<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CARING PRODUCTS INTERNATIONAL, INC.
(Name of small business issuer in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2399 98-0134875
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
------------------------------
200 FIRST AVENUE WEST, SUITE 200, SEATTLE, WASHINGTON 98119, (206) 282-6040
(Address and telephone number of principal executive offices and principal place
of business)
------------------------------
SUSAN A. SCHRETER
CARING PRODUCTS INTERNATIONAL, INC.
200 FIRST AVENUE WEST, SUITE 200
SEATTLE, WASHINGTON 98119
(206) 282-6040
(Name, address and telephone number of agent for service)
------------------------------
COPIES OF ALL CORRESPONDENCE TO:
<TABLE>
<S> <C>
STEVEN A. SAIDE, ESQ. DEBRA K. WEINER, ESQ.
BRYAN CAVE LLP GROVER T. WICKERSHAM, P.C.
245 PARK AVENUE 430 CAMBRIDGE AVENUE, SUITE 100
NEW YORK, NEW YORK 10167 PALO ALTO, CALIFORNIA 94306
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING PRICE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1)(2) (1)(2) FEE
<S> <C> <C> <C> <C>
Units (3) each consisting of:............................... 1,725,000 $6.00 $10,350,000 $3,137
(i) one share of Common Stock, par value $0.01 per share
(the "Common Stock"); and.............................. 1,725,000 -- -- --
(ii) one Warrant to purchase one share of Common Stock...... 1,725,000 -- -- --
Representatives' Warrants (4)............................... 150,000 -0- -0- -0-
Units issuable upon exercise of the Representatives'
Warrants, each consisting of:............................. 150,000 $7.20 $1,080,000 $328
(i) one share of Common Stock; and......................... 150,000 -- -- --
(ii) one Warrant to purchase one share of Common Stock...... 150,000 -- -- --
Common Stock issuable upon exercise of Warrants, including
Warrants underlying Representatives' Warrants (5)......... 1,875,000 $9.00 $16,875,000 $5,114
Totals...................................................... $28,305,000 $8,579
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as
amended.
(2) Proposed maximum offering price is based on the closing price of the Common
Stock on the OTC Bulletin Board on September 5, 1997.
(3) Includes 225,000 Units that Paulson Investment Company, Inc. and Cohig &
Associates, Inc., the representatives of the several underwriters (the
"Representatives"), have the right to purchase to cover over-allotments, if
any.
(4) In connection with the sale of the Units, the Registrant is granting to the
Representatives warrants to purchase 150,000 Units (the "Representatives'
Warrants").
(5) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock as may be issuable pursuant to the anti-dilution provisions
of the Warrants and the Representatives' Warrants.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS
IN PART I OF FORM SB-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM
NUMBER IN
FORM SB-2 ITEM CAPTION IN FORM SB-2 LOCATION IN PROSPECTUS
- --------------- ------------------------------------------------ ---------------------------------------------------
<C> <S> <C>
1 Front of Registration Statement and Outside
Front Cover of Prospectus..................... Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover Page; Back Cover Page
3 Summary Information and Risk Factors............ Prospectus Summary; Risk Factors
4 Use of Proceeds................................. Use of Proceeds
5 Determination of Offering Price................. Front Cover Page; Risk Factors; Underwriting
6 Dilution........................................ Not Applicable
7 Selling Security Holders........................ Not Applicable
8 Plan of Distribution............................ Front Cover Page; Underwriting
9 Legal Proceedings............................... Business
10 Directors, Executive Officers, Promoters and
Control Persons............................... Management; Principal Stockholders; Certain
Transactions
11 Security Ownership of Certain Beneficial Owners
and Management................................ Management; Principal Stockholders
12 Description of Securities....................... Dividend Policy; Description of Securities
13 Interests of Named Experts and Counsel.......... Not Applicable
14 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Not Applicable
15 Organization within Last Five Years............. Not Applicable
16 Description of Business......................... Front Cover Page; Prospectus Summary; The Company;
Use of Proceeds; Dividend Policy; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal Stockholders; Certain
Transactions; Description of Securities; Index to
Consolidated Financial Statements
17 Management's Discussion and Analysis or Plan of
Operation..................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18 Description of Property......................... Business
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM
NUMBER IN
FORM SB-2 ITEM CAPTION IN FORM SB-2 LOCATION IN PROSPECTUS
- --------------- ------------------------------------------------ ---------------------------------------------------
<C> <S> <C>
19 Certain Relationships and Related
Transactions.................................. Certain Transactions
20 Market for Common Equity and Related Shareholder
Matters....................................... Front Cover Page; Dividend Policy; Market Price of
Common Stock; Description of Securities--Public
Trading
21 Executive Compensation.......................... Management
22 Financial Statements............................ Index to Consolidated Financial Statements
23 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure........... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
SUBJECT TO COMPLETION DATED SEPTEMBER 9, 1997
<TABLE>
<CAPTION>
<S> <C>
1,500,000 UNITS
[LOGO] CARING PRODUCTS INTERNATIONAL, INC.
</TABLE>
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE WARRANT TO PURCHASE ONE SHARE OF COMMON STOCK
Caring Products International, Inc., a Delaware corporation (the "Company"),
is hereby offering units (the "Units"), each Unit consisting of one share (the
"Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock"), and one warrant to purchase one share of Common Stock (the "Warrants")
for the initial offering price of $ per Unit (the "Unit Offering Price").
The Common Stock and Warrants will separate immediately upon issuance and will
trade as separate securities. Each Warrant initially entitles the holder thereof
to purchase one share of Common Stock at an exercise price equal to $ (150%
of the Unit Offering Price), subject to certain adjustments, including if the
Company's audited fiscal 1999 revenues do not exceed $15 million and/or its
audited fiscal 1999 net income (adjusted to exclude any expenses relating to the
vesting of any employee options or warrants) before interest expense and taxes
does not exceed $1.5 million, a one-time downward adjustment of the exercise
price to $ (120% of the Unit Offering Price). The Warrants are exercisable
at any time, unless previously redeemed, until the fifth anniversary of the date
of this Prospectus, subject to certain conditions. The Company may redeem the
outstanding Warrants, in whole or in part, at any time upon at least 30 days'
prior written notice to the registered holders thereof, at a price of $0.25 per
Warrant, provided that the closing bid price of the Common Stock has been at
least 200% of the then current exercise price of the Warrants for each of the 20
consecutive trading days immediately preceding the date of the notice of
redemption. See "Description of Securities--The Warrants."
Prior to this Offering, there has been no public market for the Units or the
Warrants. The Company's Common Stock has been trading on the OTC Bulletin Board
under the symbol "CGPD" since August 14, 1997, and the last reported bid price
of the Company's Common Stock on the OTC Bulletin Board on September 5, 1997 was
$1.00. The Company's Common Stock is also traded on the Vancouver Stock Exchange
("VSE") under the symbol "CRP." Application has been made to have the Units,
Common Stock and Warrants included for quotation on the Nasdaq SmallCap Market.
No assurance can be given that such application will be approved and, if
approved, that an active trading market for the Units, Common Stock or Warrants
will be established or maintained.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY ANY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Unit................................................... $ $ $
Total (3).................................................. $ $ $
</TABLE>
(1) Excludes a non-accountable expense allowance equal to 3% of the gross
proceeds of this Offering payable to the Representatives, and the value of
five-year warrants (the "Representatives' Warrants") entitling the
Representatives to purchase up to an aggregate of 150,000 Units at a price
of $ per Unit (120% of the initial public offering price of the Units).
In addition, the Company and the several underwriters (the "Underwriters")
have agreed to indemnify each other against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $915,000, including the Representatives' non-accountable expense
allowance.
(3) The Company has granted an option to the Representatives, exercisable within
45 days hereof, to purchase up to 225,000 additional Units to cover
over-allotments, if any, in the purchase of the Units offered hereby (the
"Over-Allotment Option"), on the same terms and conditions as the Units
offered hereby. If the Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company would be $ , $ and $ , respectively. See
"Underwriting."
The Units are offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to their right
to reject orders in whole or in part and to certain other conditions. It is
expected that the delivery of the Units will be made in New York, New York on or
about , 1997.
PAULSON INVESTMENT COMPANY, INC. COHIG & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
PICTURE SUMMARIES
1. Picture of the Rejoice product packaging.
2. Picture of the Rejoice pant for men and women.
3. Picture of the Rejoice disposable liner.
4. Picture of a customer selecting Rejoice pant size at a drug store.
5. Picture of Rejoice ExtraCare liners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK AND/OR WARRANTS. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN
CONNECTION WITH THE OFFERING, MAY BID FOR, AND PURCHASE UNITS, SHARES OF COMMON
STOCK AND/OR WARRANTS IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
------------------------
This Prospectus includes trademarks and registered trademarks of the Company
including Rejoice-Registered Trademark- and BumberChute-TM-, and trademarks and
registered trademarks of other companies.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS AND THE INFORMATION CONTAINED UNDER "RISK FACTORS."
UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE DATA (I) GIVES EFFECT TO A
ONE-FOR-SIX REVERSE STOCK SPLIT (THE "REVERSE STOCK SPLIT") OF THE COMPANY'S
COMMON STOCK EFFECTED ON JUNE 16, 1997; (II) DOES NOT INCLUDE 1,799,266 SHARES
ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS, SUBJECT TO CERTAIN CONTINGENCIES,
AND 702,115 SHARES ISSUABLE UPON EXERCISE OF OUTSTANDING WARRANTS; (III) DOES
NOT INCLUDE UP TO 700,734 SHARES OF COMMON STOCK, SUBJECT TO CERTAIN
CONTINGENCIES, RESERVED FOR ISSUANCE UNDER THE COMPANY'S 1993 AND 1996 INCENTIVE
PROGRAMS (THE "STOCK OPTION PLANS"); (IV) ASSUMES NO EXERCISE OF THE WARRANTS,
THE REPRESENTATIVES' WARRANTS AND THE OVER-ALLOTMENT OPTION; (V) DOES NOT
INCLUDE WARRANTS POTENTIALLY ISSUABLE AS A RESULT OF THE SETTLEMENT OF CERTAIN
LITIGATION; AND (VI) DOES NOT REFLECT AN ADDITIONAL REVERSE STOCK SPLIT THAT THE
COMPANY ANTICIPATES MAY BE REQUIRED PRIOR TO THE SALE OF THE SECURITIES OFFERED
HEREBY TO SATISFY THE INITIAL INCLUSION REQUIREMENTS OF THE NASDAQ SMALLCAP
MARKET. ALL DOLLAR AMOUNTS IN THIS PROSPECTUS ARE EXPRESSED IN U.S. DOLLARS
UNLESS OTHERWISE INDICATED.
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE,"
"EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT
ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THOSE
EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF,
AMONG OTHER THINGS, THE FACTORS SET FORTH IN THE SECTION ENTITLED "RISK
FACTORS."
THE COMPANY
Caring Products International, Inc. (the "Company" or "CPI") has designed
and markets a line of proprietary urinary incontinence products that are sold
under the Rejoice brand name in the United States and Canada. These products are
intended to address the special needs of adults and children over the age of
four who suffer from light and moderate incontinence.
Urinary incontinence, whether permanent or temporary, can be debilitating
and can impair a person's ability to participate in many simple daily
activities. The Company believes its Rejoice products, because of their high
degree of absorbency, side seepage protection, compact liner size and
conventional underwear appearance, offer to those who suffer from light and
moderate incontinence a less restrictive, more active lifestyle, as well as a
highly effective, more dignified and less costly alternative to traditional
incontinence products such as bulky disposable diapers, belted undergarments and
guards.
The Company currently offers the following Rejoice products specifically
designed for the adult and children's urinary incontinence markets: Rejoice,
Rejoice ExtraCare and Rejoice for Children. These products incorporate the
Company's two-piece incontinence management system, consisting of a reusable,
light-weight cotton pant that looks and feels like conventional underwear that
is used in conjunction with a disposable, highly absorbent liner. The thin liner
fits securely into a patented channel in the pant and provides a high degree of
protection against side seepage even when the wearer is moving or sitting,
activities that can be problematic for the incontinence sufferer. The channel
design, combined with an air-laid, super absorbent polymer liner, significantly
enhances absorption and surface dryness. The reusable pant is a pull-on style
and is available in sizes for men, women, boys and girls. The compact liner size
makes the liners more convenient to carry, use and throw away and results in
significantly reduced transportation and storage costs to distributors,
retailers and healthcare institutions.
In order to focus more of its resources on marketing its products, the
Company subcontracts the manufacture of its pants and liners, as well as the
conversion, storage and delivery (fulfillment) services necessary to bring the
products to market. The Company is currently manufacturing its pants in Northern
Mexico and British Columbia, Canada. In the near future, the Company expects to
move a higher volume of production to its subcontractor in Mexico, where pant
manufacturing is more cost effective. The liner
3
<PAGE>
material is manufactured in Canada by an independent contractor under an
exclusive supply agreement expiring in August 2003 and is then shipped to a
converter who, in turn, ships the finished liners to the Company's fulfillment
vendors.
The Rejoice product line serves two principal markets, retail and
healthcare. The retail market consists of the ultimate end users or consumers
who are reached through mass merchandisers (including drug and, to a small
extent, grocery store chains), independent pharmacies, specialty catalog
companies and home delivery service providers. In September 1995, the Company
shipped Rejoice to its first drug store chain for nationwide distribution in
approximately 300 stores. As of July 31, 1997, the number of drug and grocery
store chains, drug wholesalers and independent pharmacies that sell Rejoice
products had increased to approximately 6,000 locations, including SAVON, OSCO,
Revco, K&B, Thrifty-Pay Less, Long's Drug Stores, Bartell's, Genovese, Hills and
others. To date, the Company's product sales have been primarily to its retail
customers for adult incontinence sufferers.
The healthcare market consists primarily of inpatient and outpatient
hospital facilities, rehabilitation facilities, home healthcare providers,
nursing homes, hospice centers and surgical supply stores. In the healthcare
market, the Company sells through hospital supply companies, home healthcare
companies, medical/surgical suppliers and distributors, durable medical
equipment suppliers and hospital buying groups. In late 1996, the Company signed
an agreement with Medline Industries, Inc., a hospital supply company
headquartered in Illinois ("Medline"), for distribution of its products to the
healthcare market, including a specially-packaged Rejoice product that is being
sold exclusively by Medline to the healthcare market. To date, the Company's
product sales to the healthcare market have not been material. However, as the
initial training of Medline field representatives is completed, the Company
expects the healthcare market will become an increasingly important market for
the Rejoice products. There is no assurance, however, that the Company's Rejoice
products will achieve the market acceptance, either in the retail or the
healthcare markets, necessary to support profitable operations.
The Company's principal executive offices are located at 200 First Avenue
West, Suite 200, Seattle, Washington 98119, and its telephone number is (206)
282-6040. As used herein, the term the "Company" refers to Caring Products
International, Inc., a Delaware corporation, and its subsidiaries, Caring
Products Industries, Ltd., a British Columbia corporation, and C.P.
International, Inc., a Delaware corporation. See "History of the Company" for an
explanation of the Company's corporate history.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered.................................... 1,500,000 Units. Each Unit consists of one share of
Common Stock and one Warrant to purchase one share of
Common Stock. The Common Stock and the Warrants will be
separately transferable immediately following completion
of this Offering. See "Description of Securities."
Offering Price........................................ $ per Unit (the "Unit Offering Price").
Warrant Exercise Price................................ $ per share of Common Stock (150% of the Unit Offering
Price), subject to certain adjustments, including if the
Company's audited fiscal 1999 revenues do not exceed $15
million, and/or its audited fiscal 1999 net income
(adjusted to exclude any expenses relating to the vesting
of employee options or warrants) before interest expense
and taxes does not exceed $1.5 million, a one-time
downward adjustment of the exercise price to $
per share (120% of the Unit Offering Price).
Warrant Exercise Period............................... The period commencing on the date of this Prospectus and
terminating five years from the date of this Prospectus.
Redemption............................................ The Company may redeem the Warrants at a price of $0.25
per Warrant, upon not less than 30 days' prior written
notice, provided that the closing bid price of the Common
Stock has been at least 200% of the then current exercise
price of the Warrants for each of the 20 consecutive
trading days immediately preceding the date of the notice
of redemption. See "Description of Securities--The
Warrants."
Common Stock Outstanding:
Before the Offering (1)........................... 4,125,375 shares
After the Offering (1)(2)......................... 5,625,375 shares
Risk Factors.......................................... An investment herein involves a high degree of risk and
should not be considered by investors who cannot afford
to lose their entire investment. See "Risk Factors" for
certain factors to be considered by potential investors.
Use of Proceeds....................................... The net proceeds from this Offering will be used to repay
certain indebtedness, advertise and promote the Company's
products, train field representatives and home healthcare
professionals, acquire equipment, provide working capital
and for other general corporate purposes. See "Use of
Proceeds."
OTC Bulletin Board Symbol............................. CGPD
Vancouver Stock Exchange Trading Symbol............... CRP
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
Proposed Nasdaq Symbols(3).................. Units.............................. BDRY U
Common Stock....................... BDRY
Warrants........................... BDRY W
</TABLE>
- ------------------------
(1) Excludes as of August 27, 1997 (i) 574,266 shares of Common Stock issuable
upon exercise of outstanding options granted pursuant to the Company's Stock
Option Plans at exercise prices ranging from $1.65 to $6.00 per share; (ii)
subject to certain contingencies, 1,225,000 options, granted pursuant to the
Company's Stock Option Plans at an exercise price per share equal to the
greater of the Unit Offering Price or the closing bid price of the Common
Stock on the date of the sale of the Units offered hereby; (iii) 702,115
shares of Common Stock issuable upon exercise of outstanding warrants at
exercise prices ranging from $1.86 to Cdn. $7.20 per share; (iv) subject to
certain contingencies, 700,734 shares of Common Stock reserved for issuance
under the Stock Option Plans; and (v) warrants potentially issuable as a
result of the settlement of certain litigation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Business--Legal Proceedings," "Management--Stock Option
Plans" and "Description of Securities."
(2) Excludes (i) 225,000 shares of Common Stock issuable upon exercise of the
Over-Allotment Option; (ii) 150,000 shares of Common Stock issuable upon
exercise of the Representatives' Warrants and (iii) 1,875,000 shares of
Common Stock issuable upon exercise of the Warrants (including the Warrants
issuable upon exercise of the Over-Allotment Option and the Representatives'
Warrants). See "Capitalization" and "Underwriting."
(3) Application has been made to have the Units, Common Stock and Warrants
included for quotation on the Nasdaq SmallCap Market. However, there can be
no assurance that such application will be approved and, if approved, that
an active trading market will be established or maintained for the Company's
securities.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
---------------------------- ------------------------
1996 1997 1996 1997
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 1,118,486 $ 2,287,497 $ 428,468 $ 818,403
Gross profit (loss)...................................... 86,590 559,890 (18,769) 432,932
Operating expenses....................................... 3,241,483 3,362,288 576,361 852,695
Net loss................................................. (3,959,940) (2,904,886) (687,650) (623,509)
Net loss per share(1).................................... (1.84) (0.74) (0.18) (0.15)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------
MARCH 31, 1997 ACTUAL AS ADJUSTED(2)
-------------- -------------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................................. $ 1,626,971 $ 1,184,548 $ 8,504,548
Total assets..................................................... 6,388,537 7,222,934 10,118,006
Total liabilities................................................ 4,293,335 5,587,649 1,162,721
Long-term obligations............................................ 30,353 30,353 30,353
Accumulated deficit.............................................. (10,631,163) (11,254,672) (11,254,672)
Stockholders' equity(3).......................................... 2,095,202 1,635,285 8,955,285
</TABLE>
- ------------------------
(1) Based upon the weighted average number of shares outstanding during the
period, excluding shares issuable upon exercise of outstanding options and
warrants. The effect of inclusion of such option and warrant shares would be
anti-dilutive.
(2) Adjusted to give effect to the sale of 1,500,000 Units offered hereby at an
assumed offering price of $6.00 per Unit, the receipt of the estimated net
proceeds therefrom and the anticipated application of such estimated net
proceeds and repayment of the line of credit in the amount of $2.5 million
from proceeds other than this Offering (use of restricted cash). See "Use of
Proceeds."
(3) Excludes (i) as of March 31, 1997 and June 30, 1997, 570,933 and 574,266,
respectively, shares of Common Stock issuable upon exercise of outstanding
options granted pursuant to the Company's Stock Option Plans at a weighted
average exercise price of $4.02 and $4.02, respectively; (ii) as of March
31, 1997 and June 30, 1997, 575,448 and 702,115, respectively, shares of
Common Stock issuable upon exercise of outstanding warrants at exercise
prices ranging from $1.86 to Cdn. $7.20; (iii) as of March 31, 1997 and June
30, 1997, 262,400 and 259,067, respectively, shares of Common Stock reserved
for issuance under the Stock Option Plans; (iv) subject to certain
contingencies, 1,225,000 shares issuable upon exercise of outstanding
options granted under the Stock Option Plans after June 30, 1997 at an
exercise price per share equal to the greater of the Unit Offering Price or
the closing bid price of the Common Stock on the date of the sale of the
Units offered hereby; (v) warrants potentially issuable as a result of the
settlement of certain litigation; and (vi) as of August 27, 1997, 700,734
shares of Common Stock, subject to certain contingencies, reserved for
issuance under the Stock Option Plans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Management--Stock Option Plans" and "Description of
Securities."
