and validly issued, fully paid and nonassessable and free from all
taxes with respect to the issuance thereof and from all liens, charges
and security interests created (whether by affirmative action or
inaction) by the Issuer and shall not have any legends or restrictions
on resale, except as required by Section 13(b) hereof.
(d) The Issuer shall promptly secure the listing of the shares
of Common Stock issuable upon exercise of the Warrants upon the
national securities exchange or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official
notice of issuance upon exercise of the Warrants) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon
the exercise of the Warrants.
SECTION 10. Obtaining of Governmental Approvals and Stock Exchange
Listings.
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The Issuer will, at its own expense, (a) obtain and keep effective any
and all permits, consents and approvals of governmental agencies and authorities
which may from time to time be required of the Issuer in order to satisfy its
obligations hereunder and (b) take all action which may be necessary so that the
Warrant Shares, immediately upon their issuance upon the exercise of the
Warrants, will be listed on each securities exchange or over-the-counter market,
if any, on which the Common Stock is then listed if such listing is permitted by
applicable law, regulation or rule.
SECTION 11. Adjustment of Exercise Price and Number of Warrant Shares
Purchasable. Prior to the Expiration Date, the Exercise Price and the number of
Warrant Shares purchasable upon the exercise of each Warrant are subject to
adjustment from time to time upon the occurrence of any of the events enumerated
in this Section 11.
(a) In the event that the Issuer shall at any time after the
date of this Agreement (i) declare a dividend on the Common Stock in
Common Stock, Convertible Securities or other Rights, (ii) split or
subdivide the outstanding Common Stock, (iii) combine the outstanding
Common Stock into a smaller number of shares, or (iv) issue by
reclassification of its Common Stock any shares of Common Stock,
Convertible Securities or other Rights, then, in each such event, the
number of Warrant Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the holder shall be
entitled to receive the kind and number of such shares or other
securities of the Issuer which the holder would have owned or have been
entitled to receive after the happening of any of the events described
above, had such Warrant been exercised immediately prior to the
happening of such event (or any record date with respect thereto). Such
adjustment shall be made whenever any of the events listed above shall
occur. An adjustment made pursuant to this paragraph (a) shall become
effective immediately after the effective date of the event retroactive
to the record date, if any, for the event.
(b) If at any time, as a result of an adjustment made pursuant
to this Section 11, the holder of any Warrant thereafter exercised
shall become entitled to receive any shares of the Issuer other than
shares of Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Warrant shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares
contained in this Section 11, and the provisions of this Agreement with
respect to the Warrant Shares shall apply on like terms to such other
shares.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each warrant is adjusted pursuant to Section 11(a) hereof,
the Exercise Price per Warrant Share payable upon exercise of each
Warrant shall be adjusted by multiplying such Exercise Price
immediately prior to such adjustment by a fraction, the numerator of
which shall be the number of Warrant Shares purchasable upon the
exercise of each Warrant immediately prior to such
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adjustment, and the denominator of which shall be the number of Warrant
Shares purchasable immediately after such adjustment; provided,
however, that in no event shall the Exercise Price be adjusted to an
amount which is less than the par value of the Common Stock.
(d) In the event of any capital reorganization of the Issuer,
or of any reclassification of the Common Stock (other than a
reclassification referred to in Section 11(a)(iv) above), or in case of
the consolidation of the Issuer with or the merger of the Issuer with
or into any other corporation or of the sale of the properties and
assets of the Issuer as, or substantially as, an entirety to any other
Person, each Warrant shall, after such capital reorganization,
reclassification of Common Stock, consolidation, merger or sale, and in
lieu of being exercisable for Warrant Shares, be exercisable, upon the
terms and conditions specified in this Warrant Agreement, for the
number of shares of stock or other securities or assets to which a
holder of the number of Warrant Shares purchasable (at the time of such
capital reorganization, reclassification of Common Stock,
consolidation, merger or sale) upon exercise of such Warrant would have
been entitled upon such capital reorganization, reclassification of
Common Stock, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this Section 11 with respect to
the rights thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as nearly as they may
reasonably be, to any shares of stock or other securities or assets
thereafter deliverable on the exercise of the Warrants. The Issuer
shall not effect any such consolidation, merger or sale, unless prior
to or simultaneously with the consummation thereof the successor
corporation (if other than the Issuer) resulting from such
consolidation or merger or the corporation purchasing such assets or
the appropriate corporation or entity shall assume, by written
instrument, the obligation to deliver to the holder of each Warrant the
shares of stock, securities or assets to which, in accordance with the
foregoing provisions, such holder may be entitled and all other
obligations of the Issuer under this Warrant Agreement. The provisions
of this paragraph (d) shall apply to successive reorganizations,
reclassifications, consolidations, mergers and sales.
