SEC Investigating ColorMax; Funds Frozen

ColorMax Technologies Inc., which sells lenses that help treat colorblindness, is in turmoil.

The small Tustin company said Thursday that it is the target of an investigation by the Securities and Exchange Commission and that more than $427,000 in operating funds have been frozen in a legal dispute.

ColorMax probably will be unable to pay employees without access to the funds, said Richard Farkas, a lawyer for ColorMax. The company said it recently completed a top-level corporate shake-up and reduced its payroll to six employees from 15.

The SEC probe into potential violations of securities laws came after the company sharply revised its revenue downward for the first two quarters last year. The SEC asked the company for documents related to the restated revenue, as well as information about ownership stakes of several shareholders, the company said.

SEC officials would not comment.

The company slashed more than $678,000 from its revenue for the first half last year, deleting sales that had been logged prematurely, according to a report filed with the SEC.

The revision reduced revenue to $88,709 from $767,159 for the first half of the year. In the third quarter, the company lost $770,00 on sales of $140,000.

The company’s stock, which has lost 98% of its value in the past 12 months, closed Thursday at 22 cents a share, up nearly 2 cents in over-the-counter trading. The shares traded as high as $14 a year ago.

As part of its restructuring plan, ColorMax also announced that in recent weeks the company has named a new chairman and a new chief executive officer, and has replaced three board members. A fourth new board member also was elected.

Edward R. McLaughlin Jr., who at one time served as the company’s director of investor relations, became president and chief executive in mid-January. He succeeded optometrist James E. Bailey, who had held the position less than four months.

A new board member, corporate consultant Harold L. Rapp, was selected chairman.

Dissident shareholders, objecting to the changes, filed suit in Orange County Superior Court to freeze the $427,000 in funds, Farkas said. After its banker, Hanmi Bank, deposited the funds with the court clerk, ColorMax filed suit seeking to release the funds, Farkas said.

The dissident shareholders and the bank could not be reached for comment.

Stepping down from the board were Donald H. Hansen, John D. Jantzi and Kenneth M. Larkin.

Joining Rapp on the board are Fred Villella, a former executive director of the Federal Emergency Management Agency, financial consultant John A. Brunkow and Rich Toubman, a principal at Global Vantage Ltd., a Newport Beach investment banking firm.

Bailey will remain as chief technology officer. His departure was merely an attempt to lighten his workload, said ColorMax spokesman Tom Gavin. “He was kind of working 98-hour weeks,” Gavin said.

In late 1999, the company received a big boost when the U.S. Food and Drug Administration approved a new treatment for colorblindness. At the time, ColorMax executives projected 2002 sales of $21.4 million.

But the firm’s stock plunged after the FDA, citing potentially misleading advertising, cautioned consumers that the tinted glasses didn’t cure colorblindness.