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RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
EVALUATING AN INVESTMENT. PURCHASE OF THE SECURITIES OFFERED HEREBY SHOULD NOT
BE CONSIDERED BY PERSONS UNABLE TO AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES. Since the Company's
formation in November 1992 through September 1995, when it began marketing
Rejoice, the Company engaged primarily in research and product development
related to its incontinence products, market awareness activities, recruitment
of management, sales and technical personnel, capital equipment acquisitions and
related activities. The revenues generated by the Company to date have been
insufficient to support the Company's operations. For working capital, the
Company has had to rely primarily upon various debt and equity financings. At
June 30, 1997, the Company had an accumulated deficit of $11,254,672 and expects
to incur losses during the rollout of its products to the healthcare, retail and
international markets. The Company's operations are subject to all of the risks
inherent in the establishment of a new business enterprise. The likelihood of
the success of the Company must be considered in light of the problems, expenses
and delays frequently encountered in connection with a new business and the
development of new products including, without limitation, uncertainty as to the
market acceptance of the Company's products. There can be no assurance that the
Company will be able to successfully continue to market its products, that the
Company will not incur additional losses in the future or that it will be able
to achieve profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF ACCESS TO CAPITAL. The
Company has never had positive cash flow from operations and has been dependent
on obtaining debt and equity financing for the continuation and expansion of its
operations. The Company believes the proceeds from this Offering, together with
its bank financing arrangements, will be sufficient to meet the Company's
capital requirements for at least the next 12 months. Cash flow from operations,
if any, will supplement these sources of capital. If this Offering is not
completed, the Company has secured an additional line of credit from a related
party that the Company believes will be sufficient to meet the Company's capital
requirements through at least April 1, 1998. There can be no assurance, however,
that the Company will not require additional capital. The sale of additional
equity or convertible debt securities, if required, may result in additional
dilution to the holders of the Common Stock. There can be no assurance that
additional financing, if required, will be available on terms and conditions
acceptable to the Company, if available at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON SINGLE PRODUCT LINE. The Company is currently marketing only
its Rejoice line of incontinence products and substantially all of the Company's
revenues have been derived from sales of Rejoice pants and liners for adults. If
sales of Rejoice for adults were to decline materially, whether as a result of
competition or any other factors, the Company's business, results of operations
and financial condition would be adversely affected. The Company's business plan
calls for increased advertising and marketing for its Rejoice for Children
products and for the joint-venturing or licensing of its BumberChute toddler
toilet training products. There is no assurance that the Company will be able to
locate a suitable partner or that BumberChute will be successfully brought to
market. Disposition of the Company's BumberChute inventory could adversely
impact the Company's future gross profit margins. See "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Products."
MANAGEMENT OF OPERATIONS AND GROWTH. The Company has experienced rapid
growth in its operations that has placed, and could continue to place, a
significant strain on the Company's financial,
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management, accounting and other resources. The Company is currently recruiting
a chief financial officer to be responsible for the ongoing design,
implementation and maintenance of effective systems of internal accounting
controls and the timely preparation of periodic financial and management
reports. The Company's future performance will depend, in part, on its ability
to manage both its domestic and contemplated international retail and healthcare
activities and will require the Company to hire additional personnel,
particularly in sales, marketing and customer support and in the management of
the Company's subcontracted pant and liner production services. In addition, the
Company's ability to manage its operations and growth effectively will require
it to update on an ongoing basis its operational and financial control systems,
facilities and infrastructure and management information systems and to attract,
train, motivate, manage and retain key employees. Although the Company believes
it will be able to hire qualified management staff in all areas of the Company's
operations and to manage its growth, if it were unable to do so, the Company's
business and results of operations could be adversely affected.
COMPETITION. The disposable incontinence products industry is highly
competitive. The Company competes with large, nationally known consumer products
manufacturers as well as with many in-house brands and smaller companies. Many
of the Company's competitors have significantly greater financial and other
resources than the Company and are well established as suppliers to the
healthcare industry and the retail market. These competitors may at any time
introduce new products, upgrade existing products or reduce their prices, any of
which may negatively affect the market for the Company's products. See
"Business--Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends, to a
significant extent, upon the abilities and continued efforts of its executive
personnel, including William H.W. Atkinson, its Chairman and Chief Executive
Officer, and Susan A. Schreter, its President and Chief Operating Officer. The
Company has entered into employment agreements with Mr. Atkinson and Ms.
Schreter, and the Company has applied to obtain insurance on the lives of Mr.
Atkinson and Ms. Schreter in the amount of $1,000,000 each. However, the loss of
any key employee of the Company could have a material adverse effect upon the
Company. See "Management."
DEPENDENCE ON LINER RAW MATERIAL SOURCE. All of the Company's liner
products contain thermally-bonded, air-laid pulp materials. The Company's
ability to manufacture its liner products and meet market demand is highly
dependent on a sufficient supply of these materials. The Company has a supply
agreement that expires in August 2003 with a manufacturer of these materials,
which contains annual minimum purchase requirements. Although the Company has
not met those requirements in any year of the agreement and, therefore, the
supplier could terminate the agreement, the supplier has continued to accept
purchase orders from the Company and has indicated its willingness to continue
its relationship with the Company. If the supplier were to terminate its
relationship with the Company, the Company believes that alternative
manufacturing sources are available. However, changes or interruptions in raw
material production or supply may adversely affect the Company's ability to meet
product demand in a timely manner. See "Business--Manufacturing and
Fulfillment."
UNCERTAINTIES OF CONSUMER GOODS MARKETPLACE. The Company, in part, sells
its incontinence products to consumers for their personal use. The consumer
goods market is characterized by a lack of predictability. Many factors
unrelated to the quality and availability of the Company's products, such as
economic conditions, new technologies or product introductions, could affect the
consumer goods marketplace and, therefore, the Company's success in selling its
products in this marketplace. There is no assurance that unpredicted shifts in
the consumer goods market will not affect the Company's ability to successfully
market its incontinence products. See "Business--Sales and Marketing."
CONCENTRATION OF CUSTOMERS. The Company currently sells, and intends to
continue to solicit, large retail and drug store chains with regional or
national store distribution capability. The Company also sells its products to
several national drug wholesale supply companies that distribute products to
independent pharmacies, retail stores and surgical supply stores. In addition,
the Company's entry into the healthcare
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market is being consolidated through its primary product distribution
relationship with Medline. In both the healthcare and retail markets,
chain-oriented hospitals, home healthcare organizations or drug stores can make
up a significant percentage of the Company's revenues, exposing the Company to
increased credit risk, pressure to discount product prices for its largest
customers or distributors or significant decreases in revenues resulting from
the loss of a customer or reduced sales to a customer. Approximately 33% of the
Company's revenues were from two customers during the year ended March 31, 1997,
and approximately 57% were from one customer during the three-month period ended
June 30, 1997. During the year ended March 31, 1996, two customers accounted for
approximately 25% of revenues and for the three-month period ended June 30,
1996, three customers accounted for approximately 31% of revenues. There is no
assurance that the Company's distributors or retail customers will continue to
purchase or distribute the Company's products in the future.
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. In November
1994, a patent was issued by the U.S. Patent and Trademark Office on the
Company's channel design (see "Business--Products"). There can be no assurance
that any additional patents will be issued in the future on the Company's
existing products, that additional products developed by the Company will be
patentable, or that any issued patent will provide the Company with any
competitive advantages, will not be challenged by any third parties, or that the
patents of others will not have an adverse effect on the Company's business.
Furthermore, there can be no assurance that competitors will not be able to
design around the Company's patented products or develop or acquire
substantially equivalent trade secrets and proprietary technology independent of
the Company. Competitors of the Company may have filed applications for, or may
have been issued patents and may obtain additional patents and proprietary
rights relating to, products that compete with those of the Company. Litigation
and other proceedings, which could result in substantial cost to the Company,
may be necessary to enforce any patents issued to the Company or to determine
the scope and validity of third party proprietary rights. In addition, there can
be no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or commercial advantage to the Company.
The Company also relies on trade secrets, know-how, improvements to
technology, confidentiality agreements and the pursuit of collaborative and
licensing opportunities to develop and maintain its competitive position.
Although the Company protects its proprietary technology in part by
confidentiality agreements with its employees, consultants and certain
contractors, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
discovered by its competitors. See "Business--Patents, Trademarks and
Proprietary Rights."
FLUCTUATING QUARTERLY RESULTS. The Company has experienced significant
quarterly fluctuations in revenues, gross profit margins and operating results
and expects these fluctuations to continue in the future. Fluctuations in
revenues, gross profit margins and operating results may cause volatility in the
Company's stock price. The Company believes that fluctuations have been
attributable to various factors, including the budgeting and purchasing
practices of its customers, the length of the customer product evaluation
process for the Company's products, the demand for the Company's products,
changes in the mix of products sold and in the mix of sales by distribution
channels, the size and timing of customer orders, changes in pricing policies by
the Company, the competitive conditions in the industry, changes in the
Company's fixed and variable costs and expenses and general economic conditions.
Historically, the Company has had little or no backlog. Therefore, quarterly
revenues and operating results depend primarily on the volume and timing of
orders received during the quarter, which are difficult to forecast. In
particular, the receipt of an initial order from a store chain in any quarter
may result in a corresponding spike in revenues for such quarter as the chain's
outlets receive their initial inventory of products. Thereafter, sales to such
chain's outlets tend to be made at a lower but more consistent level, reflecting
the ordinary course of business. A significant portion of the Company's
operating expenses is relatively fixed, since personnel levels and other
expenses are based upon anticipated
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revenues. Because the Company's quarterly revenues may vary for the reasons
stated above, the Company may not be able to reduce spending in response to
sales shortfalls or delays in any quarter. These factors can cause significant
variations in operating results from quarter to quarter. The Company believes
that quarter to quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company
expects to use approximately $3 million of the net proceeds of this Offering to
repay principal and interest on its outstanding credit facilities, including
debt incurred after June 30, 1997, approximately $1.75 million for advertising
and other promotional activities, approximately $400,000 for the training and
educating of Medline field representatives and other home healthcare
professionals regarding the Company's products, approximately $200,000 for the
upgrade of its computer hardware and software and the purchase of other
equipment, and the balance for working capital and other general corporate
purposes, including acquiring additional inventory and financing receivables
growth. In addition, the Company may make acquisitions of complementary
technologies, products or businesses, although the Company has no specific
agreements or commitments, and is not currently engaged in any negotiations for,
any such acquisitions. The Company's management will have broad discretion to
allocate the proceeds of this Offering, and the amounts actually expended for
each use listed above may vary significantly depending on a number of factors,
including the amount of future revenue growth, the amount of cash generated or
used by the Company's operations, and the progress of the Company's marketing
efforts. See "Use of Proceeds."
POSSIBLE SUBSTANTIAL ADDITIONAL SHARE ISSUANCES. As of August 27, 1997, the
Company had outstanding (i) options to purchase up to 574,266 shares of Common
Stock at exercise prices ranging between $1.65 to $6.00 per share; (ii) subject
to certain contingencies, options to purchase up to 1,225,000 shares of Common
Stock at a per share exercise price equal to the greater of the Unit Offering
Price or the closing bid price of the Company's Common Stock on the date of the
sale of the Units offered hereby, (iii) warrants to purchase up to 528,583
shares of Common Stock at an exercise price of Cdn. $5.67 per share until
October 5, 1997; (iv) warrants to purchase up to 46,865 shares of Common Stock
at an exercise price of Cdn. $7.20 per share until October 1, 1997; (v) warrants
to purchase 126,667 shares of Common Stock at an exercise price of $1.86 per
share until May 8, 1998 and thereafter at an exercise price of $2.16 until May
8, 1999; (vi) warrants potentially issuable as a result of the settlement of
certain litigation; and (vii) subject to certain contingencies, 700,734 shares
of Common Stock reserved for issuance under the Stock Option Plans. Included in
the Units offered hereby are Warrants for 1,500,000 shares of Common Stock
(1,725,000 shares if the Over-allotment Option is exercised in full). In
addition, the Representatives have an option to purchase up to an aggregate of
150,000 Units exercisable for a period of four years, commencing one year from
the date of this Prospectus, at an exercise price of 120% of the public offering
price per Unit. The exercise of such options or warrants could significantly
increase the number of shares outstanding and have an adverse impact both on
earnings per share and per share dilution. See "--Shares Eligible for Future
Sale; Possible Adverse Effect on Market Price," "Description of Securities" and
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET
PRICE. Sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Units, Common Stock and Warrants. Upon completion of this
Offering, the Company will have outstanding 5,625,375 shares of Common Stock. Of
these shares, approximately 1,700,672 shares, including the 1,500,000 shares
contained in the Units offered hereby, will be immediately eligible for sale in
the public market without restriction on the date of this Prospectus. An
additional 1,810,316 shares will be immediately eligible for sale in the public
market without restriction on the date of this Prospectus, but are subject to
90-day lock-up agreements with the Representatives. The 1,666,667 shares that
were issued by the Company in connection with an offering under Regulation S of
the Securities Act in October 1995, to the extent not previously resold into the
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United States, are available for resale into the United States without
restriction at such time as an exemption from registration under the Securities
Act of 1933, as amended (the "Securities Act") is or becomes available. An
additional 447,720 shares are restricted shares ("Restricted Shares") subject to
the restrictions upon resale under Rule 144 of the Securities Act. Of these
shares, approximately 139,782 shares not subject to lock-up agreements are
eligible for immediate resale without restriction under Rule 144(k). The
remaining Restricted Shares are held by affiliates of the Company, are eligible
for immediate resale subject to the volume and other restrictions of Rule 144,
but are subject to one year lock-up agreements with the Representatives. See
"Description of Securities," "Shares Eligible for Future Sale" and
"Underwriting."
LIMITED PUBLIC MARKET FOR COMMON STOCK; VOLATILITY OF SECURITIES PRICES;
LACK OF ACTIVE U.S. PUBLIC TRADING MARKET. No market exists for the Units and
the Warrants. The Company's outstanding shares of Common Stock are currently
traded on the VSE and, to a very limited extent, on the OTC Bulletin Board.
Factors such as announcements by the Company or its competitors concerning
technological innovations, new commercial products or procedures, proposed
government regulations and developments or disputes relating to patents or
proprietary rights may have a significant effect on the market price of the
Company's securities. Changes in the market price of the Company's Common Stock
may bear no relation to the Company's actual operational or financial results.
Application has been made to have the Units, Common Stock and Warrants approved
for quotation on the Nasdaq SmallCap Market. As of the date of the application,
the Company did not meet certain of the listing requirements. There is no
assurance that such application will be approved and, even if approved, that an
active trading market will be established or maintained. As a result, purchasers
of the Company's securities offered hereby could find it difficult to sell their
securities.
IMPACT OF POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; PENNY STOCK
REGULATIONS. The Company has applied to have the Units, Common Stock and
Warrants quoted on the Nasdaq SmallCap Market contemporaneously with the
completion of this Offering. On August 22, 1997, Nasdaq adopted new more
stringent listing and maintenance criteria. In order to maintain Nasdaq listing
in accordance with the new standards, the Company will be required to have (i)
at least $2 million in net tangible assets; (ii) net income of at least $500,000
in two of the last three years; or (iii) a market capitalization of at least $35
million. In addition, the Company will be required to have a market value of its
public float of at least $1 million, a minimum bid price of $1.00 and two market
makers. No assurance can be given that the Company will meet the initial
inclusion criteria, or if it does, that it will be able to maintain such
listing. If the Company is unable to maintain the listing criteria, its
securities will be subject to delisting from Nasdaq. Trading, if any, in the
Company's securities would thereafter be conducted on the OTC Bulletin Board or
the "pink sheets," maintained by the National Quotation Bureau. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's securities.
In addition, if the Company were to fail to meet the maintenance
requirements for listing on Nasdaq and the price of the Company's Common Stock
was below $5.00 at such time, such security would come within the definition of
"penny stock" as defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and be covered by Rule 15g-9 of the Exchange Act. That Rule
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5 million or individuals with
net worth in excess of $1 million or annual income exceeding $200,000 or
$300,000 jointly with their spouse). For transactions covered by Rule 15g-9, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, Rule 15g-9, if it becomes applicable, would affect the
ability or willingness of broker-dealers to sell the Company's securities and
therefore would affect the ability of purchasers in this Offering to sell their
securities in the secondary market.
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REDEMPTION OF WARRANTS. The Warrants will be subject to redemption at $0.25
per Warrant on 30 days' written notice, provided that the closing bid price of
the Common Stock for each of the 20 consecutive trading days immediately
preceding the date of the notice of redemption equals or exceeds 200% of the
then current Warrant exercise price. If the Company exercises the right to
redeem the outstanding Warrants, holders would be forced either to exercise the
Warrant or accept the redemption price. See "Description of Securities--The
Warrants."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE THE
WARRANTS. Holders will be able to exercise the Warrants only if a current
prospectus relating to the Common Stock underlying the Warrants is then in
effect, and only if the Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the state in which such
holders of the Warrants reside. Although the Company has undertaken to maintain
the effectiveness of a current prospectus covering the Common Stock underlying
the Warrants, there can be no assurance that the Company will be able to do so.
The value of the Warrants may be impaired if a current prospectus covering the
Common Stock issuable upon exercise of the Warrants is not kept effective, or if
such Common Stock is not qualified or exempt from qualification in the states in
which the holders of the Warrants reside.
The Warrants are separately transferable immediately upon issuance. Although
the Units will not knowingly be sold to purchasers in jurisdictions in which the
Units are not registered or otherwise qualified for sale, purchasers may buy the
Warrants in the after market in, or may move to, jurisdictions in which the
shares underlying the Warrants are not so registered or qualified during the
period that the Warrants are exercisable. In that event, the Company would be
unable to issue shares to those persons desiring to exercise their Warrants, and
holders of the Warrants would have no choice but to attempt to sell the Warrants
in a jurisdiction where such sale is permissible or allow them to expire
unexercised. See "Description of Securities--Warrants."
DILUTION. Investors acquiring shares of Common Stock included in the Units
offered hereby will incur immediate and substantial net tangible value dilution
of $4.45 per share ($4.30 per share if the Over-Allotment Option is exercised in
full), assuming no exercise of outstanding or issuable options or warrants,
including those included in this Offering. To the extent that outstanding or
issuable options and warrants to purchase the Company's Common Stock are
exercised or the Company is required to issue additional warrants as a result of
the settlement of certain litigation and such warrants are exercised, there will
be further dilution in ownership of the Company and there may be further net
tangible value dilution to investors acquiring shares of Common Stock included
in the Units offered hereby. (see "Business--Legal Proceedings").
LIMITATIONS ON USE OF NET OPERATING LOSS CARRYFORWARDS. Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code") imposes certain
limitations on the ability of a "loss corporation" to use its net operating
losses ("NOLs") to offset its future taxable income in taxable years following
an "ownership change" (including an ownership change resulting from the issuance
of stock). In general, an ownership change occurs if the percentage (as measured
by value) of the loss corporation's stock (other than certain preferred stock)
which is owned, directly or indirectly, by one or more 5% stockholders (or
certain groups of stockholders collectively treated as a 5% stockholder) is
increased by more than 50 percentage points over the lowest percentage of stock
owned by such 5% stockholders at any time during the applicable "testing period"
of three years or less. In the event of an ownership change, the amount of
pre-change NOLs that the loss corporation can use to offset its taxable income
in a post-change taxable year will generally be limited to an amount equal to
the product of the "long-term tax-exempt rate" in effect on the date of the
ownership change and the value of the loss corporation's stock immediately prior
to the ownership change (without taking into account for such valuation purposes
certain capital contributions received by the loss corporation during the
two-year period preceding the ownership change). The long-term tax-exempt rate
is an interest rate based upon certain specified U.S. Treasury debt obligations
adjusted for differences between rates on taxable and tax-exempt obligations and
announced on a monthly
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basis by the Internal Revenue Service. In addition, if the loss corporation does
not continue its historic business or continue to use a substantial portion of
its historic assets in its business for a two-year period following an ownership
change, the effect would be that no portion of the pre-change NOLs would be
available to offset future taxable income (except in certain very limited
circumstances).
INTERNATIONAL OPERATIONS. The Company has a wholly-owned subsidiary which
is located in Canada. In addition, the Company sells to Canadian customers and
purchases its products from suppliers located in Canada and Mexico.
International transactions may be denominated in foreign or United States
currencies. The Company does not currently engage in foreign currency hedging
transactions. If a material amount of future sales or purchases are denominated
in foreign currency, a change in the value of foreign currencies relative to the
United States dollar could result in losses from such transactions. Additional
risks inherent in the Company's international business activities include
changes in regulatory requirements, tariffs and other trade barriers, political
and economic instability, difficulty in staffing and managing foreign
operations, customs requirements, potentially adverse tax consequences, the
burden of complying with a wide variety of complex foreign laws and treaties,
and the possibility of difficulty in accounts receivable collections. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition or results of operations.
ABSENCE OF DIVIDENDS. The Company does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. Any payments of cash dividends on
the Common Stock in the future will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
plans for expansion, as well as other factors that the Board of Directors deems
relevant. Even if its future operations result in significant revenues and
profitability, as to which there is no assurance, there is no present
anticipation that dividends will be paid. The Company's current policy is to
retain profits, if any, to fund growth and expansion. See "Dividend Policy."
BLANK CHECK PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Company's Board
of Directors has the authority to issue up to 1,000,000 shares of Preferred
Stock and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of shares of Preferred Stock, while potentially providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present intention to issue shares of Preferred
Stock. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which will prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
also could have the effect of delaying or preventing a change in control of the
Company. See "Description of Securities." In addition, certain officers have the
right to receive certain payments upon a change in control of the Company. Such
agreements could have the effect of delaying, deferring or preventing a change
in control of the Company by increasing the aggregate cost to potential
investors of an acquisition of the Company. See "Management--Executive
Compensation--Employment Agreements."
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CORPORATE HISTORY
The Company, Caring Products International, Inc., a Delaware corporation,
resulted from a series of corporate reorganizations and related transactions, as
follows:
First West Canada Capital Corporation ("FWCC") was originally incorporated
under the laws of the Province of British Columbia on December 6, 1984. On
December 20, 1993, FWCC renounced its original jurisdiction of incorporation and
became a Wyoming corporation. On December 23, 1993, FWCC merged into FWCC Merger
Corp., a wholly-owned subsidiary of FWCC, which was incorporated in the State of
Delaware on December 7, 1993. Prior to the merger, which effected the
reincorporation of FWCC as a Delaware corporation, FWCC was an inactive
corporation. Immediately following the merger, FWCC Merger Corp. was an inactive
corporation.
On November 4, 1992, Caring Products International, Inc. was incorporated
under the laws of the State of Delaware ("Old Caring Products"). On December 30,
1993, Old Caring Products merged with and into FWCC Merger Corp., and FWCC
Merger Corp. became the surviving corporation. In connection with this merger,
the name of the surviving entity was changed to Caring Products International,
Inc. Caring Products Industries, Ltd., a British Columbia corporation, is a
wholly-owned subsidiary of Caring Products International, Inc. and until March
1996 principally engaged in pant production activities. C.P. International,
Inc., a Delaware corporation, is also a wholly-owned subsidiary of Caring
Products International, Inc., and its principal business is the sale and
marketing of the Company's products. The term, the "Company" as used herein,
refers to the surviving entity in the merger, Caring Products International,
Inc. and its wholly-owned subsidiaries, Caring Products Industries, Ltd. and
C.P. International, Inc.