(e) Except with respect to Excluded Securities (as defined
below), in case the Issuer shall issue any shares of Common Stock or
Convertible Securities after the date hereof at a price per share (or
having a conversion or exercise price per share) of less than the
Exercise Price per Warrant Share, the Exercise Price per Warrant Share
shall be appropriately adjusted by decreasing (but not increasing) the
Exercise Price per Warrant Share to such lower price per share. An
adjustment made pursuant to clause (a) shall be made 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 (e), the consideration receivable
by the Issuer in connection with the issuance of additional shares of
Common Stock or of Convertible Securities after the date hereof shall
be deemed to be equal to (X) in the case the consideration received by
the Issuer is
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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 Convertible Securities
plus the minimum aggregate amount, if any, payable upon conversion,
exchange or exercise of any such Convertible Securities, and (Y) in the
case the consideration received by the Issuer is other than cash, the
fair market value of the consideration received by the Issuer as
determined by the good faith judgment of the Board of Directors of the
Issuer; provided, however, that in the event the Warrant Holder
disagrees in good faith with the determination of the Board of
Directors of the Issuer, 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 Warrant Holder; and
provided, further, that the Issuer, 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. The issuance or reissuance of any shares of
Common Stock or Convertible Securities (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 Exercise Price per
Warrant Share pursuant to clause (a), shall not be deemed to constitute
an issuance of Common Stock or Convertible Securities by the Issuer
pursuant to which this clause (e) applies. Upon the expiration or
termination of any unconverted, unexchanged or unexercised Convertible
Securities for which an adjustment has been made pursuant to this
clause (e), the adjustments shall forthwith be reversed to effect such
Exercise Price per Warrant Share as would have been in effect at the
time of such expiration or termination had such Convertible Securities,
to the extent outstanding immediately prior to such expiration or
termination, had never been issued. For purposes of this clause (e),
"Excluded Securities" shall mean: (i) shares of Common Stock issuable
upon conversion of the Preferred Stock; (ii) shares of Common Stock
issuable or issued to employees of and consultants to the Issuer
pursuant to the Management Option Plan; (iii) any capital stock issued
as a stock dividend or upon any stock split or other subdivision or
combination of shares of the Issuer's capital stock; (iv) shares of
Common Stock issuable upon conversion of any Convertible Securities
issued prior to the date hereof and outstanding on the date hereof, (v)
shares of Common Stock issuable upon conversion of the Issuer's Class A
Convertible Preferred Stock outstanding on the date hereof or (vi)
Common Stock issued upon the conversion or exercise of Convertible
Securities issued after the date hereof as to which an adjustment to
the Exercise Price per Warrant Share has been made pursuant to this
clause (e) upon the issuance of such Convertible Securities.
(f) Irrespective of any adjustments in the Exercise Price or
the number or kind of shares purchasable upon exercise of the Warrants,
Warrant Certificates theretofore or thereafter issued may continue to
express the same Exercise Price per share and number and kind of shares
as are stated on the Warrant Certificates
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initially issuable pursuant to this Agreement.
(g) If any question shall at any time arise with respect to
the adjusted Exercise Price or Warrant Shares issuable upon exercise,
such question shall be determined by the independent auditors of the
Issuer and such determination shall be binding upon the Issuer and the
holders of the Warrants and the Warrant Shares.