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USE OF PROCEEDS
The net proceeds from the sale of the Units offered hereby, based on an
assumed offering price of $6.00 per Unit, are estimated to be $7,320,000
($8,514,750 if the Over-Allotment Option is exercised in full) after deducting
underwriting discounts and estimated expenses of this Offering and assuming no
exercise of the Warrants.
The Company expects to use approximately $3 million of the net proceeds of
this Offering to repay principal and interest on its outstanding credit
facilities, including debt incurred after June 30, 1997, approximately $1.75
million for advertising and other promotional activities, approximately $400,000
for the training and educating of Medline field representatives and other home
healthcare professionals regarding the Company's products and approximately
$200,000 to upgrade its computer hardware and software and purchase other
equipment. The balance of the net proceeds of this Offering will be used for
working capital and general corporate purposes, including acquiring additional
inventory and financing receivables growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." Where appropriate, proceeds of this Offering also may be used to
acquire complementary technologies, products or business, although there are no
specific agreements or commitments and the Company is not currently engaged in
any negotiations for any such acquisitions. The amounts actually expended by the
Company on any particular matter may vary significantly from the Company's
current plans depending upon a number of factors, including future revenue
growth, the cash generated or used by the Company's operations and the progress
of the Company's marketing efforts.
Pending the uses described above, the net proceeds will be invested in
short-term, interest-bearing securities, including government obligations and
money market instruments.
DIVIDEND POLICY
The Company has never paid a dividend on its Common Stock. It is the present
policy of the Company not to pay cash dividends on the Common Stock but to
retain earnings, if any, to fund growth and expansion. Any payment of cash
dividends on the Common Stock in the future will be dependent upon the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, as well as other factors that the Board of
Directors deems relevant.
16
<PAGE>
CAPITALIZATION
The following table sets forth the debt and capitalization of the Company at
June 30, 1997 (i) on an actual basis and (ii) as adjusted to reflect the
estimated net proceeds from the sale of 1,500,000 Units offered by the Company
hereby at an estimated initial public offering price of $6.00 per Unit and
repayment of the line of credit in the amount of $2.5 million from proceeds
other than this Offering. The information set forth below is unaudited and
should be read in conjunction with the Company's consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
<S> <C> <C>
Lines of credit................................................................... $ 3,644,928 $ --
Current portion of long-term obligations.......................................... 13,648 13,648
Notes payable to related parties.................................................. 780,000 --
Long-term obligations (less current portion)...................................... 30,353 30,353
-------------- --------------
Total debt.................................................................... $ 4,468,929 $ 44,001
-------------- --------------
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 1,000,000 shares authorized, none
issued and outstanding........................................................ -- --
Common Stock, par value $0.01 per share; 75,000,000 shares authorized, 4,125,375
shares issued and outstanding, 5,625,375 issued and outstanding, as
adjusted(1)................................................................... 41,254 56,254
Additional paid-in capital...................................................... 12,848,703 20,153,703
Accumulated deficit............................................................. (11,254,672) (11,254,672)
-------------- --------------
Total stockholders' equity.................................................... 1,635,285 8,955,285
-------------- --------------
Total capitalization........................................................ $ 6,104,214 $ 8,999,286
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Does not include (i) 574,266 shares issuable upon exercise of outstanding
options granted pursuant to the Company's Stock Option Plans; (ii) 702,115
shares issuable upon exercise of outstanding warrants; (iii) subject to
certain contingencies, up to 1,225,000 shares issuable upon exercise of
outstanding options granted pursuant to the Company's Stock Option Plans
after June 30, 1997; (iv) subject to certain contingencies, 700,734 shares
of Common Stock reserved for issuance under the Stock Option Plans; and (v)
warrants potentially issuable as a result of the settlement of certain
litigation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources,"
"Business--Legal Proceedings," "Management--Stock Option Plans" and
"Description of Securities."
17
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the VSE under the symbol "CPI"
since January 1994, following its merger with FWCC Merger Corp., and under the
symbol "CRP" since June 16, 1997, and has also traded on the OTC Bulletin Board
under the symbol "CGPD" since August 14, 1997. The Company has applied to have
the Units, Common Stock and Warrants quoted on the Nasdaq SmallCap Market.
However, there is no assurance that such application will be approved and, if
approved, that an active trading market will be established or maintained in the
United States. At the date of its application, the Company does not satisfy all
of the initial listing requirements for the Nasdaq SmallCap Market.
The following table sets forth the high and low closing prices for the
Common Stock on the VSE for the periods indicated (i) stated in Canadian dollars
and, except as noted, without giving effect to the Reverse Stock Split and (ii)
as adjusted, in U.S. dollars and retroactively giving effect to the Reverse
Stock Split.
<TABLE>
<CAPTION>
AS ADJUSTED (US$)(1)
ACTUAL (CDN.$)
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1996
First Quarter................................................................. $ 1.61 $ 1.56 $ 6.95 $ 6.73
Second Quarter................................................................ 1.65 0.86 7.12 3.71
Third Quarter................................................................. 1.32 0.85 5.70 3.67
Fourth Quarter................................................................ 1.25 0.98 5.40 4.23
Fiscal Year Ended March 31, 1997
First Quarter................................................................. $ 1.25 $ 0.50 $ 5.40 $ 2.16
Second Quarter................................................................ 0.97 0.65 4.19 2.81
Third Quarter................................................................. 1.10 0.38 4.75 1.64
Fourth Quarter................................................................ 1.00 0.52 4.32 2.24
Fiscal Year Ending March 31, 1998
First Quarter through June 16, 1997........................................... $ 0.85 $ 0.51 $ 3.67 $ 2.20
First Quarter from June 17, 1997(2)........................................... 4.00 2.50 2.88 1.80
Second Quarter through September 5, 1997(2)................................... 3.00 1.50 2.16 1.08
</TABLE>
- ------------------------
(1) Canadian dollars have been converted at the noon buying rate on August 22,
1997 of U.S. $1.00 = Cdn. $1.39. These adjusted prices are not indicative of
what the price might have been if the Reverse Stock Split had occurred prior
to June 16, 1997 nor is any representation made that the Canadian dollar
amounts could have been, or could be, converted into U.S. dollars at such
rate on August 22, 1997 or at any other rate.
(2) Reflects the Reverse Stock Split effected on June 16, 1997.
The following table sets forth the high and low closing bid prices for the
Common Stock on the OTC Bulletin Board for the period indicated. All prices are
stated in U.S. dollars and reflect the Reverse Stock Split.
<TABLE>
<CAPTION>
ACTUAL
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ending March 31, 1998
Second Quarter from August 14, 1997 through September 5, 1997................................. $ 1.875 $ 1.00
</TABLE>
On September 5, 1997, the closing bid price of the Common Stock on the OTC
Bulletin Board was $1.00. As of August 25, 1997, the number of record holders of
the Company's Common Stock was approximately 116, and the number of beneficial
holders was approximately 950.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements, related notes
and other information included elsewhere in this Prospectus. The consolidated
statement of operations data set forth below for the year ended March 31, 1996
are derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by KPMG, Chartered
Accountants. The consolidated statement of operations data set forth below for
the year ended March 31, 1997 and the consolidated balance sheet data as of
March 31, 1997 are derived from the consolidated financial statements of the
Company, which consolidated financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated
statement of operations data set forth below for the three month periods ended
June 30, 1996 and 1997 and the consolidated balance sheet data at June 30, 1997,
are derived from the unaudited consolidated financial statements of the Company
that include, in the opinion of management, all adjustments, consisting only of
normal recurring accruals, that the Company considers necessary for a fair
presentation of its results of operations for such periods. The results of
operations for the three month period ended June 30, 1997 are not necessarily
indicative of the results to be expected for the entire year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- ----------------------
1996 1997 1996 1997
--------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 1,118,486 2,287,497 428,468 818,403
Cost of sales..................................... 1,031,896 1,727,607 447,237 385,471
Gross profit (loss)............................... 86,590 559,890 (18,769) 432,932
Selling expenses.................................. 1,978,206 2,083,173 328,808 548,950
General and administrative expenses............... 1,126,815 1,198,148 225,667 289,467
Total operating expenses.......................... 3,241,483 3,362,288 576,361 852,695
Loss from operations.............................. (3,154,893) (2,802,398) (595,130) (419,763)
Net loss.......................................... (3,959,940)(1) (2,904,886) (687,650) (623,509)
Net loss per share................................ (1.84) (0.74) (0.18) (0.15)
Weighted average common shares and common
equivalent shares outstanding................... 2,154,955 3,948,054 3,723,708 4,125,375
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................................................... $ 1,626,971 1,184,548
Cash............................................................................... 118,573 132,880
Restricted cash.................................................................... 2,694,671 2,537,591
Accounts receivable, net........................................................... 625,085 951,875
Inventories........................................................................ 2,432,583 3,110,444
Total current assets............................................................... 5,889,953 6,741,844
Total assets....................................................................... 6,388,537 7,222,934
Accounts payable................................................................... 1,029,418 1,016,150
Lines of credit.................................................................... 2,500,000 3,644,928
Notes payable to related parties................................................... 571,300 780,000
Total current liabilities.......................................................... 4,262,982 5,557,296
Total liabilities.................................................................. 4,293,335 5,587,649
Total stockholders' equity......................................................... 2,095,202 1,635,285
</TABLE>
- --------------------------
(1) Includes $864,735 in costs associated with an offering of convertible
promissory notes (Bridge Financing) completed in fiscal year 1996.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
From the date of the Company's incorporation in November 1992 through
September 1995 when it began marketing Rejoice, the Company was principally
engaged in various activities, including product development, technology
acquisition, recruitment of employees, identification of sources of
subcontracted production, organization of marketing and production headquarters,
market research and testing, trademark and patent filings and the raising of
funds to support the Company's substantial development expenses. Revenues from
various product test marketing programs in retail, catalog, direct mail and
healthcare markets during that period were nominal.
In order to consolidate the Company's marketing and production management
activities into a single location, the Company moved its headquarters to
Seattle, Washington from New York in August 1995.
Until March 1996, the Company produced pants in its own facility in Burnaby,
British Columbia. Thereafter, the facility provided cutting and other services
to support its Canadian pant subcontractor. The Company expects to complete its
relationship with this subcontractor and close its Burnaby, British Columbia
location in September 1997.
The Company's new source of pant production is from a large underwear
manufacturer located in Northern Mexico. That producer offers the Company a
lower per unit pant cost than the Company's per unit pant cost at its own
facility in Canada or through a Canadian-based pant subcontractor. In addition,
the Company anticipates that it will derive additional cost reductions from the
elimination of certain overhead, labor and administrative costs associated with
operating the Burnaby facility. No material expenses or losses are expected from
the closing of the Burnaby facility and sale of certain sewing equipment.
The Company anticipates that it will continue to manufacture its pant and
liner products through subcontractors located in the United States and Mexico.
In September 1995, the Company shipped product to its first drug store chain
for store-wide distribution and shelf placement in approximately 300 stores. In
each subsequent fiscal quarter the number of drug stores, independent pharmacies
and surgical supply stores that sell the Company's products has increased. As of
June 30, 1997, the Company distributed its products to approximately 6,000 drug,
pharmacy and surgical supply stores.
In late 1996, the Company signed a distribution agreement with Medline, a
hospital supply company. This relationship will support the Company's interests
in entering the healthcare markets, which includes inpatient and outpatient
hospital facilities, rehabilitation facilities, home healthcare providers,
nursing homes, hospice centers and surgical supply stores. The Company is
currently training various Medline healthcare representatives to sell the
Company's products and producing customized sales literature to support these
efforts. The Company anticipates that sales to the healthcare market will
increase as a percentage of the Company's total revenues in future quarters.
As discussed below, the fiscal years ended March 31, 1996 and March 31, 1997
were characterized by nominal sales offset by significant expenses associated
with financing, manufacturing and promoting the Company's products. The Company
expects to continue to incur losses during the rollout of its products to the
healthcare, retail and international markets.
20
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE FISCAL YEAR ENDED MARCH 31, 1996 TO THE FISCAL YEAR ENDED
MARCH 31, 1997
The components of the Company's revenues for the fiscal year ended March 31,
1996 ("Fiscal 1996") and the fiscal year ended March 31, 1997 ("Fiscal 1997")
were as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Rejoice pants..................................................... $ 479,481 $ 889,149
Rejoice liners.................................................... 635,902 1,390,611
Other............................................................. 3,103 7,737
------------ ------------
Total............................................................. $ 1,118,486 $ 2,287,497
------------ ------------
------------ ------------
</TABLE>
Revenues increased from $1,118,486 in Fiscal 1996 to $2,287,497 in Fiscal
1997, an increase of 105%. Sales of the Company's adult pants and liners
represented virtually all of the Company's revenues in both years. The increase
in revenues resulted primarily from the increase in the number of retail outlets
which sell the Company's products from approximately 1,200 at the end of Fiscal
1996 to approximately 6,000 at the end of Fiscal 1997. The increase in retail
outlets carrying the Rejoice products resulted from the broad-based promotional
activities of the Company to support brand introduction and consumer awareness
of the brand. There was no significant change in the Company's pricing to its
wholesale customers from Fiscal 1996 to Fiscal 1997. Total liner sales are
expected to continue to be higher than pant sales because the average consumer
will need to purchase more disposable liners than reusable pants.
Cost of goods sold increased from $1,031,896 in Fiscal 1996 to $1,727,607 in
Fiscal 1997, an increase of 67% reflecting product costs associated with the
increased amount of sales. Gross profit on sales increased from $86,590 in
Fiscal 1996 to $559,890 in Fiscal 1997. The improvement in gross profit
reflected lower unit cost of goods sold due to the transfer during Fiscal 1997
of virtually all pant production to subcontractors from a significant amount of
in-house pant production. Gross profit as a percentage of revenues (gross profit
margin) increased from 8% in Fiscal 1996 to 24% in Fiscal 1997. Gross profit
margins may fluctuate in the future depending on changes in the mix of products
sold, the mix of sales by distribution channels and other factors such as the
sale of inventory with lower gross profit margins.
Total operating expenses increased 4% from $3,241,483 in Fiscal 1996 to
$3,362,288 in Fiscal 1997. Of the Fiscal 1997 amount, $2,083,173 was related to
selling expenses, including advertising creative costs, consumer physician
promotion and education materials, radio advertising placement, trade show,
salaries and travel costs. Selling expenses increased 5% over Fiscal 1996. The
Company expects that selling expenses will continue to be the largest component
of the Company's operating expenses. General and administrative expenses in
Fiscal 1997 were $1,198,148, an increase of 6% as compared to $1,126,815 in
Fiscal 1996. Legal and accounting expenses during both periods were a
significant portion of general and administrative expenses. These expenses
primarily relate to various registrations and filings in the United States and
Canada. During Fiscal 1996, the Company also incurred expenses related to
completing a bridge financing, including a $250,000 finder's fee and deemed
interest of $413,000 as a result of the valuation of the warrants issued in such
financing. Research and development expenses continued to decline during the two
periods, from $74,704 in Fiscal 1996 to $8,679 in Fiscal 1997 because all
significant research and development regarding the Company's existing products
is complete. Research and development expenses are not expected to be a
significant cost to the Company during Fiscal 1998 as a result of the Company's
intention to continue its focus on expanding sales of its existing products
rather than on developing new products.
Interest income generated during Fiscal 1997 was $163,986 as compared to
$112,671 in Fiscal 1996. The increase was attributable to higher average deposit
balances throughout the year. Interest expense increased 121% during the two
periods from $92,314 to $204,203 reflecting the higher average balance of
outstanding debt.
21
<PAGE>
Improved pant gross profit margins are expected in future periods as a
result of increasing the volume of pants produced by lower cost production in
Mexico as compared to its subcontractor in Canada. The Company is scheduled to
close its factory location in Burnaby, British Columbia in September 1997, at
which time there is expected to be a reduction in certain overhead and facility
costs related to supporting pant production in Canada. No material losses
associated with the closure of this facility are expected. No similar facility
support is required for subcontracted pant production in other locations that
are currently used by the Company. While no assurances can be provided, the
Company expects that increased demand for both pants and liners will enable the
Company to negotiate volume discounts which might positively affect gross profit
margins. In addition, no assurance can be provided that increased pant
production through lower cost subcontractors will lead to profitable operations.
During Fiscal 1996 and Fiscal 1997, the Company subcontracted production of all
its liners through subcontracted liner converters in the United States.
The net loss for Fiscal 1997 was $2,904,886 as compared to a net loss of
$3,959,940 for Fiscal 1996, representing a decrease of $1,055,054 or 27%. The
net loss per share was $0.74 in Fiscal 1997 as compared to $1.84 in Fiscal 1996.
Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on sales or results of operations in Fiscal 1996 and Fiscal 1997.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 TO THE THREE MONTHS ENDED
JUNE 30, 1997
Revenues increased from $428,468 in the first quarter ended June 30, 1996
(the "1996 Period") to $818,403 in the first quarter ended June 30, 1997 (the
"1997 Period"), an increase of 91%. This increase was primarily as a result of
the increase in the number of retail drug store chains that sell the Company's
Rejoice incontinence products.
Cost of goods sold decreased from $447,237 in the 1996 period to $385,471 in
the 1997 Period, a decrease of 14%. The decrease in cost of goods sold was
attributable to a significant reduction in costs associated with pant
production, including fewer Canadian production staff compared to the comparable
prior period. Gross profit on sales increased from a loss of $18,769 in the 1996
Period to a profit of $432,932 in the 1997 Period. The improvement in gross
profit margin in the 1997 Period primarily reflected the first introduction of
retail pants produced at a lower unit priced pant subcontractor in Mexico and
the significant reduction in Canadian-based staff and facility costs. In
addition, the Company paid a lower cost per liner from its liner subcontractor
in the United States during the 1997 Period. Gross profit margins may fluctuate
in the future depending on changes in the mix of products sold, the mix of sales
by distribution channels and other factors such as the sale of inventory with
lower gross profit margins.
Total operating expenses increased 48% from $576,361 in the 1996 Period to
$852,695 in the 1997 Period. The increase was primarily attributable to
increased advertising and sales expenses associated with supporting an increased
number of drug stores that sell the Company's products, as well as employee
travel and new salary expenses associated with the Company's commencement of
sales training and marketing activities. Total selling expenses increased 67%
from $328,808 in the 1996 Period to $548,950 in the 1997 Period. General and
administrative expenses increased 28% from $225,667 to $289,467 in the 1997
Period. The increase represented increased operating costs associated with the
growth in the Company's corporate and marketing offices.
The Company also generated $22,499 in interest income during the 1997 Period
as compared to $3,336 in interest income generated during the 1996 Period.
Interest income was offset by interest expense of $152,155 in the 1997 Period
and $45,400 in the 1996 Period. The increase in interest expense related to the
increase in short-term and long-term borrowings in the 1997 Period from the 1996
Period.
The net loss for the 1997 Period was $623,509 as compared to $687,650 for
the 1996 Period, a 10% improvement. The net loss per share was $0.15 in the 1997
Period as compared to $0.18 per share in the 1996 Period.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through private
placements of its equity securities as well as various debt financing
transactions. During Fiscal 1996, the Company received net proceeds of
$5,707,123 from the sale of 1,666,667 special warrants (the "Private
Placement"). During Fiscal 1996, the Company supported its operations from the
proceeds of several small borrowings and incurred short-term debt of $2.5
million in the form of promissory notes issued together with warrants as part of
a bridge financing. These notes were subsequently repaid with the proceeds of a
short-term secured promissory note issued by the Company to a single investor in
September 1995. In October 1995, the Company secured a revolving line of credit
in the amount of $2.5 million from Seattle First National Bank and repaid the
secured promissory note issued in September 1995. The loan bore interest at
6.91% per annum, payable monthly, and was secured by a deposit of $2.5 million.
The loan was repaid in full in August 1997.
During Fiscal 1997, the Company supported its operations from various
short-term, unsecured borrowings from related parties which totaled $571,300 at
March 31, 1997. In April 1997, $366,300 of such borrowings were repaid and the
$205,000 balance of such borrowings was repaid in June 1997, in both cases using
proceeds received from the Company's bank line of credit.
In April 1997, Bradstone Equity Partners Inc., f/k/a H.J. Forest Products
Inc. ("Bradstone"), guaranteed a Cdn $1.75 million credit facility for the
Company from the Toronto Dominion Bank. In July 1997, the guarantee was
increased by $1.25 million to an aggregate of $2.5 million. The guarantee is
through April 1, 1998. Borrowings under the line of credit bear interest at the
Canadian prime rate plus .25% (5% at August 26, 1997) and are due on demand. The
Company issued to the guarantor warrants to purchase 126,667 shares of Common
Stock exercisable at $1.86 per share at any time until May 8, 1998 and
thereafter at $2.16 per share until May 8, 1999. The warrants were recorded on
issuance at their estimated fair market value of $163,592 with a corresponding
reduction in the recorded value of the line of credit. The debt discount will be
amortized to interest expense over the term of the line of credit. In May 1997,
the Company borrowed $780,000 out of a total possible draw down of $1.25 million
under a note payable to Bradstone. Interest is payable thereunder at the
Canadian prime rate plus 3% (7.75% at August 26, 1997) and the principal is due
in May 1998. Repayment of the note is secured by a lien on substantially all of
the Company's assets and by a pledge of all of the Company's Common Stock owned
by William H.W. Atkinson and Susan A. Schreter, the Company's Chief Executive
Officer and President, respectively. In September 1997, Bradstone agreed that if
this Offering were not completed and the Company required capital for its
operations, Bradstone would loan the Company up to an additional $1.25 million
on the same terms and conditions as the May 1997 note, provided that if drawn
down, a representative of Bradstone would be appointed to the Company's Board of
Directors, among other conditions. Also in September 1997, the Company obtained
from Toronto Dominion Bank an increase in its credit facility of Cdn. $1.75
million, bringing the total facility to Cdn. $3.5 million, under terms and
conditions similar to the original loan, which aggregate credit facility is
secured by the guarantee from Bradstone in the aggregate amount of Cdn. $3.5
million. Substantially all of the Company's assets are pledged as security for
its various indebtedness.
As of March 31, 1997, the Company's principal sources of liquidity included
cash (including amounts restricted as security for loans) of $2,813,244, net
accounts receivable of $625,085 and inventories of $2,432,583. The Company's
operating activities used cash of $2,982,936 for the year ended March 31, 1997.
Increases in accounts payable of $678,106 and accounts receivable of $344,407
reflect the Company's increased levels of operations and sales. Increased
inventory of $623,591 supported the Company's growing sales volume. The Company
anticipates that the levels of both inventories and accounts receivable will
vary commensurate with the Company's sales and, if sales increase, may
negatively impact cash resources.
As of June 30, 1997, the Company's principal sources of liquidity included
cash (including amounts restricted as security for loans) of $2,670,471, net
accounts receivable of $951,875, inventories of $3,110,444, and available
borrowing capacity under the note payable to Bradstone of approximately
23
<PAGE>
$470,000. The Company's operating activities used cash of $1,614,388 for the
1997 Period. Increases in accounts receivable of $326,790 reflect the increased
sales volume of the Company. Increased inventories of $677,861 primarily reflect
the Company's growing sales volume with larger chain stores which require
greater inventory availability and the longer lead times associated with liner
production. During the 1997 Period, the Company financed its net loss and growth
in accounts receivable and inventories primarily from increased borrowings under
its lines of credit.
The Company believes that the estimated net proceeds from this Offering,
together with its various financing arrangements, will be sufficient to meet its
capital requirements for at least the next 12 months.
OTHER MATTERS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). SFAS
128 requires companies with complex capital structures that have publicly held
common stock or common stock equivalents to present both basic and diluted
earnings per share ("EPS") on the face of the income statement. The presentation
of basic EPS replaces the presentation of primary EPS currently required by
Accounting Principles Board Opinion No. 15 ("APB No. 15"). Basic EPS is
calculated as income available to common stockholders divided by the weighted
average number of common shares outstanding during the period. Diluted EPS is
calculated using the "if converted" method for convertible securities and the
treasury stock method for options and warrants as prescribed by APB No. 15. This
statement is effective for financial statements issued for interim and annual
periods ending after December 15, 1997. The Company does not believe the
adoption of SFAS 128 in fiscal year 1998 will have a significant impact on the
Company's reported EPS.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, DISCLOSURES OF INFORMATION ABOUT
CAPITAL STRUCTURE ("SFAS 129") which establishes standards for disclosing
information about an entity's capital structure. The disclosures are not
expected to have a significant impact on the consolidated financial statements
of the Company. SFAS 129 is effective for financial statements ending after
December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
130") which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 is effective for
years beginning after December 15, 1997. The Company does not anticipate a
material impact to its consolidated financial statements upon adoption of this
standard.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION ("SFAS 131") which establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes the related disclosures about
products and services, geographic areas, and major customers. SFAS 131 replaces
the "industry segment" concept of Financial Accounting Standard No. 14 with a
"management approach" concept as the basis for identifying reportable segments.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company does not anticipate a material impact to its
consolidated financial statements upon adoption of this standard.
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BUSINESS
The Company has designed and markets a line of proprietary urinary
incontinence products with disposable liners which are sold under the Rejoice
name. These products provide a practical, convenient and cost effective solution
to the special needs of incontinent adults and children over the age of four.
The Rejoice products incorporate a two-piece incontinence management system
consisting of a reusable, light-weight cotton pant specifically designed to look
and feel like conventional underwear and a disposable, highly absorbent liner.
The Company sells its products to over 6,000 drug and retail stores,
independent pharmacies and surgical supply stores, including SAVON, OSCO, Revco,
K&B, Thrifty-Pay Less, Long's Drug Stores, Bartell's, Genovese, Hill's and
others. In addition, the Company sells Rejoice to several healthcare and
retail-oriented catalog companies and other companies that provide home delivery
service for healthcare-oriented products.
In late 1996, the Company signed a distribution agreement with Medline to
serve as a distributor to various chain home nursing agencies, healthcare
companies and hospital rehabilitation companies, as well as independent
pharmacies and surgical supply stores. The Company has specially packaged a
Rejoice product for these markets which is being exclusively distributed by
Medline.
INDUSTRY BACKGROUND
INCONTINENCE. Incontinence is the involuntary loss of bladder or bowel
control. The Company's products are designed to be used only for urinary
incontinence which represents the largest segment of the outpatient market. It
can affect individuals of any age and can range in severity from stress
incontinence, which is the discharge of a small amount of urine due to a lack of
muscle tone, to total incontinence, which is the complete loss of bladder and/or
bowel control. This loss of control may be a temporary or permanent condition
resulting from surgical procedures, aging, illness, physical disability or
accident. In instances in which a person has a neurological disease or
uncorrectable spinal injury, the loss of bladder control can be a life-long
problem. In contrast, individuals who suffer bladder control problems during
pregnancy or during arduous exercise typically have temporary bladder control
problems.
According to the Council for Urologic Disease (the "Council"), over 12
million Americans suffer from urinary incontinence. As people age, they are more
likely to develop various healthcare problems that contribute to the development
of urinary incontinence. It is estimated by the Council that 15% to 30% of
people over the age of 60 who live at home have this condition. The Council also
has stated that the actual number of people affected by urinary incontinence is
likely to be higher because of the reluctance of many people to report the
condition to medical professionals.
Incontinence ranks as a major health problem and is receiving increased
attention by federal agencies because of its effect on long-term patient
rehabilitation and increased medical costs to insurance companies and the
federal government. Incontinence is an inconvenient and embarrassing problem to
manage away from home, which tends to isolate and limit otherwise productive
people. Based on clinical studies, there is a correlation between urinary
incontinence and higher rates of depression, insomnia, reduced mobility, higher
infection rates and reclusivity. Incontinence is also a leading reason for
admission to nursing homes.
The Company's Rejoice products were specifically designed for ambulatory
patients or functional people residing at home as a more dignified alternative
to plastic-backed disposable diaper products. Several features of the Rejoice
products were included to encourage greater patient flexibility and freedom of
movement while participating in physical therapy programs.
MARKET OVERVIEW. The market for disposable adult incontinence products,
which is comprised of healthcare and retail components, has grown from a focus
on underpads for bedding in healthcare facilities to a wide range of reusable
and disposable diapers, disposable belted undergarments and other devices and
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pads for home consumers who manage bladder control problems on a daily basis.
The total size of the incontinence supply market in 1996 was $1.31 billion,
excluding ostomy products. Approximately 92% of such amount consists of
disposable incontinence products, and the balance consists of reusable products.
The healthcare market includes inpatient and outpatient hospital facilities,
rehabilitation facilities, home healthcare providers, nursing homes, hospice
centers and surgical supply stores. The retail market reaches the end user
consumer directly, selling products through direct marketing, mass
merchandisers, including drug stores and grocery chains, and general consumer
and specialty healthcare catalogs. Within the retail market, there are two
general product brand categories: national brands and various private label
brands which may be marketed under a grocery or drug store name.
The Company's current principal market is the portion of the North American
population with light and moderate incontinence who predominantly make their own
decisions as to which incontinence product to purchase for home use. The Company
expects that the continued increase in the size of the elderly population and
the increase in the average life span will increase the number of incontinence
sufferers and the demand for well-styled, affordable incontinence management
products, particularly for aging baby boomers and their parents. In addition, to
the extent that the increase in cancer rates during the past five years
continues, including the increased incidence of men who have had surgery for
prostate cancer, there likely will be an increase in demand for incontinence
products.
The Company is exploring the possibility of entering the international
market, particularly Europe. The European incontinence market is estimated to
consist of approximately 18 million people out of a population base of 350
million. Although European incontinence product distribution channels may not be
as developed as those in the United States and Canada, the European market is
attractive because of the reimbursement policies of several large European
countries with respect to the costs of incontinence products. The Company also
anticipates that the European market will be receptive to its Rejoice products
because of the European market's general support for products which offer
comparable quality and price but are more environmentally efficient. The
relatively compact size of the Rejoice liner and the reusable nature of the
Rejoice pant offer opportunities to reduce landfill waste when compared to
disposable diapers and undergarments. See "--Growth Strategy--Identifying
International Opportunities."
GROWTH STRATEGY
The Company's strategy is to provide a line of proprietary incontinence
products with disposable liners for adults and children and to provide value to
the consumer by offering products that exceed national brand performance and
quality. The Company's goal is to provide incontinence products that provide a
high degree of protection in terms of absorbency, convenience, fit, conventional
undergarment appearance and natural fabric quality at prices significantly below
brand name disposable diapers and belted undergarment products. The key
components of this business strategy include the following activities and
services:
- BUILDING ITS BRAND NAME. The Company is employing its marketing
resources to build recognition for the Rejoice brand with retail and
healthcare purchasing agents, home consumers and the professional medical
community. It emphasizes in all marketing materials the important comfort
and lifestyle benefits of wearing Rejoice instead of bulkier disposable
diapers for active people living at home.
- INCREASING RETAIL DISTRIBUTION. The Company believes that the growing
awareness by consumers of the availability of products specifically made
for incontinence sufferers, from the marketing campaigns of major
national brands, will continue to add to the shelf space for incontinence
products at mass merchandisers, including grocery and drug store chains.
The Company intends to continue developing relationships with a variety
of retailers for its incontinence products. See "--Sales and Marketing."
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- PENETRATING THE HEALTHCARE MARKET. The Company intends to continue
developing relationships with healthcare product distributors and
healthcare product purchasing agents serving selected segments of the
healthcare market for incontinence products. Examples of these select
segments include outpatient facilities and rehabilitation hospitals, home
healthcare nursing agencies, assisted living centers, hospitals and other
outpatient care providers. The Company anticipates that the development
of the healthcare market will increase retail sales of the Company's
Rejoice products to the extent consumers are introduced to these products
by their healthcare providers and provided with an introductory sample to
take home. See "--Sales and Marketing."
- EXPANDING CUSTOMER SERVICE. The Company is committed to building strong
relationships with its retail and distributor customers through
responsive and timely customer service. Integral to its customer service
is its relationships with fulfillment companies which offer sophisticated
electronic data interchange, warehousing and shipping capabilities. To
ensure consistent fulfillment services in a cost efficient manner, the
Company expects to consolidate all of its United States fulfillment
services in a single central location. See "--Manufacturing and
Fulfillment."
- IDENTIFYING INTERNATIONAL OPPORTUNITIES. The Company is exploring the
possibility of entering the international, particularly the European,
retail and healthcare markets with its Rejoice products through
distributorships, joint ventures, licenses or other similar arrangements.
Although the Company believes that its Rejoice products can be marketed
internationally, it has not conducted any test marketing outside the
United States and Canada and there may be cultural differences in the
perception and marketing of incontinence products that may adversely
affect the Company's ability to market its Rejoice products
internationally. Accordingly, there can be no assurance that an
international market will develop for the Company's Rejoice products.
PRODUCTS
The Company has designed and is marketing a line of adult and children's
incontinence products that it believes offers to those who suffer from light and
moderate incontinence a highly effective, more dignified and less costly
alternative to their traditional options, such as bulky disposable diapers,
belted undergarments or guards. By enabling incontinence sufferers to wear a
fashionably-styled pair of underwear specifically designed to accommodate a
highly absorbent, disposable liner, the Company's products give incontinence
sufferers the ability to engage in many activities that would otherwise be
difficult or impossible for them to undertake. The competing incontinence
products designed for individuals with light bladder control problems are
similar to many feminine hygiene products, which can be bulky and do not prevent
side seepage when a person is moving or sitting down. The Company has not
designed products for the incontinence sufferer, usually bedridden individuals,
who requires products for heavier bladder control and protection for bed linen.
The daily cost of using Rejoice incontinence products is significantly less
than the cost of using competing brand name disposable diapers, belted
undergarments and guards. The Company's products incorporate a two-piece
incontinence management system which includes a reusable light-weight cotton
pant specifically designed to look and feel like conventional underwear and a
disposable, highly absorbent, thin liner. The liner fits securely into a
patented channel in each pant that provides reliable protection against side
seepage even when the wearer is moving or sitting down. The Company's pants are
manufactured in a pull-on style and are available in men's, women's, boys' and
girls' sizes. Although women with light bladder control problems have the option
of using the disposable liner with their own cotton underwear, the Company
recommends use of the Company's pant with its liner for the most effective
protection.
The Company believes that the performance of its two-piece incontinence
management system with the proprietary channel design and high absorbency
characteristics of its disposable liner is significantly
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better than other incontinence products. The Company believes that its channel
technology and superabsorbent polymer liner offer the following advantages:
PANT CHANNEL TECHNOLOGY. The Company's proprietary pant design, with a
built-in fabric channel or "Safety Splash Guard" at the crotch of each pant, is
designed to hold the liner in place. In addition, the channel may contain some
excess fluid prior to absorption by the disposable liner especially when the
wearer is walking or sitting. The channel is made of a fluid-resistant fabric
that is heat sealed at the seams, not simply stitched, to help protect against
leakage. In November 1994, the Company was issued a United States patent for its
channel design. See "--Patents, Trademarks and Proprietary Rights."
SUPERABSORBENT POLYMER LINER. The other component of the Company's
two-piece incontinence management system is a highly absorbent disposable liner.
The raw material for the liner is supplied under an agreement which expires in
August 2003 and is exclusive with respect to the supply of liners for a two-
piece pant and liner system. The liner contains air-laid non-woven paper
throughout which thermally-bonded superabsorbent polymers ("SAPs") have been
disbursed to increase product strength, absorbency and surface dryness. The
thermal bonding of the SAPs keeps the liner from bunching and crimping when the
liner is wet, which allows the entire liner (not just the surface like most
incontinence products that use SAPs) to retain its shape over longer periods of
time, benefiting individuals who may not be able to change frequently. The SAPs
used in the liner are designed to contain moisture within the liner even when
pressure is applied from sitting for long periods. This superabsorbent design
feature assists in the reduction of moisture, allowing the wearer to maintain a
higher degree of dryness and comfort while reducing the potential for diaper
rash and odor. In addition to the liners' absorbency features, the Company's
liners are substantially smaller in size than conventional disposable diapers
used for urinary incontinence.
The Company currently offers for sale the following Rejoice products
specifically designed for the adult and children's incontinence markets:
REJOICE. Rejoice, the Company's principal product, is a men's and women's
pull-on pant with an 11-inch disposable liner. Rejoice pants have been designed
to look and feel like conventional underwear. Rejoice is targeted for more
active people presently using a full-sized disposable diaper, belted
undergarment or guard in a consumer outpatient setting. Other users of Rejoice
include patients within a home healthcare or outpatient rehabilitation setting,
disabled individuals, especially people using wheelchairs, individuals with
disease-related incontinence and individuals recovering from a stroke or who
have serious arthritis and cannot manage a disposable diaper or standard pull-on
underwear by themselves. Rejoice is available in several discreet, non-bulky
pull-on cotton pant sizes and complementary liners that are easy to change and
offer enhanced leg mobility while providing leak protection to people with
disabilities.
REJOICE EXTRACARE. Rejoice ExtraCare is an 18-inch disposable liner product
designed as an enhancement for disposable or reusable diaper products worn by
bedridden patients. Rejoice ExtraCare can be used as a substitute for other
diaper enhancement products such as disposable bed sheets or "chux."
REJOICE FOR CHILDREN. Rejoice for Children is a line of pant products
designed for older children with incontinence due to disease, birth defects or
urinisis. Each Rejoice for Children pant, in either boys' or girls' sizes, is
designed to accommodate either the Rejoice 11-inch or the Rejoice ExtraCare
18-inch liner. Historically, parents of these older children with specialized
needs have purchased smaller-sized adult diapers, reusable training pant
products, disposable bed sheets, plastic underpads for protection or have used
baby diapers to be placed inside a plastic pant.
OTHER PRODUCTS
The Company has developed a toddler toilet training product to be sold under
the name BumberChute, which incorporates the Company's two-piece incontinence
management system. The product was designed for boys and girls aged 19 months to
four years to ease the transition from diapers to
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conventional underwear. The Company believes that the commercialization of its
BumberChute product will require the expenditure of greater resources for
marketing and advertising than its Rejoice products because of the highly
competitive nature of the market. In addition, the period of use per consumer is
shorter than that for its Rejoice adult incontinence products. Accordingly, the
Company has dedicated its limited resources to the marketing and promotion of
its Rejoice products and is seeking a licensing or joint venture partner or
partners to assist in bringing its BumberChute product to the national and
international retail markets. There is no assurance that the Company will be
able to locate a suitable partner or that BumberChute will be successfully
brought to market. Disposition of the Company's BumberChute inventory could
adversely impact the Company's future gross profit margins.
SALES AND MARKETING
The Company's marketing efforts for the Rejoice products are focused both in
the retail and healthcare markets. The Company has developed and is implementing
different marketing strategies for the retail and healthcare segments of its
business. For the retail side of the Company's operations, the Company has
organized a nationwide network of brokers or manufacturers representatives who
assist in securing meetings with buyers and monitor store placement and sales
activity. With regard to certain healthcare markets in the United States, the
Company has packaged its basic Rejoice pant and liner product into a more
suitable package for healthcare market distribution by Medline. The Company is
currently working with Medline's regional managers to train Medline's
field-based home healthcare and hospital sales representatives on how to market
various Rejoice products. This initial training is expected to be completed by
the end of calendar 1997; however, the Company will likely provide ongoing
training services to Medline as it hires new sales employees.
RETAIL MARKET. The Company has focused on sales to the ultimate end user or
the consumer who purchases incontinence products for a family member. To gain
market share in the growing outpatient consumer market, the Company is
concentrating on establishing, through its nationwide network of brokers and
manufacturer representatives, distribution relationships with drug store chains,
grocery store chains which offer pharmacy services and retail chains. In
addition, the Company seeks to establish direct distribution through various
catalog companies, drug wholesalers and independent pharmacies. The Company also
has arrangements with several mail order suppliers of healthcare products to
service home consumers who call the Company for immediate product delivery
because they live too far away from retail or drug stores that sell Rejoice or
they are homebound.
The Company began selling Rejoice in retail locations in the United States
in September 1995 and is currently selling Rejoice in approximately 6,000
stores, which include several retail, drug and grocery store chains, as well as
drug wholesalers and independent pharmacies. Among such stores are SAVON drug
stores, OSCO drug stores, Revco drug stores, K&B drug stores, Bartell's drug
stores, Thrifty-Pay Less drug stores, Genovese drug stores and Long's drug
stores. To date, the Company's product sales have been primarily to its retail
customers. There is no assurance that the number of retail accounts will be
maintained or continue to grow or that Rejoice will gain long-term market
acceptance in the varied retail markets, which are very competitive.
The Company intends to continue aggressively to try to appeal to home
consumers with light and moderate incontinence. The Company is also targeting
individuals recovering from surgery, individuals with neurological diseases,
women with interstitial cystitis and other chronic bladder infections, and
individuals with spinal injuries. These individuals are likely to have permanent
rather than temporary incontinence problems and require greater daily usage of
liners than individuals with very light or light incontinence.
The Company is seeking to educate the home consumer through public
relations, print and radio advertising, free liner sample and literature
programs, pharmacist education programs, attendance at consumer-based trade
shows and referrals from medical professionals.
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HEALTHCARE MARKETS. The primary market for healthcare sales of incontinent
products is to inpatient and outpatient hospital facilities, rehabilitation
facilities, home healthcare providers, nursing homes, hospice centers and
surgical supply stores. The Company's marketing strategy for the healthcare
market is to sell its products through hospital distribution companies, home
healthcare companies, medical/surgical suppliers and distributors, durable
medical equipment ("DME") suppliers and hospital buying groups.
In late 1996, the Company signed a three and one-half year distribution
agreement with Medline for the distribution of various Rejoice products to
hospitals, home healthcare nursing agencies, DME's and other healthcare
accounts. In April 1997, the Company completed a specially packaged Rejoice
product that is being sold exclusively by Medline to varied healthcare accounts.
The Company also has developed marketing materials for Medline and is supporting
Medline's sales efforts through the training of their field representatives,
direct mail and brochure development, telemarketing and training customer
service support.
The Company is targeting healthcare accounts which serve patients during
recovery and rehabilitation. Rejoice is being positioned as a more dignified,
comfortable product which does not restrict or discourage patient movement or
participation during physical therapy.
The Company is marketing various Rejoice products to healthcare markets
through trade show participation, direct mail of product information to
physicians' offices and healthcare buyers, the marketing support of the
Company's medical advisory board and public relations activities.
The Company is currently selling Rejoice products to a nominal number of
healthcare accounts, including Medline. To date, sales to the healthcare market
have not been material. There is no assurance that the Rejoice products will
gain acceptance in the varied healthcare markets which are very competitive or
that gross profit margins will be positively impacted from sales to the
healthcare market.
MARKETING PROGRAMS. The Company expects to devote considerable funds,
including a portion of the net proceeds of this Offering, to advertising and
educating members of the medical community and home consumers about the product
advantages of Rejoice. The marketing activities are expected to include, but not
be limited to, providing direct mail product information when requested by
urologists, gynecologists, gerontologists and home healthcare specialists, trade
show attendance, delivery of product samples to home consumers, store and
product brochures and appropriate press releases to the media. The Company also
expects to use a portion of its marketing resources for medical community
promotional materials and institutional in-service training programs.
MANUFACTURING AND FULFILLMENT
In order to devote more of its resources to sales and in an effort to
maintain a streamlined system of operations and product delivery, the Company
"outsources" certain processes and functions, and it expects to continue to do
so for the foreseeable future. The Company currently subcontracts production of
pants in Canada and Mexico and conversion of thermally-bonded raw liner material
in the United States.
PANT MANUFACTURING. Historically, the Company manufactured its own pant
requirements in its facilities in the Vancouver, British Columbia metropolitan
area. The Company ceased in-house pant production in March 1996 and intends to
sell off various pant manufacturing equipment during fiscal 1998. The Company
has been subcontracting production of its pants in Vancouver (Le Genereux
Clothing Company, Ltd.) since November 1994 and, commencing December 1996, in
Mexico (Teycon s.a. de c.v.). The Company has a non-exclusive production
agreement with its Vancouver subcontractor which expires in November 1997, and
has no formal agreement with its Mexican subcontractor, with whom the Company
has an arrangement to submit purchase orders as needed. The Company's Vancouver
subcontractor has produced approximately 175,000 pants per year for the Company.
The Company has been advised by the Mexican subcontractor that it has the
capacity to produce 90,000 pants per month which it can expand to meet any
foreseeable monthly demand by the Company. Although the Company has made the
strategic
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decision to subcontract its pant manufacturing, it is not materially dependent
on any single contractor and believes it could quickly commence production with
other manufacturers in Mexico, Puerto Rico, Taiwan or China. The Company's
Vancouver subcontractor has filed a lawsuit against the Company, which the
Company believes is wholly without merit. Notwithstanding the lawsuit, the
parties have continued to perform under the contract. See "--Legal Proceedings."