SECTION 12. Notices to the Warrant Holder. Upon any adjustment of the
Exercise Price or number of Warrant Shares issuable upon exercise pursuant to
Section 11 hereof the Issuer shall promptly, but in any event within ten
Business Days thereafter, cause to be given to the Warrant Holder, at its
address appearing on the Warrant Register by first- class mail, postage prepaid,
a certificate signed by its chief financial officer setting forth the Exercise
Price as so adjusted and/or the number of shares of Common Stock issuable upon
the exercise of each Warrant as so adjusted and describing in reasonable detail
the facts accounting for such adjustment and the method of calculation used.
Where appropriate, such certificate may be given in advance and included as a
part of the notice required to be mailed under the other provisions of this
Section 12.
In the event:
(a) the Issuer shall authorize issuance to all holders of
Common Stock of rights or warrants to subscribe for or purchase Capital
Stock of the Issuer or of any other subscription rights or warrants; or
(b) the Issuer shall authorize a dividend or other
distribution to all holders of Common Stock payable in evidences of its
indebtedness, cash or assets; or
(c) of any consolidation or merger to which the Issuer is a
party and for which approval of any stockholders of the Issuer is
required, or of the conveyance or transfer of the properties and assets
of the Issuer substantially as an entirety, or of any capital
reorganization or reclassification or change of the Common Stock (other
than a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or
combination); or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Issuer; or
(e) the Issuer shall authorize any other action which would
require an adjustment of the Exercise Price or number of Warrant Shares
issuable upon exercise pursuant to Section 11 hereof;
then the Issuer shall cause to be given to the Warrant Holder at its address
appearing on the Warrant Register, at least twenty (20) Business Days prior to
the applicable record date hereinafter specified (or as expeditiously as
possible after the occurrence of any
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involuntary dissolution, liquidation or winding up referred to in clause (d)
above), by first- class mail, postage prepaid, a written notice stating (i) the
date as of which the holders of record of Common Stock to be entitled to receive
any such rights, warrants or distribution are to be determined, or (ii) the date
on which any such consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up is expected to become effective (or has become
effective, in the case of any involuntary dissolution, liquidation or winding
up), and the date as of which it is expected that holders of record of Common
Stock shall be entitled to exchange their shares for securities or other
property, if any, deliverable upon such reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up. The failure to
give the notice required by this Section 12 or any defect therein shall not
affect the legality or validity of any distribution, right, warrant,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up, or the vote upon any action.
SECTION 13. Restrictions on Transfer.
(a) The Warrant Holder represents that it is not acquiring the
Warrants (and upon any exercise of the Warrants, each holder represents
that it will not be acquiring the Warrant Shares) with a view to any
distribution or public offering within the meaning of the Securities
Act but subject to any requirement of law that the disposition of its
property shall at all times be within its control. The Warrant Holder
acknowledges that the Warrant Shares issuable upon exercise of the
Warrants have not as of the date hereof been registered under the
Securities Act and agrees that it will not sell or otherwise transfer
any of its Warrant Shares except upon the terms and conditions
specified herein.
(b) (i) The Warrant Holder agrees, and each subsequent
transferee described in paragraph (ii) below shall agree, that it will
not transfer any Warrant Shares except pursuant to an exemption from,
or otherwise in a transaction not subject to, the registration
requirements of the Securities Act (as confirmed in an opinion of
counsel reasonably acceptable to the Issuer to the transferor to the
effect that the proposed transfer may be effected without registration
under the Securities Act) or pursuant to an effective registration
statement under the Securities Act.
(ii) Each Warrant Certificate and each certificate for the
Warrant Shares (unless the legal opinion delivered in connection
therewith is to the effect that the first paragraph of such legend is
not required in order to ensure compliance with the Securities Act)
shall include a legend in substantially the following form:
THE WARRANTS AND UNDERLYING SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER, AN EXEMPTION FROM, OR
OTHERWISE IN A
13
<PAGE>
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT.
IN ADDITION, THE WARRANTS AND UNDERLYING SHARES MAY BE TRANSFERRED ONLY
IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT,
DATED AS OF JUNE 11, 1999, BETWEEN THE ISSUER AND THE INITIAL HOLDER OF
THE WARRANTS NAMED THEREIN, A COMPLETE AND CORRECT COPY OF WHICH IS
AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE ISSUER AND WILL
BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT
CHARGE.