LINER MANUFACTURING AND CONVERSION. The raw material for the Company's
liners is manufactured in an air-laid thermal bonding process using SAPs. This
process creates biodegradable cloth-like products made from natural cellulose
fibers that are stronger, softer and more absorbent than conventional wet laid
paper products. In the air-laid process, wood pulp is dried into individual
fibers, transported by air (rather than water as in conventional paper making)
and then deposited uniformly with the assistance of a vacuum. Once the fibers
are laid uniformly, the rest of the paper making process concentrates on
progressively strengthening the material through compaction under heat and
pressure and the application of adhesive binders. The use of an air laid process
allows multi-layer introduction of SAPs uniformly over the entire liner product.
The raw material for the Company's liners is manufactured under a supply
agreement which expires in August 2003 with Merfin Hygienic Products Ltd.
("Merfin"), a leading producer of air-laid paper. Under the Merfin agreement,
the Company is required to meet certain annual minimum purchase requirements,
and until such minimum is met, is required to purchase all of its requirements
from Merfin. The price at which the Company is entitled to purchase the material
from Merfin is negotiated on an annual basis. The agreement provides that Merfin
may not sell its SAP raw material to any other company that uses a two-piece
system incorporating a liner, thereby making the agreement exclusive for the
Company's purposes. To date, the Company has not met its annual minimum purchase
requirements, and Merfin could, as a result, terminate the agreement. However,
Merfin has continued to accept purchase orders from the Company and has
indicated its willingness to continue to build its own sales revenues through
its relationship with the Company. To date, the Company has not encountered any
difficulties in obtaining its requisite supply of liner raw material from
Merfin, and the Company believes Merfin's capacity to provide raw material for
the Company's product liners will be sufficient to meet the Company's needs for
the foreseeable future. In addition to the supply arrangement, the Company
expects that Merfin's research and development department will work with the
Company in the future on further product improvements.
In May 1997, Merfin was acquired by Buckeye Cellulose Corporation, a United
States manufacturer of cellulose products. To date, there has been no indication
that Merfin will terminate or seek to change its relationship with the Company.
Historically, the Company has been dependent on its relationship with Merfin.
However, the Company believes that there now are alternative sources of the
liner raw material available from a limited number of suppliers. Accordingly,
the Company believes that a termination of its arrangement with Merfin as a
result of the recent change of control or otherwise, if it occurred, would not
have a material adverse impact on the Company's operations or financial results.
The liner rollstock material produced by Merfin is shipped to subcontractors
in the United States where it is converted into finished liners according to the
Company's specifications. The process of liner conversion involves slitting the
finished rolls of raw material into designated liner lengths, covering each
liner with a soft cotton-like coverstock, adding a self-adhesive strip to each
liner and packaging the liners for shipment to one of the Company's fulfillment
centers in Harrisburg, Pennsylvania, Sparks, Nevada or in Vancouver or Toronto,
Canada. See "--Warehousing and Fulfillment."
The Company's liners have been converted by two conversion companies in the
United States, both of whom have advised the Company that they have ample
capacity to satisfy the Company's liner conversion needs. There are also several
other companies located in the United States who could perform liner conversion
services for the Company.
WAREHOUSING AND SHIPPING. The Company currently uses various companies for
warehousing and shipping (fulfillment) services in Harrisburg, Pennsylvania,
Sparks, Nevada, Vancouver, British Columbia
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and Toronto, Ontario. However, the Company believes that there are numerous
options for obtaining warehousing and fulfillment services and that it would not
be difficult to make arrangements for additional or different service providers.
To ensure consistent fulfillment sources in a cost effective manner, the Company
expects to consolidate all of its United States fulfillment sources in a single
central location during Fiscal 1998.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has devoted significant time and financial
resources to research and development activities to develop its current products
and improvements to those products. The Company anticipates that certain of its
research and development activities in the future may be conducted in
conjunction with Merfin's research and development department, although there
currently is no formal research and development contract between the two
entities. Research and development expenditures were $74,704 in Fiscal 1996 and
$8,679 in Fiscal 1997. The Company does not anticipate that research and
development will represent a significant portion of its expenses in the future.
BACKLOG
The Company generally ships within three to ten days of receipt of a
purchase order depending upon the size of the order. Accordingly, backlog is not
significant for the Company.
COMPETITION
The disposable incontinence products industry is highly competitive and
consists of several large and medium sized companies as well as numerous smaller
companies. Many of the Company's competitors have financial, marketing and other
resources substantially greater than those of the Company, as well as a
substantially longer history of operations than the Company. Competition in the
industry is generally based on price, performance and comfort. The Company
believes that its ability to compete depends on elements both within and outside
its control, including the success and timing of new product developments by the
Company and its competitors, product performance and price, distribution and
customer service. The Company believes that its products represent an
improvement over plastic-cased diaper products in terms of consumer comfort and
dignity, cost, product discretion and protection against side-seepage. Although
the Company believes it offers products with price and performance
characteristics competitive with other manufacturers' products, there is no
assurance that products can be developed, manufactured or marketed successfully
in the future. In order to be successful, the Company must continue to respond
promptly and effectively to its competitors' innovations. There is no assurance
that the Company will be able to compete successfully in the disposable
incontinence products industry.
The retail market is dominated by major national brand product
manufacturers, including Kimberly Clark's Depend-Registered Trademark- and
Poise-Registered Trademark- brands, Johnson & Johnson's
Serenity-Registered Trademark- brand and Procter & Gamble's
Attends-Registered Trademark- brand. In addition to these companies, which
collectively dominate the market, the retail market for disposable incontinence
products is made of up medium sized and small companies, as well as a small, but
fast growing, private label segment currently dominated by Confab, Inc.
The healthcare market is dominated by Proctor & Gamble Company, Kimberly
Clark Corporation and INBRAND Corporation. Several medium sized and numerous
smaller firms account for the balance of the healthcare market.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company has filed three patent applications with the U.S. Patent and
Trademark Office covering two "channel" pant designs (applications were made for
two variations on one design) and has filed additional applications in certain
European markets. In November 1994, a patent was issued by the U.S. Patent and
Trademark Office and thereafter the Company abandoned its then two pending
applications for
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the variations on the issued patent. The issued patent expires on July 30, 2012.
Management believes that favorable rulings on certain patent claims will help
protect against new entrants into the combination two-piece incontinence and
training pant markets with similar designs that specifically guard against side-
seepage.
There is no assurance that additional products that the Company develops
will be patentable, that the issued patent will provide the Company with any
competitive advantages or will not be challenged by any third parties, or that
the patents of others will not have an adverse effect on the Company's business.
Furthermore, there is no assurance that competitors will not be able to design
around the Company's patented products or develop or acquire substantially
equivalent trade secrets and proprietary technology independent of the Company.
Competitors of the Company may have filed applications for, or may have received
patents and may obtain additional patents and proprietary rights relating to,
products that compete with those of the Company. Litigation and other
proceedings, which could result in substantial cost to the Company, may be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of third party proprietary rights. In addition, there is no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or commercial advantage to the Company.
The Company uses a number of trademarks and logos in connection with the
sale and advertising of its products. The Company believes that its trademarks
and logos are of considerable value to its business and intends to continue to
protect them to the fullest extent possible. The Company has filed trademark
applications for its corporate logo, BumberChute and Rejoice brands in the
United States, Canada and certain European and Asian countries.
The Company also relies upon trade secrets, know-how, improvements to
technology, confidentiality agreements and the pursuit of collaborative and
licensing opportunities to develop and maintain its competitive position.
Although the Company protects its proprietary technology in part by
confidentiality agreements with its employees, consultants and certain
contractors, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
discovered by its competitors.
FACILITIES
The Company maintains its principal executive and marketing office at 200
First Avenue West, Seattle, Washington. The office, covering approximately 4,800
square feet, is rented pursuant to a lease that expires in July 2000. The annual
base rent is $72,163 ($6,013 per month).
EMPLOYEES
As of August 31, 1997, the Company employed approximately 15 persons on a
full-time basis. Of these employees, approximately two are employed in
manufacturing, two in operations and marketing, six in sales and five in
administration and finance. In addition, the Company employs approximately 25 to
35 people on a part-time basis. These employees largely perform customer
service, marketing and administrative functions for the Company. The Company
does not have a collective bargaining agreement with any of its employees, and
the Company considers its employee relations to be satisfactory.
LEGAL PROCEEDINGS
In March 1996, Le Genereux Clothing Company, Ltd. ("Le Genereux"), one of
the Company's subcontractors for pant manufacturing, filed a Writ of Summons and
Statement of Claim in the Supreme Court of British Columbia alleging breach of
contract to purchase pants pursuant to the Manufacturing Agreement between the
parties. (See "--Manufacturing and Fulfillment.") The plaintiff claims it is
entitled to liquidated damages in the amount of $913,607, plus interest and
costs. In August 1997, Le
33
<PAGE>
Genereux filed a motion to reduce its damage claim to approximately $300,000
plus interest and costs. The Company believes this litigation is a frivolous
nuisance action, wholly without merit, and has been vigorously defending itself.
The Company does not believe that the ultimate resolution of this litigation
will have a material adverse impact on its results of operations. Despite the
litigation, Le Genereux continues to assemble pants for the Company, and the
Company continues to be current on its payment obligations to Le Genereux.
During the pendency of this litigation, the Company placed orders with Le
Genereux that fulfill the Company's entire obligation pursuant to the
Manufacturing Agreement. The Company does not believe there is any remaining
basis for Le Genereux's claim and will seek dismissal of the action if it is not
withdrawn voluntarily.
In May 1996, HUB, Inc., a Minnesota corporation, Thomas M. Vertin and The
Harold G. Goodman 1984 Grantor Trust, all of whom were involved in providing a
short-term bridge loan to the Company in 1995, filed a summons and complaint
against the Company in the U.S. District Court for the District of Minnesota.
This suit alleged, primarily, breach of contract and sought an award of 54,167
warrants to purchase the Company's Common Stock at an exercise price of $0.30
during the first year following issuance and $0.60 during the second year
following issuance as additional compensation for the provision of the loan. In
September 1997, the parties agreed to settle the suit in consideration of the
payment by the Company to the plaintiffs of an aggregate of $25,000 on the
sooner of the completion of this Offering or December 1, 1997, and the issuance
to the plaintiffs of such number of warrants at such exercise price as approved
by the VSE. The Company agreed to recommend to the VSE the issuance to the
plaintiffs of two year warrants to purchase an aggregate of 32,000 shares of
Common Stock at an exercise price equal to 80% to 90% of the fair market value
of the Company's Common Stock on the date of issuance. The Company expects that
the matter will be submitted to the VSE on or before September 19, 1997. No
assurance can be given regarding the timing or nature of the VSE's decision.
34
<PAGE>
MANAGEMENT
The following table sets forth information concerning the directors and
executive officers of the Company as of August 27, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
William H.W. Atkinson(1)(2)..... 54 Chairman of the Board and Chief Executive Officer
Susan A. Schreter(1)............ 36 President, Chief Operating Officer and Director
Anthony A. Cetrone(1)(3)........ 68 Director
Michael M. Fleming(2)(3)........ 48 Director
Dr. Herbert Sohn................ 70 Director
Paul Stanton(2)................. 59 Vice Chairman of the Board
</TABLE>
- ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
The Company's by-laws provide that the size of the Board of Directors shall
initially be fixed by the Incorporator, and thereafter may be changed by
resolution of the Board. The Company's Board of Directors currently is fixed at
eight members, and there are two vacancies. Members of the Board serve until the
next annual meeting of stockholders and until their successors are elected and
qualified. Meetings of the Board are held when and as deemed necessary or
appropriate, but the Board has two regularly scheduled meetings each year.
Officers are appointed by and serve at the discretion of the Board. There are no
family relationships among any of the Company's officers and directors.
WILLIAM H.W. ATKINSON co-founded the Company in November 1992 and has been
Chairman of the Board since inception. He became the Company's Chief Executive
Officer in May 1994. Since January 1994, Mr. Atkinson also has served as the
Chairman of the Board of Caring Products Industries, Ltd., Burnaby, British
Columbia, a subsidiary of the Company that engages in healthcare product
manufacturing and distribution. From June 1991 through April 1994, Mr. Atkinson
was Vice-Chairman and a Trustee of Mercer International, Vancouver, British
Columbia, a Nasdaq-traded company with interests in the financial services,
natural resources and pulp and paper businesses in Eastern Europe. Mr. Atkinson
also currently serves as the Company's Chief Financial Officer while the Company
seeks a suitable candidate for such position.
SUSAN A. SCHRETER co-founded the Company in November 1992 and has served as
President, Chief Operating Officer and a director since inception. Prior
thereto, she was the founder and President of a privately-held firm providing
consulting services to growing companies, private business investors and buy-out
funds in the areas of acquisition due diligence, cash flow and strategic
business planning and capital investment.
ANTHONY A. CETRONE, a director of the Company since September 1993, has been
President and Chief Executive Officer of Micron Medical Products ("Micron
Medical"), Fitchburg, Massachusetts, a medical products company, since June
1988. Micron Medical has been a subsidiary of Arrhythmia Research Technology,
Inc. ("Arrhythmia Research"), Austin, Texas, a company that manufactures
cardiological medical products since November 1992. Since October 1991, he has
also served as the Chairman of the Board of Micron Products, the parent of
Micron Medical. From January 1993 to February 1995, Mr. Cetrone also served as
the President and Chief Executive Officer of Arrhythmia Research and has served
on Arrhythmia's Board of Directors since November 1992.
35
<PAGE>
MICHAEL M. FLEMING has been affiliated with the law firm of Ryan, Swanson &
Cleveland, Seattle, Washington, since November 1992, where he has specialized in
real estate, dispute resolution, securities and environmental matters. He was
associated with the firm on an "of counsel" basis from November 1992 until
January 1996, at which time he became a partner of the firm. Since July 1988,
Mr. Fleming has also served as the President and owner of Kidcentre, Inc., a
provider of childcare services in Seattle, Washington. Since April 1985, he has
also been the President and owner of Fleming Investment Co., Seattle,
Washington, a private investment company. Mr. Fleming was elected to the
Company's Board of Directors in November 1992.
DR. HERBERT SOHN was elected to the Board of Directors in August 1997. Since
1989, Dr. Sohn has served as an attending urologist at the Louis A. Weiss
Memorial Hospital in Chicago. He has also served as a clinical associate
professor of surgery at the Abraham Lincoln School of Medicine at the University
of Illinois since 1973. A graduate of the Chicago Medical School, Dr. Sohn
completed residencies in urology and surgery at the University Hospitals of
Cleveland. He also received a Juris Doctorate degree from the John Marshall Law
School.
PAUL STANTON was elected to the Board of Directors in September 1996 and has
served as Vice Chairman of the Board since joining the board. He also has served
as a consultant to the Company since February 1996. Mr. Stanton has been
employed as President of Paul Stanton & Associates, which provides strategic
analysis and consulting services to product manufacturers and retail drug
chains, since January 1996. From February 1986 to December 1995, he was Vice
President of General Merchandise and Drug Store Merchandising of Pathmark, an
east coast supermarket chain.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established three committees: Executive
Committee, Compensation Committee and Audit Committee. The Board appoints the
members of the various committees and those members serve at the discretion of
the Board.
The Executive Committee, consisting of three members, has been delegated the
authority to exercise all powers and authority of the Board of Directors in the
management of the business and affairs of the Company, including the right to
authorize: (i) the purchase of stock; (ii) adopt an agreement of merger or
consolidation; (iii) recommend to the stockholders the sale, lease or exchange
of all or substantially all of the Company's properties or assets; (iv)
recommend to the stockholders a dissolution of the Company or a revocation of
dissolution; (v) amend the by-laws; or (vi) authorize the declaration of a
dividend. The Executive Committee meets at such times as it deems appropriate.
The Compensation Committee has been established to review and make
recommendations to the Board regarding the compensation to be paid by the
Company and its subsidiaries to their executive officers, key employees and
consultants, including, without limitation, the grant of incentive awards under
the Company's incentive program. See --"Stock Option Plans." The Compensation
Committee consists
solely of independent directors and meets at such times as it deems appropriate.
The Audit Committee has been established to review and monitor the general
policies and practices of the Company and its subsidiaries with regard to
accounting, financial reporting, internal auditing and financial controls and to
serve as a channel of communication between the Board of Directors and the
Company's independent certified accountants. At least a majority of the Audit
Committee consists of independent directors. The Audit Committee meets at least
two times per year and at such other times as it deems appropriate.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the General Corporation Law of the State of Delaware, the
Company's Restated Certificate of Incorporation provides that directors will not
be personally liable to the Company for
36
<PAGE>
monetary damages arising from a breach of their fiduciary duty as directors.
This provision does not limit the personal liability of a director (i) for any
breach of such director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) under Section 174 of the General
Corporation Law of the State of Delaware; or (iv) for any transaction from which
the director derived an improper personal benefit. This limitation of liability
also does not affect the availability of equitable remedies such as injunctive
relief or rescission.
The Company's Restated Certificate of Incorporation also provides that the
Company must, to the fullest extent permitted by the General Corporation Law of
the State of Delaware, indemnify all persons whom it has the power to indemnify
from and against all expenses, liabilities or other matters. The Company's
By-laws further provide that the Company must indemnify its directors, officers,
employees and agents to the fullest extent permitted by the Delaware General
Corporation Law and provides for the advancement of expenses incurred by such
persons in advance of the final disposition of any civil or criminal action,
suit or proceeding, subject to repayment if it is ultimately determined that he
or she was not entitled to indemnification. The indemnification and advancement
of expenses provided in the By-laws are expressly deemed to not be exclusive of
any other rights to which a person seeking indemnification or advancement of
expenses may otherwise be entitled.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company for the
three fiscal years ended March 31, 1995, 1996 and 1997 of the Company's Chief
Executive Officer and President (the "Named Executive Officers"). No other
executive officer of the Company received salary and bonuses of $100,000 or more
in the fiscal year ended March 31, 1997.
SUMMARY COMPENSATION TABLE*
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------- -------------
SALARY OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) (#)
- ---------------------------------------------------------------------------- --------- ------------- -------------
<S> <C> <C> <C>
William H. W. Atkinson ..................................................... 1997 $ 125,000 54,333
Chief Executive Officer and Chairman 1996 96,000 44,300
1995 96,000 29,333
Susan A. Schreter .......................................................... 1997 $ 125,000 54,333
President and Chief Operating Officer 1996 96,000 44,300
1995 96,000 29,333
</TABLE>
- ------------------------
* Columns in the Summary Compensation Table that were not relevant to the
compensation paid to the Named Executive Officers were omitted.
37
<PAGE>
No employee of the Company receives any additional compensation for his or
her services as a director. Non-management directors receive no salary for their
services as such, but receive a fee of $2,000 for each meeting attended, and may
participate in the Company's stock option plans. The Board of Directors has also
authorized payment of reasonable travel or other out-of-pocket expenses incurred
by non-management directors in attending meetings of the Board of Directors and
committees thereof.
EMPLOYMENT AGREEMENTS. In December 1993, the Company entered into
three-year employment agreements with Mr. Atkinson and Ms. Schreter, the
Company's Chief Executive Officer and President, respectively. Both agreements
were subsequently amended as of March 1996 to provide, among other things, for
an additional three-year term. Each agreement may be terminated for "cause" (as
defined in the agreements) and under other circumstances set forth in the
agreements. Under the terms of the agreements, Mr. Atkinson and Ms. Schreter are
both entitled to receive an annual base salary of $125,000, or such higher
salary as may be approved by the Board of Directors from time to time. Each year
during the term of their agreements, Mr. Atkinson and Ms. Schreter are entitled
to receive stock options in an amount equal to at least 20% of the aggregate
number of options offered under the Company's option and incentive plans to all
officers, key executives, directors, professional or administrative employees or
consultants or advisors, any of its subsidiaries or any of its agents (as
defined in the respective plans), or to a cash payment to compensate for the
shortfall in the event this provision is not complied with. Mr. Atkinson and Ms.
Schreter also are entitled to participate in any bonus or profit sharing plan
that may be adopted from time to time by the Company, and to specified
additional bonus payments and option grants upon termination under certain
specified circumstances. Upon a change in control, as defined in the agreements,
Mr. Atkinson and Ms. Schreter will be entitled to receive, in addition to the
other compensation and benefits due to them, his or her then-effective base
salary for a period of three years from the date of termination, plus all
benefits, other than the bonus and stock options (or the value thereof), to
which they would have been entitled had they continued their employment. In
addition, the agreements provide that Mr. Atkinson and Ms. Schreter are entitled
to receive all rights, privileges and fringe benefits afforded to other senior
executives of the Company and to payment or reimbursement for reasonable
expenses incurred in the performance of his or her respective services under the
agreement. The agreements also contain confidentiality provisions.
OPTION GRANTS. The following table shows at March 31, 1997, certain
information regarding options granted to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT TO TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(1) PRICE ($/SHARE) DATE
- -------------------------------------------------------- ------------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C>
William H.W. Atkinson................................... 54,333(2) 19.4% $ 3.00 11/13/01
Susan A. Schreter....................................... 54,333(2) 19.4% $ 3.00 11/13/01
</TABLE>
- ------------------------
(1) Based on options to purchase 280,333 shares of Common Stock granted to
employees and directors, including executive officers, in Fiscal 1997.
(2) The terms of such options are consistent with those of options granted to
other employees and directors under the Company's Stock Option Plans. The
options vested immediately because of length of service. The Plans contain
provisions permitting the Board of Directors to, among other things,
accelerate vesting of options in the event of a change in control of the
Company.
38
<PAGE>
FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE. The following table sets forth
information regarding exercises of stock options during the fiscal year ended
March 31, 1997 by the Named Executive Officers and the year-end values of
exercised and unexercised options by such Named Executive Officers:
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1997
AND FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR END(#) YEAR END(#)
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
William H.W. Atkinson............................ 0 $ 0 127,966(1)/0(2) $ 0(1)/$0(2)
Susan A. Schreter................................ 0 $ 0 127,966(1)/0(2) $ 0(1)/$0(2)
</TABLE>
- ------------------------
(1) Exercisable options.
(2) Unexercisable options.
On August 27, 1997, the Company awarded Susan A. Schreter stock options to
purchase 450,000 shares of Common Stock (the "Schreter Options") and William
H.W. Atkinson stock options to purchase 450,000 shares of Common Stock (the
"Atkinson Options"), under an amendment to the 1996 Stock Option Plan adopted by
the Board of Directors on such date. The number of the Schreter Options and the
Atkinson Options (the "Options") will be reduced pro rata if the total number of
stock options held by either Ms. Schreter (including the Schreter Options) or
the total number of stock options held by Mr. Atkinson (including the Atkinson
Options) exceeds 7.7% of the total number of shares of Common Stock issued and
outstanding (excluding shares issuable upon exercise of outstanding options and
warrants) upon completion of this Offering. The exercise price per share of the
Options is the greater of the Unit Offering Price or the closing bid price of
the Common Stock on the date of the sale of the Units offered hereby. The
Options vest in four equal semi-annual installments commencing six months from
the date of grant. The Options terminate upon the expiration of five years from
the date of grant, or, if sooner, three months after termination of Ms. Schreter
or Mr. Atkinson, as the case may be, as an employee of the Company for any
reason (or such shorter period as required by the VSE, if any), provided that in
the event of death or termination of employment by reason of a disability, the
three month period referenced above shall be one year (or such shorter period as
required by the VSE, if any) and, if her or his employment is terminated for
cause, their respective Options terminate immediately. In addition, the Options
are subject to the terms and conditions of the 1996 Stock Option Plan. See
"Management--Stock Option Plans."
STOCK OPTION PLANS
The Company's 1993 Incentive Program (the "1993 Stock Option Plan") was
adopted by the Board of Directors and approved by the Company's stockholders in
November 1993. The Company's 1996 Incentive Program (the "1996 Stock Option
Plan") was adopted by the Board of Directors and approved by the Company's
stockholders in November 1996. Pursuant to the terms of the 1996 Stock Option
Plan, no further awards will be made under the 1993 Stock Option Plan. The 1993
Stock Option Plan and the 1996 Stock Option Plan are sometimes collectively
referred to in this Prospectus as the "Stock Option Plans." The Stock Option
Plans were adopted to provide a means by which selected officers, employees,
directors and consultants to the Company could be given an opportunity to
purchase stock in the Company. The purpose of the Stock Option Plans is to
promote the growth of the Company by enabling the Company to attract and retain
the best available persons for positions of substantial responsibility and to
provide certain key employees with additional incentives to contribute to the
success of the Company.
39
<PAGE>
Under the 1993 Stock Option Plan, 348,668 were initially reserved for
issuance. The 1993 Stock Option Plan further provides for an increase of 10% of
any increase in the number of shares issued and outstanding over the number of
shares outstanding on December 20, 1993, the date the 1993 Stock Option Plan was
adopted. As of June 30, 1997, a total of 358,933 options were outstanding under
the 1993 Stock Option Plan. No further awards will be made under the 1993 Stock
Option Plan.
Under the 1996 Stock Option Plan, the aggregate number of shares of Common
Stock that may be issued or transferred is 833,333 (the "Base Amount"), plus (i)
any shares of Common Stock which are forfeited under the 1993 Stock Option Plan
or the 1996 Stock Option Plan after the Board's adoption of the 1996 Stock
Option Plan; plus (ii) the number of shares of Common Stock repurchased by the
Company in the open market and otherwise with an aggregate price no greater than
the cash proceeds received by the Company from the sale of shares under the 1993
Stock Option Plan or the 1996 Stock Option Plan; plus (iii) any shares of Common
Stock surrendered to the Company in payment of the exercise price of options
issued under the 1993 Stock Option Plan or the 1996 Stock Option Plan; provided,
that the aggregate number of shares available for grants at any given time will
be reduced by the aggregate of all shares previously issued or transferred
pursuant to the Stock Option Plans plus the aggregate of all shares which may
become subject to issuance or transfer under then-outstanding and then-currently
exercisable grants under the Stock Option Plans; and provided, further, that no
award may be issued that would bring the total of all outstanding awards under
the 1996 Stock Option Plan to more than 25% (the "Maximum Percentage") of the
total number of the shares of Common Stock at the time outstanding. The maximum
number of shares for which options may be granted under the 1996 Stock Option
Plan to any person during any calendar year is 166,667 (the "Annual Amount").
On August 27, 1997, the Board of Directors adopted an amendment to the 1996
Stock Option Plan (the "Amendment"), pursuant to which the Base Amount was
increased from 833,333 shares to 2,500,000 shares, the Annual Amount was
increased from 166,667 shares to 600,000 shares and the Maximum Percentage was
increased from 25% to 35%. The Amendment is subject to (i) the approval by the
Company's stockholders under applicable law and regulatory requirements, and
(ii) the completion of a public offering such as this Offering. Pursuant to the
Amendment, stock option grants may be made prior to such stockholder approval
and the completion of this Offering, but in no event may such grants be
exercised until such approval is obtained and a public offering is consummated.
As of August 27, 1997, a total of 1,799,266 options were outstanding under the
1996 Stock Option Plan.
The Stock Option Plans provide for the grant of incentive stock options,
non-qualified stock options, stock appreciation rights in tandem with stock
options or freestanding, restricted stock grants and restored grants
(collectively, "Grants") as approved by the Board of Directors or a committee
thereof (the "Committee"). Incentive stock options granted under the Stock
Option Plans are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Non-qualified stock options granted under the Stock Option Plans are
intended not to qualify as incentive stock options under the Code.
Eligible participants under the Stock Option Plans include executive,
professional or administrative employees, directors, executive officers,
consultants or advisors of the Company and its direct or indirect subsidiaries,
all of whom are collectively referred to as "Grantees." Incentive stock options
may be granted under the Stock Option Plans only to selected employees
(including officers) of the Company and its affiliates. All Grantees may be
awarded Grants other than incentive stock options.
The maximum term of incentive stock options under the Stock Option Plans is
10 years, except that in certain cases, as discussed below, the maximum term is
five years. The exercise price of incentive stock options under the Stock Option
Plans may not be less than the fair market value of the Common Stock subject to
the option on the date of the option grant and, in some cases, as discussed
below, may not be less than 110% of such fair market value. The exercise price
of non-qualified options under the Stock Option Plans is determined by the
Board.
40
<PAGE>
No incentive stock option may be granted under the Stock Option Plans to any
person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the option exercise price is at least 110%
of the fair market value of the stock subject to the option on the date of
grant, and the term of the option does not exceed five years from the date of
grant. For incentive stock options granted under the Stock Option Plans, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which such options are exercisable for the first
time by any Grantee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
Grants under the 1993 Stock Option Plan terminate within such period
determined by the Board up to 90 days after the grantee ceases to be employed by
the Company or any affiliate of the Company, unless (i) the termination of
employment is due to such person's permanent and total disability (as defined in
the Code), in which case the Grant may be exercised at any time within twelve
months of such termination; (ii) the grantee dies while employed by the Company
or any affiliate of the Company, in which case the Grant may be exercised (to
the extent the option was exercisable at the time of the grantee's death) within
such period determined by the Board between six and twelve months of the
grantee's death by the person or persons to whom the rights to such option
passed by will or by the laws of descent and distribution; or (iii) the Grant by
its terms specifically provides otherwise. Grants under the 1996 Stock Option
Plan may be exercised only while the Grantee is in the employment or consultancy
of the Company, except that the Board or Committee may provide for partial or
complete exceptions to this requirement. The Stock Option Plans terminate on the
tenth anniversary of their respective effective dates unless terminated earlier
by the Board or extended by the Board.
401(K) PLAN. In March 1997, the Company established a 401(k) savings and
retirement plan covering all full time employees who are at least 21 years of
age and have at least three months of service. Under the plan, employees may
defer up to 15% of their pretax salary, but not more than the statutory limits.
The Company did not match employee contributions to the plan for the year ended
March 31, 1997 or for the three months ended June 30, 1997.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS. In December 1993, the Company
entered into three-year employment agreements with Mr. Atkinson, the Company's
Chief Executive Officer, and Ms. Schreter, the Company's President and Chief
Operating Officer. Both agreements were subsequently amended as of March 1996 to
provide, among other things, for an additional three-year term. Each agreement
may be terminated for "cause" (as defined in the agreements) and under other
circumstances set forth in the agreements. Under the terms of the agreements,
Mr. Atkinson and Ms. Schreter are both entitled to receive an annual base salary
of $125,000, or such higher salary as may be approved by the Board of Directors
from time to time. Each year during the term of their agreements, Mr. Atkinson
and Ms. Schreter are entitled to receive stock options in an amount equal to at
least 20% of the aggregate number of options offered under the Company's option
and incentive plans to all officers, key executives, directors, professional or
administrative employees or consultants or advisors, any of its subsidiaries or
any of its agents (as defined in the respective plans), or to a cash payment to
compensate for the shortfall in the event this provision is not complied with.
Mr. Atkinson and Ms. Schreter also are entitled to participate in any bonus or
profit sharing plan that may be adopted from time to time by the Company, and to
specified additional bonus payments and option grants upon termination under
certain specified circumstances. Upon a change in control, as defined in the
agreements, Mr. Atkinson and Ms. Schreter will be entitled to receive, in
addition to the other compensation and benefits due to them, his or her
then-effective base salary for a period of three years from the date of
termination, plus all benefits, other than the bonus and stock options (or the
value thereof), to which they would have been entitled had they continued their
employment. In addition, the agreements provide that Mr. Atkinson and Ms.
Schreter are entitled to receive all rights, privileges and fringe benefits
afforded to other senior executives of the Company and to payment or
reimbursement for reasonable expenses incurred in the performance of his or her
respective services under the agreement. The agreements also contain
confidentiality provisions.
41
<PAGE>
ADVISORY BOARD
In April 1997, the Company formed an advisory board which consists of eight
urologists located throughout the United States. The Company considers this
Board to be an important resource for evaluating the usefulness of Rejoice
products for various patient applications. In addition, the Board is expected to
assist the Company in enhancing consumer and patient knowledge about
incontinence and increasing the level of awareness of patient options regarding
treatment and products for managing incontinence.
The Company has entered into agreements with each member of the Advisory
Board. The principal provisions of these agreements, which are similar in their
terms, provide for reimbursement of certain expenses and non-qualified stock
options. Each member has also agreed, pursuant to such agreements, not to
disclose any confidential information of the Company.
The members of the Company's Advisory Board are:
<TABLE>
<S> <C>
William C. Gates Jr., M.D.... Clinical Assistant Professor of Urology at University Medical
Center in Jackson, Mississippi
Lawrence W. Jones, M.D....... Clinical Professor of Surgery and Urology at University of
Southern California School of Medicine; Attending Physician
at Huntington Memorial Hospital and St. Luke Medical Center
in Pasadena, California
David H. Kauder, M.D......... Urological Surgeon at Atlanticare Hospitals in Lynn,
Massachusetts; Lecturer at North Shore Children's Hospital in
Salem, Massachusetts
Harry C. Miller, Jr., M.D.... Professor Emeritus of Urology at George Washington University
Medical Center in Washington, D.C.
M. Ray Painter, M.D.......... Practicing Urologist in Glenwood Springs, Colorado; Founder
and President of Physician Reimbursement System Inc., a
provider of administrative services to urologists
Wilfred E. Watkins, M.D...... Staff member of Mercy Medical Center in Nampa and the
Columbia West Valley Medical Center in Caldwell, Idaho;
Doctor at Idaho Urology Clinic in Nampa, Idaho
Charles L. Weisenthal, Chief of Urology at Sinai Samaritan Medical Center and
M.D.......................... Clinical Associate Professor of Urology at Medical College of
Wisconsin
Robert D. Wickham, M.D....... Clinical Professor of Urology at College of Physicians and
Surgeons at Columbia University; Attending Surgeon Emeritus
in Urology at St. Luke's/Roosevelt Hospital Center; Executive
Director for the New York Section of the American Urological
Association of New York
</TABLE>
CERTAIN TRANSACTIONS
Paul Stanton, the Vice Chairman of the Board of Directors of the Company,
has provided consulting services to the Company since June 1996. Pursuant to an
oral arrangement with the Company, Mr. Stanton received consulting fees of
$72,000 in Fiscal 1997 and a consulting fee of $6,000 per month through August
1997. As of September 1, 1997, Mr. Stanton has agreed to provide consulting
services on an hourly-fee basis as requested by the Company.
During Fiscal 1997, the Company purchased certain services relating to plant
equipment in the aggregate amount of $106,043 from Schreter & Associates, a
company controlled by Robert E. Schreter, the father of Susan A. Schreter, the
Company's President.
It is the policy of the Company with respect to insider transactions, that
all transactions between the Company, its officers, directors, principal
stockholders and their affiliates be on terms no less favorable to the Company
than could be obtained from unrelated third parties in arms-length transactions,
and that all such transactions shall be approved by a majority of the
disinterested members of the Board of Directors. The Company believes that the
transactions described above complied with such policy.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of August 27, 1997
with respect to the beneficial ownership of the Company's Common Stock by (i)
each stockholder known by the Company to be the beneficial owner of more than
five percent of the Company's Common Stock; (ii) each director; (iii) the Named
Executive Officers and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(1) OWNED
- --------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
AGF Growth Equity Fund Ltd.(2) .............................................................. 284,000 6.88%
443 Queen Street West, 31st Fl.
Toronto, ON M5K 1E9
Canada
BPI Canadian Small Cap Fund(2) .............................................................. 413,833 10.03%
161 Bay Street, Suite 9000
Toronto, ON M5J 2S1
Canada
Canagex Associates(2) ....................................................................... 390,850 9.47%
800 Victoria Square, Suite 4500
Montreal, PQ H4Z 1C3
Canada
Royal Canadian Small Cap Fund (Royal Bank Investments)(2) ................................... 338,333 8.20%
77 King Street West, Suite 3800
Toronto, ON M5K 1H1
Canada
Sagit Investment Management Ltd.(2) ......................................................... 383,300 9.29%
789 West Pender Street
Vancouver, BC V6C 1H2
Canada
Susan A. Schreter(3)(4) ..................................................................... 283,546 6.67%
200 First Avenue West, Suite 200
Seattle, Washington 98119
William H.W. Atkinson(5)(6) ................................................................. 279,566 6.57%
5850 Byrne Road, Unit 8
Burnaby, British Columbia
Canada V5J 3J3
Anthony A. Cetrone(7)........................................................................ 38,044 *
Michael M. Fleming(8)........................................................................ 38,044 *
Paul Stanton(9).............................................................................. 29,167 *
All Executive Officers and Directors as a Group (5 persons)(10).............................. 668,366 14.90%
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership of directors, officers and 5% or more stockholders
includes both outstanding Common Stock and shares issuable upon exercise of
warrants or options that are currently exercisable or will become
exercisable within 60 days of August 26, 1997. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
43
<PAGE>
(2) The stockholder is a large Canadian institution with shares widely held by
its clients.
(3) Of these shares, 46,672 are held in trust by Montreal Trust Company of
Canada, subject to the direction or determination of the Quebec Securities
Commission. The escrowed shares will be released on September 30, 1997. See
"Description of Securities--Escrowed Shares." The remaining shares,
excluding shares issuable upon exercise of outstanding options, are pledged
to secure the repayment of the Company's $1.25 million promissory note to
Bradstone Equity Partners Inc.
(4) Includes 120,800 shares issuable upon exercise of currently outstanding
stock options.
(5) Of these shares, 45,482 are held in trust by Montreal Trust Company of
Canada, subject to the direction or determination of the Quebec Securities
Commission. The escrowed shares will be released on September 30, 1997. See
"Description of Securities--Escrowed Shares." The remaining shares,
excluding shares issuable upon exercise of outstanding options, are pledged
to secure the repayment of the Company's $1.25 million promissory note to
Bradstone Equity Partners Inc.
(6) Includes 127,967 shares issuable upon exercise of currently exercisable
stock options.
(7) Includes 37,665 shares issuable upon exercise of currently exercisable
stock options.
(8) Includes 37,665 shares issuable upon exercise of currently exercisable
stock options.
(9) Includes 29,167 shares issuable upon exercise of currently exercisable
stock options.
(10) Includes 360,429 shares issuable upon exercise of currently exercisable
stock options.
44
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital consists of 75,000,000 shares of Common
Stock, par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par
value $0.01 per share. As of August 27, 1997, the Company had outstanding
4,125,375 shares of Common Stock and no shares of Preferred Stock.
UNITS
The Common Stock and the Warrants offered hereby will be sold only in Units.
Each Unit consists of one share of Common Stock and one Warrant. The Common
Stock and Warrants will separate upon issuance and thereafter will trade only as
separate securities.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share at all
meetings of stockholders. Stockholders are not permitted to cumulate votes in
the election of directors. All shares of Common Stock are equal to each other
with respect to liquidation rights and dividend rights. There are no preemptive
rights to purchase any additional shares of Common Stock. In the event of
liquidation, dissolution or winding up of the Company, holders of the Common
Stock will be entitled to receive on a pro rata basis all assets of the Company
remaining after satisfaction of all liabilities and preferences of the
outstanding Preferred Stock, if any. The outstanding shares of Common Stock and,
assuming issuance in accordance with the terms of the applicable instrument, the
shares of Common Stock issuable in this Offering are or will be, as the case may
be, duly and validly issued, fully paid and nonassessable.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board of Directors. The issuance of such shares of Preferred Stock, while
providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, holders of such Preferred Stock may have other rights,
including economic rights senior to the Common Stock, and, as a result, the
issuance thereof could have a material adverse effect on the value of the Common
Stock.
THE WARRANTS
Each Warrant will entitle the holder to purchase one share of Common Stock
at a price of $ per share (150% of the Unit Offering Price), subject to
certain adjustments including, if the Company's audited fiscal 1999 revenues do
not exceed $15 million and/or its audited 1999 net income before interest
expense and taxes does not exceed $1.5 million, a one-time downward adjustment
of the exercise price to $ per share (120% of the Unit Offering Price). The
Company may grant performance-based options or warrants to its employees. The
vesting of performance-based options or warrants may result in certain expenses
that would reduce net income for financial accounting purposes. Solely for the
purpose of determining whether a downward adjustment to the exercise price of
the Warrants will be made based on fiscal 1999 net income, any expenses relating
to the vesting of any performance-based options or warrants held by employees
will be excluded in determining fiscal 1999 net income. The Warrants will,
subject to certain conditions, be exercisable at any time until the fifth
anniversary of the date of this Prospectus, unless earlier redeemed. Outstanding
Warrants are redeemable by the Company, at $0.25 per Warrant, upon at least 30
days' prior written notice to the registered holders, if the closing bid price
(as defined in the Warrant Agreement described below) per share of Common Stock
for the 20 consecutive trading days
45
<PAGE>
immediately preceding the date notice of redemption is given equals or exceeds
200% of the then current exercise price of the Warrants. If the Company gives
notice of its intention to redeem, a holder would be forced either to exercise
his or her Warrant before the date specified in the redemption notice or accept
the redemption price.
The Warrants will be issued in registered form under a Warrant Agreement
(the "Warrant Agreement") between the Company and The Bank of Nova Scotia Trust
Company of New York, as warrant agent (the "Warrant Agent"). The shares of
Common Stock underlying the Warrants, when issued upon exercise of a Warrant,
will be fully paid and nonassessable, and the Company will pay any transfer tax
incurred as a result of the issuance of Common Stock to the holder upon its
exercise.
The Warrants contain provisions that protect the holders against dilution by
adjustment of the number of shares that may be purchased by the holders. Such
adjustment will occur in the event, among others, that the Company makes certain
distributions to holders of its Common Stock or effects a stock split or other
recapitalization. The Company is not required to issue fractional shares upon
the exercise of a Warrant. The holder of a Warrant will not possess any rights
as a stockholder of the Company until such holder exercises the Warrant.
A Warrant may be exercised upon surrender of the Warrant certificate on or
before the expiration date of the Warrant at the offices of the Warrant Agent,
with the form of "Election To Purchase" on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by payment of the
exercise price (by certified or bank check payable to the order of the Company
or wire transfer of good funds) for the number of shares with respect to which
the Warrant is being exercised.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of shares or other securities underlying the Warrants. The Company has agreed to
use all commercially reasonable efforts to cause a registration statement with
respect to such securities under the Securities Act to be filed and to become
and remain effective in anticipation of and prior to the exercise of the
Warrants and to take such other actions under the laws of various states as may
be required to cause the sale of the Common Stock (or other securities) issuable
upon exercise of Warrants to be lawful. If a current registration statement is
not in effect at the time a Warrant is exercised, the Company may at its option
redeem the Warrant by paying to the holder cash equal to the difference between
the market price of the Common Stock on the exercise date and the exercise price
of the Warrant. The Company will not be required to honor the exercise of
Warrants if, in the opinion of the Company's Board of Directors upon advice of
counsel, the sale of securities upon exercise would be unlawful.
The foregoing discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares of Common Stock issuable upon the exercise of
the Warrants. The holders of the Warrants may be expected to exercise their
Warrants at a time when the Company would, in all likelihood, be able to obtain
any needed capital by an offering of Common Stock on terms more favorable than
those provided for by the Warrants. Further, the terms on which the Company
could obtain additional capital during the life of the Warrants may be adversely
affected.
46
<PAGE>
OTHER WARRANTS
In connection with a secured promissory note issued by the Company in
September 1995, the Company issued to the lender warrants to purchase 46,865
shares of Common Stock at Cdn. $7.20 per share exercisable at any time until
October 1, 1997.
In connection with the Private Placement (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources"), the Company issued 1,666,667 Special Warrants, which were
exercisable, for no additional consideration, into units of Common Stock and
warrants (the "Unit Warrants"). The Special Warrants were exercisable into an
aggregate of up to 1,666,667 shares of Common Stock and were deemed exercised as
of February 27, 1996. The underlying Unit Warrants were exercisable at an
exercise price of Cdn. $4.86 until October 5, 1996 and are exercisable at an
exercise price of Cdn. $5.67 until October 5, 1997. In connection with the
Private Placement, the Company issued a special right (the "Special Right") to
the placement agent as partial consideration for its services. Upon the deemed
exercise of the Special Right as of February 27, 1996, the agent received
warrants to purchase up to 133,333 shares of Common Stock on the same terms as
the Unit Warrants. As of August 26, 1997, a total of 528,583 Unit Warrants
(including the warrants issued to the placement agent) remain outstanding to
purchase 528,583 shares of Common Stock at any time until October 5, 1997 at
Cdn. $5.67 per share.