SECTION 14. Amendments and Waivers. Any provision of this
Warrant Agreement may be amended, supplemented, waived, discharged or terminated
by a written instrument signed by the Issuer and the holders of a majority of
the then outstanding Warrants.
SECTION 15. Notices.
(a) Any notice or demand to be given or made by the holders of
the Warrants or the Warrant Shares to the Issuer pursuant to this
Warrant Agreement shall be sufficiently given or made if personally
delivered, sent by overnight courier or telecopied (in each such case
delivery will be effective upon receipt) or mailed by certified mail,
postage prepaid, return receipt requested (delivery will be effective
three days after the date of mailing) addressed to the Issuer at the
Warrant Office.
(b) Any notice to be given by the Issuer to the Warrant Holder
shall be sufficiently given if personally delivered, sent by overnight
courier or telecopied (in each such case delivery will be effective
upon receipt) or mailed by certified mail, postage prepaid, return
receipt requested (delivery will be effective three days after the date
of mailing) addressed to such holder as such holder's name and address
shall appear on the Warrant Register.
SECTION 16. Binding Effect; Third Party Rights. This Warrant
Agreement shall be binding upon and inure to the sole and exclusive
benefit of the Issuer, its successors and assigns, the Warrant Holder,
the registered holders from time to time of the Warrants and the
Warrant Shares.
SECTION 17. Termination. This Warrant Agreement shall
terminate and be of no further force and effect at 5:00 P.M. New York
City time on the Expiration Date or the date on which none of the
Warrants shall be outstanding (whether by reason of the involuntary
conversion thereof or the expiration thereof by the
14
<PAGE>
Issuer).
SECTION 18. Counterparts. This Warrant Agreement may be
executed in two or more separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the
same instrument.
SECTION 19. Governing Law. This Warrant Agreement and each
Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without regard to the choice of
law provisions thereof.
SECTION 20. Benefits of this Warrant Agreement. Nothing in
this Warrant Agreement shall be construed to give to any Person other
than the Issuer and the registered holders of the Warrants and the
Warrant Shares any legal or equitable right, remedy or claim under this
Warrant Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed and delivered by their proper and duly authorized
officers, as of the date and year first above written.
CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
By:_____________________________
Darby S. Macfarlane
Chairman and Chief Executive
Officer
LB I GROUP INC.
By:_____________________________
Name:
Title:
16
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS AND UNDERLYING SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR STATE SECURITIES LAWS AND
MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, THE WARRANTS AND
UNDERLYING SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS
SPECIFIED IN THE WARRANT AGREEMENT, DATED AS OF JUNE 11, 1999, BETWEEN THE
ISSUER AND THE INITIAL HOLDER OF THE WARRANTS NAMED THEREIN, A COMPLETE AND
CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF
THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
WARRANT CERTIFICATE
Evidencing Warrants
to Purchase Common Stock of
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
No. ___-___ Warrants
This Warrant Certificate certifies that __________________________
_________________________________________, or registered assigns, is the
registered holder of ____ Warrants (the "Warrants") to purchase Common Stock,
$.001 par value (the "Common Stock"), of CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC., a New York corporation (the "Issuer"). Each Warrant
entitles the holder, but only subject to the conditions set forth herein and
in the Warrant Agreement referred to below, to purchase from the Issuer at any
time prior to 5:00 P.M., New York City time at the Warrant Office, on February
11, 2005 or, if such day is not a Business Day, the next succeeding Business
Day (the "Expiration Date"), one fully paid and nonassessable share of the
Common Stock of the Issuer (the "Warrant Shares") at a price (the "Exercise
Price") of $______ per Warrant Share payable in lawful money of the United
States of America, upon surrender of this Warrant Certificate, execution of
the annexed Form of Election to Purchase and payment of the Exercise Price at
the principal place of business of the Issuer (the "Warrant Office"). The
Exercise Price and number of Warrant Shares purchasable upon exercise of the
Warrants are subject to adjustment
<PAGE>
upon the occurrence of certain events as set forth in the Warrant Agreement
referred to below.
The Issuer may deem and treat the registered holder(s) of the Warrants
evidenced hereby as the absolute owner(s) thereof (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof and of any distribution to the holder(s) hereof, and
for all other purposes, and the Issuer shall not be affected by any notice to
the contrary.