In connection with obtaining an additional bank line of credit in April
1997, the Company issued to the guarantor thereof warrants to purchase 126,667
shares of Common Stock at $1.86 per share at any time until May 8, 1998 and
thereafter at $2.16 per share until May 8, 1999.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock; or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder. A "business combination" includes mergers, asset acquisitions,
sales and other transactions resulting in a financial benefit to the
stockholder. An "interested stockholder" is a person, who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock.
SHARES ELIGIBLE FOR FUTURE SALE
No assurance can be given regarding the effect, if any, that future market
sales of shares of Common Stock, or the availability of such shares for sale,
will have on the market price of the Units, Common Stock or Warrants following
this Offering. Nevertheless, sales of substantial amounts of such shares, or the
possibility that such sales could occur, in the open market following this
Offering could adversely affect the market price of the Units, Common Stock or
Warrants.
Upon completion of this Offering and assuming no exercise of outstanding
options and warrants to purchase Common Stock after August 26, 1997, the Company
will have outstanding 5,625,375 shares of Common Stock. Of these shares,
approximately 1,700,672 shares, including the 1,500,000 shares of Common Stock
included in the Units and sold in this Offering (or 1,925,672 shares if the
Over-Allotment Option is exercised in full) by the Company and, subject to
certain conditions, up to 1,725,000 shares of Common Stock issuable upon
exercise of the Warrants (including Warrants subject to the Over-Allotment
Option), and commencing 12 months after the date of this Prospectus, up to
150,000 shares of Common
47
<PAGE>
Stock that are issuable upon exercise of the Representatives' Warrants (plus an
additional 150,000 shares issuable upon exercise of the Warrants included
therein), will, subject to any applicable state law restrictions on secondary
trading, be freely tradable without restriction under the Securities Act except
that any shares purchased by an "affiliate" of the Company (as that term is
defined in Rule 144 under the Securities Act) will be subject to the resale
limitations of Rule 144. An additional 1,810,316 shares owned by certain
stockholders that are each the beneficial holder of 5% or more of the total
shares of Common Stock outstanding on the date of this Prospectus (the
"Institutional Holders") will be immediately eligible for sale in the public
market without restriction on the date of this Prospectus but will be subject to
90-day lock-up agreements with the Representatives.
The 1,666,667 shares of Common Stock issued by the Company in connection
with a Regulation S offering to Canadian investors in October 1995, to the
extent not previously resold into the United States, are available for resale
into the United States at such time as an exemption from registration under the
Securities Act is or becomes available.
The remaining 447,720 shares of Common Stock are "restricted" shares within
the meaning of Rule 144 (the "Restricted Shares"). Of these shares,
approximately 139,782 shares not subject to lock-up agreements are eligible for
immediate resale without restriction under Rule 144(k). The remaining Restricted
Shares are held by affiliates of the Company and, subject to the terms of the
lock-up agreements discussed below, are eligible for immediate resale subject to
the volume and other restrictions of Rule 144.
In connection with this Offering, the Company and its officers and
directors, who collectively are the beneficial holders of an aggregate of
307,938 shares of Common Stock, and the Institutional Holders that collectively
are the beneficial holders of an aggregate of 1,810,316 shares of Common Stock,
have agreed with the Representatives not to sell or otherwise dispose of any
share of Common Stock without the prior written consent of the Representatives
for a period of one year or 90 days, respectively, after the effective date of
this Offering.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year including affiliates of the Company, would be entitled to sell in
brokers' transactions or to market makers within any three-month period a number
of Restricted Shares that does not exceed the greater of 1% of the then
outstanding Company's Common Stock or the average weekly trading volume in the
principal market on which such securities trade during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A person who is not an affiliate of the Company at any time during the
90 days preceding a sale, and who has beneficially owned Restricted Shares for
at least two years is currently entitled to sell such Restricted Shares without
any of the restrictions above-mentioned. However, Restricted Shares held by
affiliates must continue, after the two-year holding period to be sold in a
brokers' transaction or to market makers subject to the volume, manner of sale,
notice and availability of public information limitations described above. The
above is a summary of Rule 144 and is not intended to be a complete description.
ESCROWED SHARES
As of September 5, 1997, an aggregate of 92,154 shares of Common Stock owned
by Mr. Atkinson (45,482) and Ms. Schreter (46,672) are held in escrow by
Montreal Trust Company of Canada, subject to direction or determination of the
Quebec Securities Commission. The escrowed shares of Common Stock will be
released on September 30, 1997.
PUBLIC TRADING
The Company's Common Stock is traded on the VSE under the trading symbol
"CRP" and, since August 14, 1997, on the OTC Bulletin Board under the symbol
"CGPD." The Company has applied to
48
<PAGE>
have the Units, Common Stock and Warrants quoted on the Nasdaq SmallCap Market.
However, as of the date of the application, the Company did not meet all of the
requirements for listing on Nasdaq, including a minimum bid price of $4.00 per
share, and there is no assurance that Nasdaq will approve the Company's
application. See "Risk Factors--Limited Public Market for Common Stock;
Volatility of Securities Prices; Lack of Active U.S. Public Trading Market."
TRANSFER AGENT
Montreal Trust Company, 510 Burrard Street, Vancouver, British Columbia,
Canada V6C 3B9, and The Bank of Nova Scotia Trust Company of New York, 1 Liberty
Plaza, New York, New York 10006, are the co-transfer agents and registrars for
the Company's Common Stock.
49
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Paulson
Investment Company, Inc. and Cohig & Associates, Inc. are acting as
Representatives, have severally agreed, pursuant to the terms and conditions of
the Underwriting Agreement between the Company and the several Underwriters (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters, the number of Units set forth in the table
below at the price set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
- ------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Paulson Investment Company, Inc..................................................................
Cohig & Associates, Inc..........................................................................
---------------
Total........................................................................................ 1,500,000
---------------
---------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase such Units are subject to certain conditions. The Underwriters are
committed to purchase all of the 1.5 million Units offered by this Prospectus,
but not the 225,000 Units subject to the Over-Allotment Option (described
below), if any are purchased.
Pursuant to the Underwriting Agreement, the Underwriters have agreed to
offer the Units to the public at the initial public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession within the discretion of the Representatives, and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, within the discretion of the Representatives. After
the initial public offering of the Units, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted the
Underwriters an option, expiring at the close of business 45 days after the date
of this Prospectus, to purchase up to 225,000 additional Units from the Company
on the same terms as apply to the sale of the Units set forth above (the
"Over-Allotment Option"). The Underwriters may exercise the option only to cover
over-allotments, if any, incurred in the sale of the Units.
The Company has agreed that if it elects to redeem the Warrants at any time
commencing one year after the date of this Prospectus, it will retain Paulson
Investment Company, Inc. as the Company's solicitation agent (the "Warrant
Solicitation Agent"). The Company has agreed to pay the Warrant Solicitation
Agent for its services a solicitation fee equal to no more than 3% of the total
amount paid by the holders of the Warrants who were solicited by the Warrant
Solicitation Agent to exercise the Warrants. The exercise of the Warrants will
be presumed to be unsolicited unless the customer states in writing that the
transaction was solicited by the Warrant Solicitation Agent and designates in
writing the registered representative at the Warrant Solicitation Agent entitled
to compensation for the exercise. The fee is not payable for the exercise of any
Warrant held by the Warrant Solicitation Agents in a discretionary account at
the time of exercise, unless the Warrant Solicitation Agents receive from the
customer prior specific written approval of such exercise. No member of the
National Association of Securities Dealers, Inc. (the "NASD") or person
associated with a member of the NASD will receive a solicitation fee or any
other compensation or expense reimbursement in connection with the exercise of a
Warrant if the market price of the Common Stock received upon exercise of the
Warrant is lower than the exercise price of the Warrant.
50
<PAGE>
The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Units offered by this Prospectus to any account
over which they exercise discretionary authority.
The Underwriting Agreement provides for indemnification between the Company
and the Underwriters against certain liabilities, including liabilities under
the Securities Act and for contribution by the Company and the Underwriters to
payments that may be required in respect thereof.
The Company has agreed to pay the Representatives a nonaccountable expense
allowance equal to three percent of the gross proceeds from the sale of Units
offered hereby, of which $35,000 has already been advanced to the
Representatives. If this Offering is not consummated, any nonaccountable portion
of the advanced payment will be promptly returned to the Company.
The Company has agreed to issue to the Representatives the Representatives'
Warrants, which entitle the holders to purchase up to an aggregate of 150,000
Units at an exercise price per Unit equal to $ (120% of the public offering
price of the Units), subject to adjustment in accordance with the Underwriting
Agreement. The Representatives' Warrants are not transferable for one year from
the date of issuance, except to individuals who are either a partner or an
officer of an Underwriter, by will or by the laws of descent and distribution.
The Representatives' Warrants are not redeemable by the Company. At the time of
exercise of the Representatives' Warrants and the sale of the underlying Common
Stock, such firms desiring to so exercise will be required to cease
market-making activities for a period of time prior to and during the
distribution of the securities. The Company has agreed to maintain an effective
registration statement with respect to the issuance of the securities underlying
the Representatives' Warrants (and, if necessary, to allow their public resale
without restriction) at all times during the period in which the
Representatives' Warrants are exercisable, commencing one year after the date of
this Prospectus. Such securities are being registered on the Registration
Statement of which this Prospectus is a part.
By virtue of holding the Representatives' Warrants, the Representatives
possess the opportunity to profit from the rise in the market price of the
Company's securities. Furthermore, the exercise of the Representatives' Warrants
and the exercise of the underlying Common Stock would dilute the interests of
the Company's stockholders. The existence of the Representatives' Warrants may
make it more difficult for the Company to raise additional capital. In addition
to obtaining additional equity capital, upon exercise of the Representatives'
Warrants, the Company will be more likely to raise additional capital on more
favorable terms than those of the Representatives' Warrants.
The Company has agreed that, for a period of one year following the closing
of this Offering, it will not, subject to certain exceptions, offer, sell,
contract to sell, grant any option for the sale or otherwise dispose of any
securities of the Company without the consent of the Representatives. The
Company's officers, directors and holders of 5% or more of the outstanding
Common Stock (including holders of securities convertible or exercisable into
Common Stock) have agreed that for a period of one year following the closing of
this Offering as to the officers and directors and 90 days as to the
Institutional Holders, they will not offer, sell, contract to sell, grant any
option for the sale or otherwise dispose of any securities of the Company (other
than intra-family transfers or transfers to trusts for estate planning purposes)
without the consent of the Representatives, which will not be unreasonably
withheld, and thereafter, will give the Representatives prior notice of sale
under Rule 144 of the Securities Act for a period of five years from the date of
this Prospectus.
Prior to this Offering, the Common Stock has been traded on the VSE in
Canada and for a brief period on the OTC Bulletin Board in the United States.
There has been no public market for the Units or Warrants offered hereby.
Accordingly, the initial public offering price of the Units and the exercise
price of the Warrants has been determined by negotiations between the Company
and the Representatives. Among the factors considered in determining the initial
public offering price of the Units and the exercise price of the Warrants were
the trading price of the Common Stock, the history and the prospects of the
Company and the industry in which it operates, the status and development
prospects for the Company's products,
51
<PAGE>
the experience and qualifications of the Company's executive officers and the
general condition of the securities markets at the time of this Offering.
Until the distribution of the Units is completed, rules of the Securities
and Exchange Commission (the "Commission") may limit the ability of the
Underwriters and certain selling group members (if any) to bid for and purchase
the securities. As an exception to these rules, the Underwriters are permitted
to engage in certain transactions that stabilize the price of the Units, Common
Stock and/or Warrants.
If the Underwriters create a short position in the Units in connection with
this Offering, i.e., if they sell more Units than the number set forth on the
cover page of this Prospectus, the Underwriters may reduce that short position
by purchasing Common Stock and Warrants in the open market. The Underwriters may
also elect to reduce any short position by exercising all or part of the
Over-Allotment Option described above. The Underwriters may also impose a
penalty bid on certain selling group members. This means that if the
Underwriters purchase securities in the open market to reduce the Underwriters'
short position or to stabilize the price of the Units, Common Stock and/or
Warrants, they may reclaim the amount of the selling concession from the selling
group members who sold those shares as part of this Offering. In general, the
purchase of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be in
the absence of such purchases. The imposition of a penalty bid might also have
an effect on the price of a security to the extent that it discourages resales
of the security. Neither the Company nor the Underwriters makes any
representation or predictions as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Units, Common
Stock and/or Warrants. In addition, neither the Company nor the Underwriters
makes any representation that the Underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
In connection with this Offering, the Underwriters and certain selling group
members (if any) or their respective affiliates who are qualified registered
market makers may engage in passive market making transactions in the Company's
Common Stock on the OTC Bulletin Board in accordance with Rule 103 of Regulation
M under the Securities Exchange act of 1934, as amended, during the one business
day before commencement of offers or sales of the Units. The passive market
making transactions must comply with applicable volume and price limitations and
be identified as such. In general, a passive market maker may display its bid at
a price not in excess of the highest independent bid for the security; however,
if all independent bids are lowered below the passive market maker's bid, such
bid must then be lowered in the event certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bryan Cave LLP, New York, New York. Steven A. Saide, the Secretary of
the Company, is a member of Bryan Cave LLP. Certain legal matters relating to
this Offering will be passed upon for the Underwriters by Grover T. Wickersham,
P.C., Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company for the year ended
March 31, 1996 included in this Prospectus, have been included herein in
reliance upon the report of KPMG, Chartered Accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The consolidated financial statements of the Company as of and for the
year ended March 31, 1997 included in this Prospectus, have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
52
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Securities Act"), and in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such periodic reports and other information filed
by the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and 13th Floor, 7 World Trade Center, New York, New York 10048.
Copies of such materials can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act, with respect to the securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain portions having been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits filed
as a part thereof, which may be inspected, without charge, at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661; and 13th Floor, 7 World Trade Center, New York, New York 10048.
Copies of all or any portion of the Registration Statement, including exhibits
thereto, may be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract
or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference.
53
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Reports........................................................ F-2
Consolidated Balance Sheets as of March 31, 1997 and
June 30, 1997 (unaudited).......................................................... F-4
Consolidated Statements of Operations for the years ended
March 31, 1996 and 1997, and the three-month periods
ended June 30, 1996 and 1997 (unaudited)........................................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1996 and 1997, and the three-month period
ended June 30, 1997 (unaudited).................................................... F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1996 and 1997, and the three-month periods
ended June 30, 1996 and 1997 (unaudited)........................................... F-7
Notes to Consolidated Financial Statements........................................... F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Caring Products International, Inc.:
We have audited the accompanying consolidated balance sheet of Caring
Products International, Inc. and subsidiaries as of March 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 financial position of Caring
Products International, Inc. and subsidiaries as of March 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
June 13, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Caring Products International, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Caring Products International, Inc. and
subsidiaries for the year ended March 31, 1996. The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Caring Products
International, Inc. and subsidiaries for the year ended March 31, 1996 in
accordance with generally accepted accounting principles in the United States.
/s/ KPMG
Chartered Accountants
Vancouver, Canada
June 14, 1996
F-3
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 118,573 132,880
Restricted cash................................. 2,694,671 2,537,591
Accounts receivable, less allowance for doubtful
accounts of $91,694 at March 31, 1997 and
$88,274 at June 30, 1997 (unaudited).......... 625,085 951,875
Inventories..................................... 2,432,583 3,110,444
Prepaid expenses................................ 19,041 9,054
------------- ------------
Total current assets.......................... 5,889,953 6,741,844
Equipment, net.................................... 251,503 234,602
Intangible assets, net............................ 238,146 228,706
Other assets...................................... 8,935 17,782
------------- ------------
$ 6,388,537 7,222,934
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ 1,029,418 1,016,150
Accrued liabilities............................. 137,092 102,570
Lines of credit................................. 2,500,000 3,644,928
Notes payable to related parties................ 571,300 780,000
Current portion of lease obligations............ 13,046 5,013
Current portion of long-term debt............... 12,126 8,635
------------- ------------
Total current liabilities..................... 4,262,982 5,557,296
Lease obligations, less current portion........... 24,868 24,868
Long-term debt, less current portion.............. 5,485 5,485
------------- ------------
Total liabilities............................. 4,293,335 5,587,649
------------- ------------
Stockholders' equity:
Preferred stock, no shares outstanding.......... -- --
Common stock, 4,125,375 shares outstanding at
March 31, 1997 and June 30, 1997
(unaudited)................................... 41,254 41,254
Additional paid-in capital...................... 12,685,111 12,848,703
Accumulated deficit............................. (10,631,163) (11,254,672)
------------- ------------
Total stockholders' equity.................... 2,095,202 1,635,285
Commitments, contingencies and subsequent
events..........................................
$ 6,388,537 7,222,934
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996 AND 1997 AND
THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED MARCH 31 ENDED JUNE 30
--------------------------- -----------------------
1996 1997 1996 1997
------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,118,486 2,287,497 428,468 818,403
Cost of sales..................................... 1,031,896 1,727,607 447,237 385,471
------------ ------------ ---------- ----------
Gross profit (loss)....................... 86,590 559,890 (18,769) 432,932
------------ ------------ ---------- ----------
Operating expenses:
Selling......................................... 1,978,206 2,083,173 328,808 548,950
General and administrative...................... 1,126,815 1,198,148 225,667 289,467
Research and development........................ 74,704 8,679 -- --
Amortization and depreciation................... 61,758 72,288 21,886 14,278
------------ ------------ ---------- ----------
Total operating expenses...................... 3,241,483 3,362,288 576,361 852,695
------------ ------------ ---------- ----------
Loss from operations...................... (3,154,893) (2,802,398) (595,130) (419,763)
------------ ------------ ---------- ----------
Other income (expense):
Interest income................................. 112,671 163,986 3,336 22,499
Interest expense................................ (92,314) (204,203) (45,400) (152,155)
Costs associated with Bridge Financing.......... (864,735) -- -- --
Other, net...................................... 39,331 (62,271) (50,456) (74,090)
------------ ------------ ---------- ----------
(805,047) (102,488) (92,520) (203,746)
------------ ------------ ---------- ----------
Net loss.................................. $ (3,959,940) (2,904,886) (687,650) (623,509)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Net loss per share................................ $ (1.84) (0.74) (0.18) (0.15)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Weighted average common shares and common
equivalent shares outstanding................... 2,154,955 3,948,054 3,723,708 4,125,375
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996 AND 1997 AND
THE THREE-MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL STOCK-
--------------------- PAID-IN ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- --------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995.................. 1,974,875 $ 19,748 $ 5,056,281 $ (3,766,337) $ 1,309,692
Issuance of common stock for cash on
exercise of warrants..................... 36,666 367 21,162 -- 21,529
Issuance of common stock and warrants for
cash on private placement, net of
$697,986 of issuance costs............... 1,666,667 16,667 5,690,456 -- 5,707,123
Fair value of warrants issued with Bridge
Financing................................ -- -- 413,000 -- 413,000
Net loss................................... -- -- -- (3,959,940) (3,959,940)
---------- --------- ------------- -------------- -------------
Balance at March 31, 1996................ 3,678,208 36,782 11,180,899 (7,726,277) 3,491,404
Issuance of common stock for cash on
exercise of warrants..................... 447,167 4,472 1,504,212 -- 1,508,684
Net loss................................... -- -- -- (2,904,886) (2,904,886)
---------- --------- ------------- -------------- -------------
Balance at March 31, 1997.................. 4,125,375 41,254 12,685,111 (10,631,163) 2,095,202
Fair value of warrants issued with line of
credit guarantee (unaudited)............. -- -- 163,592 -- 163,592
Net loss (unaudited)....................... -- -- -- (623,509) (623,509)
---------- --------- ------------- -------------- -------------
Balance at June 30, 1997 (unaudited)....... 4,125,375 $ 41,254 $ 12,848,703 $ (11,254,672) $ 1,635,285
---------- --------- ------------- -------------- -------------
---------- --------- ------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------
PREFERRED
STOCK COMMON STOCK
------------ -------------
<S> <C> <C>
Par value........................................................ $ 0.01 $ 0.01
Authorized....................................................... 1,000,000 75,000,000
Issued........................................................... -- 4,125,375
Outstanding...................................................... -- 4,125,375
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
PREFERRED
STOCK COMMON STOCK
------------ -------------
(UNAUDITED)
<S> <C> <C>
Par value........................................................ $ 0.01 $ 0.01
Authorized....................................................... 1,000,000 75,000,000
Issued........................................................... -- 4,125,375
Outstanding...................................................... -- 4,125,375
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996 AND 1997 AND
THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS
YEARS ENDED MARCH 31 ENDED JUNE 30
-------------------------- ------------------------
1996 1997 1996 1997
------------ ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (3,959,940) (2,904,886) (687,650) (623,509)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization and depreciation................. 107,170 127,821 31,174 26,341
Loss on disposal of equipment................. 11,819 -- -- --
Deemed interest............................... 413,000 -- -- 34,081
Write-off of deferred financing costs......... 162,737 -- -- --
Change in operating assets and liabilities:
Increase in accounts receivable............. (114,828) (344,407) (135,733) (326,790)
Decrease (increase) in inventories.......... (584,502) (623,591) 261,784 (677,861)
Decrease (increase) in prepaid expenses..... 117,860 103,683 (6,892) 9,987
Increase in other assets.................... -- (8,935) -- (8,847)
Increase (decrease) in accounts payable..... (394,703) 609,257 (124) (13,268)
Increase (decrease) in accrued
liabilities............................... (86,642) 58,122 (12,632) (34,522)
------------ ----------- ---------- -----------
Net cash used in operating activities..... (4,328,029) (2,982,936) (550,073) (1,614,388)
------------ ----------- ---------- -----------
Cash flows from investing activities:
Capital expenditures............................ (46,264) (43,555) (4,236) --
Acquisition of intangible assets................ (5,688) -- -- --
Proceeds from disposition of equipment.......... 4,214 -- -- --
------------ ----------- ---------- -----------
Net cash used in investing activities..... (47,738) (43,555) (4,236) --
------------ ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and
capital contributions......................... 5,728,652 1,508,684 112,000 --
Decrease (increase) in restricted cash, net..... (2,701,350) 6,679 (467,893) 157,080
Proceeds from lines of credit, net.............. 2,500,000 -- -- 1,274,439
Proceeds from secured promissory note and Bridge
Financing..................................... 5,000,000 -- -- --
Repayment of secured promissory note and Bridge
Financing..................................... (5,000,000) -- -- --
Proceeds from long-term debt.................... -- 25,998 -- --
Repayment of long-term debt..................... (10,597) (38,374) (3,460) (3,491)
Proceeds from notes payable to related
parties....................................... -- 571,300 -- 950,400
Repayment of notes payable to related parties... -- -- -- (741,700)
Repayment of lease obligations.................. (10,690) (11,642) (4,694) (8,033)
Repayment of short-term loans................... (250,000) -- -- --
------------ ----------- ---------- -----------
Net cash provided by (used in) financing
activities.............................. 5,256,015 2,062,645 (364,047) 1,628,695
------------ ----------- ---------- -----------
Increase (decrease) in cash............... 880,248 (963,846) (918,356) 14,307
Cash at beginning of period....................... 202,171 1,082,419 1,082,419 118,573
------------ ----------- ---------- -----------
Cash at end of period............................. $ 1,082,419 118,573 164,063 132,880
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
Supplemental disclosure of cash flow
information--cash paid during the period for
interest........................................ $ 92,314 168,401 30,573 147,468
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
Supplemental schedule of noncash investing and
financing activities:
Capital expenditures included in accounts
payable at end of period...................... $ -- 68,849 -- --
Assets acquired through capital leases.......... $ -- 32,075 -- --
Estimated fair market value of warrants issued
recorded as deemed interest................... $ 413,000 -- -- 163,592
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
(A) DESCRIPTION OF BUSINESS
Caring Products International, Inc. (CPI) is organized under the laws of
the State of Delaware. CPI's business is the marketing of proprietary
urinary incontinence products for adults and children over the age of
four.