Warrant Certificates, when surrendered at the Warrant Office by the
registered holder hereof in person or by a legal representative duly
authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of
like tenor evidencing in the aggregate a like number of Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the Warrant Office, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued in exchange for this Warrant Certificate to the
transferee(s) and, if less than all the Warrants evidenced hereby are to be
transferred, to the registered holder hereof, subject to the limitations
provided in the Warrant Agreement, without charge except for any tax or other
governmental charge imposed in connection therewith.
This Warrant Certificate is one of the Warrant Certificates referred to
in the Warrant Agreement, dated as of February 11, 2000, by and between the
Issuer and the Warrant Holder named therein (the "Warrant Agreement"). Said
Warrant Agreement is hereby incorporated by reference in and made a part of
this Warrant Certificate and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Issuer and the holders.
[The remainder of this page intentionally left blank]
2
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Warrant Certificate to
be signed by its duly authorized officers and has caused its corporate seal to
be affixed hereunto.
CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
By:___________________
Name:
Title:
(CORPORATE SEAL)
ATTEST:
---------------------
Name:
Title:
3
<PAGE>
ANNEX TO
WARRANT CERTIFICATE
[FORM OF ELECTION TO PURCHASE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase Warrant Shares and
herewith tenders payment for such Warrant Shares to the order of the Issuer in
the amount of $__________ in accordance with the terms hereof. The undersigned
requests that a certificate for such Warrant Shares be registered in the name
of __________________________ whose address is _______________ and that such
certificate be delivered to ________________ whose address is
____________________. If said number of Warrant Shares is less than all of the
Warrant Shares purchasable hereunder, the undersigned requests that a new
Warrant Certificate representing the remaining balance of the Warrant Shares
be registered n the name of _______________ whose address is
_______________________ and that such Warrant Certificate be delivered to
_______________________ whose address is _______________________________.
Signature:
-----------------------------------
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate)
Date:______________________________
<PAGE>
EXHIBIT B
TO WARRANT AGREEMENT
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Warrant No. Holder Shares Underlying Warrant
- ---------- ------ -------------------------
A-101 LB I Group Inc. 220,690
3 World Financial Center
New York, New York 10285
A-102 LB I Group Inc. 50,000
3 World Financial Center
New York, New York 10285
A-103 LB I Group Inc. 254,372
3 World Financial Center
New York, New York 10285
A-104 LB I Group Inc. 50,000
3 World Financial Center
New York, New York 10285
<PAGE>
Consent of Independent Certified Public Accountants
Chromatics Color Sciences International, Inc.
New York, New York
We hereby consent to the incorporation by reference in the Registration
Statement filed on Form S-8 (file no. 333-51697) and the Registration Statement
on Form S-3 (file no. 333-82071 and no. 333-30948) of our report dated March 10,
2000, relating to the consolidated financial statements of Chromatics Color
Sciences International, Inc., appearing in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
/s/ BDO Seidman, LLP
New York, New York
March 30, 2000
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (No. 333-3818 and
No. 333-3820) and S-8 (No. 333-51697) of Chromatics Color Sciences
International, Inc. of our report dated February 17, 1998 appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Wiss & Company, LLP
Livingston, New Jersey
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This sched
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,790,400
<SECURITIES> 0
<RECEIVABLES> 842,300
<ALLOWANCES> 0
<INVENTORY> 1,171,800
<CURRENT-ASSETS> 4,933,700
<PP&E> 1,072,800
<DEPRECIATION> (460,600)
<TOTAL-ASSETS> 8,110,200
<CURRENT-LIABILITIES> 1,009,800
<BONDS> 0
2,942,500
0
<COMMON> 15,500
<OTHER-SE> (519,200)
<TOTAL-LIABILITY-AND-EQUITY> 8,110,200
<SALES> 1,103,200
<TOTAL-REVENUES> 1,103,200
<CGS> 0
<TOTAL-COSTS> 10,798,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,313,000
<INCOME-PRETAX> (12,808,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,808,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,808,000)
<EPS-BASIC> (.93)
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