(B) BASIS OF PRESENTATION
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the U.S. and present
the financial position, results of operations and changes in financial
position of CPI and its wholly-owned subsidiaries (collectively, the
"Company"). All material intercompany balances and transactions have
been eliminated in consolidation.
(C) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the June 30, 1996 and 1997
unaudited interim consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) RESTRICTED CASH
Restricted cash includes a short-term certificate of deposit of
$2,500,000 at March 31, 1997 and June 30, 1997 which is held as security
against a line of credit. In addition, $194,671 and $37,591 of
short-term Canadian government securities included in restricted cash
are held as collateral for guarantees made by the Company at March 31,
1997 and June 30, 1997, respectively.
In July 1997, the $2,500,000 short-term certificate of deposit was used
as payment for the related outstanding line of credit.
(B) INVENTORIES
Inventories are stated at the lower of cost, as determined by the
first-in, first-out method, or market (replacement cost for raw
materials and packaging and net realizable value for finished goods).
(C) EQUIPMENT
Equipment is stated at cost. Equipment under capital leases is stated at
the lower of the fair market value of the assets or the present value of
minimum lease payments at the inception of the leases.
F-8
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets ranging from 2 to 5 years. Equipment
held under capital leases is amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease
terms, ranging from 2 to 5 years.
Expenditures for maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is reflected in other income or expense.
(D) INTANGIBLE ASSETS
Intangible assets, representing technology purchased and costs of
patents and trademarks, are stated at cost. Amortization is recorded
using the straight-line method over the assets' estimated useful lives
which do not exceed 10 years.
(E) REVENUE RECOGNITION
The Company recognizes revenue and establishes provisions for estimated
product returns when its products are shipped to customers. Products of
the Company held by various third party storage and delivery companies
are not recognized in revenue, but are included in inventory.
(F) MARKETING AND ADVERTISING
The Company recognizes the production costs of advertising in the period
the services are provided. Costs related to one-time listing allowances
(slotting fees) to enter large, retail chains are expensed as incurred.
(G) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(H) FOREIGN CURRENCY TRANSLATION
The Company considers the U.S. dollar to be its functional currency. The
Company has a wholly-owned subsidiary, located in Canada, which is a
direct and integral extension of the Company. Accordingly, transactions
by the subsidiary denominated in Canadian dollars are re-measured at the
exchange rates in effect at the date of the transaction. At each balance
sheet date, monetary balances denominated in currencies other than the
U.S. dollar are re-measured using current exchange rates.
Gains and losses resulting from foreign currency transactions are
included in other, net in the consolidated statements of operations.
Gains and losses arising from these transactions for each of the years
ended March 31 include a gain of $51,150 for 1996 and a loss of $44,367
for 1997. Losses arising from these transactions for each of the
three-month periods ended June 30 were $50,456 for 1996 and $73,825 for
1997.
F-9
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(I) INCOME TAXES
The Company follows the asset and liability method of accounting for
income taxes. Under the asset and liability method of accounting for
income taxes, deferred tax assets and liabilities are recognized based
on the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(J) NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding during
the year. Common stock equivalents include all warrants and stock
options which would have a dilutive effect, applying the treasury stock
method.
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, during 1997. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
(L) STOCK-BASED COMPENSATION
The Company adopted the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, during 1997. This statement permits a company
to choose either a new fair-value-based method or the Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, intrinsic-value based method of accounting for stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures
of net income and earnings per share computed as if the fair-value-based
method had been applied in financial statements of companies that
continue to account for such arrangements under APB Opinion No. 25. The
Company has elected to continue to record stock-based compensation using
the APB Opinion No. 25 intrinsic-value-based method and, therefore, the
adoption of SFAS No. 123 has not impacted the Company's financial
position, results of operations, or liquidity.
F-10
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(M) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(N) EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, EARNINGS PER SHARE. SFAS 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This statement is
effective for financial statements issued for periods ending December
15, 1997, including interim periods; earlier application is not
permitted. The Company does not anticipate a material impact to its
consolidated financial statements upon adoption of this standard.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes standards for
the way public companies report information about operating segments in
annual financial statements and requires that those companies report
selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods;
earlier application is encouraged. The Company does not anticipate a
material impact to its consolidated financial statements upon adoption of
this standard.
(O) RECLASSIFICATIONS
Certain of the 1996 balances have been reclassified to conform with the
1997 presentation.
(3) LIQUIDITY
The Company has experienced net losses since its inception and has an
accumulated deficit of $10,631,163 at March 31, 1997. Management is presently
taking actions to improve operations and obtain additional debt and equity
financing.
On April 7, 1997, the Company signed a letter of intent to proceed with a
public offering (the "Offering"). The Offering is presently contemplated to
consist of units which are exercisable for one share of the Company's common
stock and a five-year warrant to purchase one additional share at a price
equivalent to 150% of the unit price. There can be no assurance that the
Offering will be successful.
F-11
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(4) CONCENTRATION OF RISK
The Company maintains cash equivalents with various financial institutions
located in the U.S. and Canada. The Company's policy is to limit the exposure at
any one financial institution and to invest solely in highly liquid investments
that are readily convertible to cash.
The Company sells its products to various customers located in the U.S. and
Canada. The Company performs ongoing credit evaluations of its customers'
financial condition, and generally requires no collateral as security against
accounts receivable. Total sales to Canadian customers represented approximately
25% of total revenues for each of the years ended March 31, 1996 and 1997, and
52% for the three-month period ended June 30, 1996. Sales to Canadian customers
for the three month period ended June 30, 1997 were less than 1% of total sales.
Approximately 33% of the Company's revenues were from two customers during
the year ended March 31, 1997, and approximately 57% were from one customer
during the three-month period ended June 30, 1997. During the year ended March
31, 1996, two customers accounted for approximately 25% of revenues and for the
three-month period ended June 30, 1996, three customers accounted for
approximately 31% of revenues.
At March 31, 1997, one customer accounted for approximately 84% of the net
accounts receivable balance, as the result of an initial purchase near the
Company's year-end. At June 30, 1997, two customers accounted for approximately
88% of the net accounts receivable balance.
The Company currently purchases its products from a limited number of
suppliers, some of which are located in Canada or Mexico. As there are other
manufacturers of products similar to the Company's products, management believes
that other suppliers could provide the Company's products on comparable terms.
Management does not believe a change in suppliers would cause a significant
delay in obtaining sufficient product quantities or result in a significant loss
of sales.
(5) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
------------ ----------
<S> <C> <C>
Finished goods..................................................... $ 1,848,802 2,577,256
Raw materials...................................................... 553,466 473,975
Packaging.......................................................... 30,315 59,213
------------ ----------
$ 2,432,583 3,110,444
------------ ----------
------------ ----------
</TABLE>
F-12
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(6) EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
---------- ---------
<S> <C> <C>
Computer equipment..................................................... $ 103,592 103,592
Office equipment....................................................... 43,795 43,795
Plant equipment........................................................ 234,251 234,251
Leasehold improvements................................................. 5,670 5,670
Capital leases:
Plant equipment...................................................... 36,950 36,950
Office equipment..................................................... 40,076 40,076
---------- ---------
464,334 464,334
Less accumulated depreciation and amortization......................... 212,831 229,732
---------- ---------
Net equipment...................................................... $ 251,503 234,602
---------- ---------
---------- ---------
</TABLE>
(7) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Purchased technology.............................................. $ 250,000 250,000
Patents and trademarks............................................ 127,088 127,088
------------ ------------
377,088 377,088
Less accumulated amortization..................................... 138,942 148,382
------------ ------------
Net intangible assets......................................... $ 238,146 228,706
------------ ------------
------------ ------------
</TABLE>
(8) RELATED PARTIES
At March 31, 1997 and June 30, 1997, accounts payable included $68,849 and
$133,873, respectively, in payables to related parties.
During the year ended March 31, 1997, the Company purchased $106,043 in
plant equipment from and paid approximately $72,000 in consulting fees to
related parties. During the three month period ended June 30, 1997, the Company
paid approximately $18,000 in consulting fees to related parties.
F-13
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(9) LINE OF CREDIT
The Company has a $2,500,000 line of credit with a bank expiring August
1997. Borrowings under the line of credit bear interest at a fixed rate of
6.91%. The line of credit is secured by a $2,500,000 certificate of deposit.
In July 1997, the $2,500,000 short-term certificate of deposit was used as
payment for the line of credit.
In April 1997, the Company obtained an additional line of credit with a bank
in the amount of Cdn. $1,750,000. Borrowings under the line of credit at June
30, 1997, net of deemed interest of $129,511, were $1,144,928 and are due on
demand. Borrowings bear interest at the Canadian prime rate plus .25% (5% at
June 30, 1997). The line of credit is secured by a guarantee from a related
party of the Company through April 1, 1998. The guarantor received 126,667
warrants, each for one share of the Company's common stock. The warrants are
exercisable at $1.86 per share through May 8, 1998 and at $2.16 through May 8,
1999. The warrants were recorded on issuance at their estimated fair market
value of $163,592 with a corresponding reduction in the recorded value of the
line of credit. The debt discount will be amortized to interest expense over the
term of the line of credit.
In September 1997, the Company obtained from Toronto Dominion Bank an
increase in its credit facility of Cdn. $1.75 million, bringing the total
facility to Cdn. $3.5 million, under terms and conditions similar to the
original loan, which aggregate credit facility is secured by the guarantee from
a related party in the aggregate amount of Cdn. $3.5 million.
Substantially all of the Company's assets are pledged as security for its
various indebtedness.
(10) NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties at March 31, 1997 are unsecured and consist
of the following:
<TABLE>
<S> <C>
Note payable, interest at 6.75%; interest and principal payable on
demand.......................................................... $ 205,000
Note payable, interest at 10% increasing to 20% if principal is
not paid at maturity; interest payable on demand and principal
due
February 1997................................................... 200,000
Note payable, interest at Canadian prime rate plus 2% (6.75% at
March 31, 1997); interest and principal payable on demand....... 100,000
Note payable, interest at 12%; interest payable on demand and
principal due March 1997........................................ 37,500
Notes payable, interest at 12%; interest and principal payable on
demand.......................................................... 28,800
---------
Total notes payable to related parties........................ $ 571,300
---------
---------
</TABLE>
In April 1997, outstanding principal balances payable to related parties of
$366,300 were repaid. In June 1997, the remaining $205,000 of payables to
related parties were repaid.
F-14
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
In May 1997, the Company entered into an agreement with a related party to
finance $1,250,000 through a note payable. At June 30, 1997, $780,000 under the
agreement had been received by the Company. Interest on the note payable is
payable monthly at the Canadian prime rate plus 3% (7.75% at both March 31, 1997
and June 30, 1997). Principal is payable in full in May 1998. The note is
secured by substantially all of the Company's assets and by the common stock of
certain executive officers and directors.
In July 1997, the remaining $470,000 under the agreement with the related
party was received by the Company. In September 1997, a related party agreed
that if the Offering was not completed and the Company required capital for its
operations, it would loan the Company up to an additional $1.25 million on the
same terms and conditions as the May 1997 loan.
(11) LONG-TERM DEBT
Long-term debt at March 31, 1996 consisted of a loan in the original
principal amount of Cdn. $70,000 (U.S. $49,645). During 1997, the Company
refinanced the outstanding balance of the loan. Under the refinancing, the loan
is payable in equal monthly installments of Cdn. $1,767 (U.S. $1,155 at March
31, 1997 and $1,280 at June 30, 1997), including interest at the Canadian prime
rate plus 1% (5.75% at March 31, 1997 and June 30, 1997).
Scheduled principal maturities of long-term debt at March 31, 1997 and June
30, 1997 are as follows for each of the following fiscal years ending March 31:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
FISCAL YEAR-END 1997 1997
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
1998.................................................................... $ 12,126 8,635
1999.................................................................... 5,485 5,485
----------- -----------
$ 17,611 14,120
----------- -----------
----------- -----------
</TABLE>
The loan is secured by the Company's equipment and accounts receivable.
F-15
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(12) CAPITAL LEASES
The Company leases equipment under capital lease agreements that expire
through January 2002. Aggregate minimum payments to be made under these
agreements at March 31, 1997 and June 30, 1997 are as follows for each of the
following fiscal years ending March 31:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
FISCAL YEAR-END 1997 1997
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
1998.................................................................... $ 14,058 5,188
1999.................................................................... 8,076 8,076
2000.................................................................... 8,076 8,076
2001.................................................................... 8,076 8,076
2002.................................................................... 7,598 7,598
----------- -----------
45,884 37,014
Less amounts representing interest at rates ranging from 9% to 11% at
March 31, 1997 and at 9% at June 30, 1997............................. 7,970 7,133
----------- -----------
$ 37,914 29,881
----------- -----------
----------- -----------
</TABLE>
At March 31, 1997 and June 30, 1997, a capital lease for plant equipment is
secured by a letter of credit in the amount of $20,000 which may be reduced by
$10,000 per annum subject to the lessor's prior consent.
(13) OPERATING LEASES
The Company leases office facilities and certain equipment under operating
lease agreements that expire through November 2000 at March 31, 1997 and through
December 2002 at June 30, 1997. Aggregate minimum rental payments on operating
leases are as follows for each of the following fiscal year-ends:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
FISCAL YEAR-END 1997 1997
- ----------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
1998................................................................... $ 90,530 77,076
1999................................................................... 92,484 104,196
2000................................................................... 92,790 104,502
2001................................................................... 33,557 45,269
2002................................................................... -- 11,712
Thereafter............................................................. -- 8,784
---------- ---------
$ 309,361 351,539
---------- ---------
---------- ---------
</TABLE>
Total rent expense for operating leases during the years ended March 31,
1996 and 1997 amounted to $80,657 and $134,176, respectively, and $25,371 and
$25,547 for the three-month periods ended June 30, 1996 and 1997, respectively.
F-16
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(14) STOCKHOLDERS' EQUITY
(A) BRIDGE FINANCING
In 1995, the Company completed an offering of convertible promissory
notes (Notes) to raise $2,500,000 (Bridge Financing) to provide interim
financing pending the completion of a proposed private placement
(Private Placement).
The Bridge Financing consisted of fifty Units, each comprised of one 12%
$50,000 Note and one common share purchase warrant to purchase 1,167
common shares of the Company at $0.30 until April 28, 1996 and thereafter
at $0.60 until April 28, 1997. Under their terms, the Notes matured on
the earlier of September 29, 1995 or ten days following the completion of
the Private Placement or a private placement in substitution thereof.
The warrants were recorded on issuance at their estimated fair value of
$413,000 with a corresponding reduction in the recorded value of the
Notes, resulting in deemed interest expense of $413,000 which is included
in costs associated with Bridge Financing in the consolidated statements
of operations. In addition, a finder's fee of $250,000 was paid in
connection with the Bridge Financing and is also included in costs
associated with Bridge Financing in the consolidated statements of
operations, upon refinancing. The balance of the costs associated with
Bridge Financing relates to interest and other costs incurred by the
Company that are specifically attributable to the Bridge Financing.
All warrants issued in conjunction with the Bridge Financing were
exercised prior to March 31, 1997.
On September 28, 1995, the Company completed a short-term loan with an
unrelated party consisting of a $2,500,000 secured promissory note and
warrants to purchase 46,865 common shares of the Company at a price of
Cdn. $7.20 per share until October 1, 1997. The proceeds of the secured
promissory note were used to repay the Notes. Subsequently, the secured
promissory note was repaid in October 1995 by funds from the revolving
line of credit.
(B) PRIVATE PLACEMENT
On October 5, 1995, pursuant to a warrant indenture made as of the same
date, the Company sold 1,666,667 Units at a price of Cdn. $5.265
(approximately U.S. $3.90) per Unit. Upon exercise or deemed exercise by
the holders, each Unit was exchanged for one common share of the Company
and one-half of one Share Purchase Warrant without additional
consideration. Each whole Share Purchase Warrant entitles the holder to
acquire one common share of the Company at a price of Cdn. $4.86 at any
time until October 5, 1996, or at anytime thereafter until October 5,
1997 at the price of Cdn. $5.67. As consideration for services rendered,
the transaction agent was paid $562,500 in addition to 133,333 whole
Share Purchase Warrants which have the same terms as the warrants
discussed above.
F-17
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(C) WARRANTS
The Company had warrants outstanding to purchase common shares as
follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
----------- ---------
<S> <C> <C>
Warrants issued in conjunction with the Private Placement whereby one
warrant entitles the holder to purchase one share at Cdn. $5.67 until
October 5, 1997...................................................... 528,583 528,583
Warrants issued pursuant to the second short-term loan whereby one
warrant entitles the holder to purchase one share at Cdn. $7.20 until
October 1, 1997...................................................... 46,865 46,865
Warrants issued pursuant to the guarantee of the bank line of credit
whereby one warrant entitles the holder to purchase one share at
$1.86 through May 8, 1998 and thereafter at $2.16 through May 8,
1999................................................................. -- 126,667
----------- ---------
Total warrants outstanding......................................... 575,448 702,115
----------- ---------
----------- ---------
</TABLE>
(D) REVERSE STOCK SPLIT
In June 1997, the Company completed a one for six reverse stock split of
its issued and outstanding common stock. These consolidated financial
statements have been restated to reflect the reverse stock split.
(15) EMPLOYEE BENEFIT PLANS
(A) RETIREMENT PLAN
In March 1997, the Company established a 401(k) savings and retirement
plan covering all full time employees who are at least 21 years of age
and have at least three months of service. Under the plan, employees may
defer up to 15% of their pretax salary, but not more than the statutory
limits. The Company did not match employee contributions to the plan for
the year ended March 31, 1997 and the three-month period ended June 30,
1997.
(B) STOCK OPTION PLANS
As of March 31, 1997, the Company had two stock option plans which are
described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option awards. Had
compensation cost for the Company's stock option awards been determined
consistent with SFAS
F-18
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
No. 123, the Company's net loss would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
------------------------
1996 1997
------------ ----------
<S> <C> <C>
Net loss:
As reported...................................................... $ 3,959,940 2,904,886
Pro forma........................................................ 4,489,512 3,228,949
Net loss per share:
As reported...................................................... $ 1.84 0.74
Pro forma........................................................ 2.08 0.82
</TABLE>
The fair value of option grants is estimated using the Black-Scholes
option pricing model with the following weighted average assumptions used
for grants in fiscal years 1996 and 1997: expected volatility of 55%;
risk free interest rate of 6.50%; expected lives of four years; and a
zero percent dividend yield.
A summary of the plans is as follows:
- 1993 INCENTIVE PROGRAM: Under the 1993 Incentive Program, as amended
and restated, 348,668 shares of common stock plus 10% of any increase
in the number of shares of common stock issued and outstanding from the
date of the program agreement to the date the program was formally
adopted by the Company's Board of Directors are available for grant to
eligible employees and consultants of the Company. The aggregate fair
market value of stock which becomes exercisable by an individual
grantee pursuant to the plan is limited to $100,000 in any calendar
year.
Stock options under the 1993 Incentive Program vest immediately for
individuals on the Board of Directors of the Company, after two years of
service for all employees, and after two years of affiliation with the
Company for consultants. Although the program allows stock options to be
issued for a maximum term of ten years, all stock options outstanding
have a maximum term of five years from the date of grant. Stock options
are granted at an exercise price equal to the ten-day trading average of
the Company's common stock as determined by the Company's Board of
Directors and approved by the Vancouver Stock Exchange.
In November 1996, the Company's Board of Directors resolved that no
additional stock options would be granted under the 1993 Incentive
Program. At March 31, 1997 and June 30, 1997, 358,933 stock options
remain outstanding under the 1993 Incentive Program.
F-19
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
- 1996 INCENTIVE PROGRAM: Under the 1996 Incentive Program, 833,333 shares
of common stock less any shares outstanding under the 1993 Incentive
Program, plus any shares forfeited under the 1996 and 1993 Incentive
Programs, shares purchased by the Company on the open market and shares
surrendered to the Company in payment of the exercise price of stock
options issued under the 1996 and 1993 Incentive Programs are available
for grant to eligible employees and consultants of the Company. No award
may be granted which will result in the awards outstanding under the plan
to be more than 25% of the total number of shares the Company has
outstanding.
Stock options under the 1996 Incentive Program vest immediately for
individuals on the Board of Directors of the Company, after two years of
service for all employees, and after two years of affiliation with the
Company for consultants. Although the program allows stock options to be
issued for a maximum term of ten years, all stock options outstanding have
a maximum term of five years from the date of grant. Stock options are
granted at an exercise price equal to the ten-day trading average of the
Company's common stock as determined by the Company's Board of Directors
and approved by the Vancouver Stock Exchange.
At March 31, 1997 and June 30, 1997, 212,000 and 215,333 stock options,
respectively, are outstanding and 262,400 and 259,067, respectively, are
available for future grant under the 1996 Incentive Program.
In August 1997, the Company amended its 1996 Incentive Program to, among
other things, modify the total shares of common stock available for grant
to eligible employees and consultants of the Company from 833,333 to
2,500,000. The amendment is subject to the approval by the Company's
stockholders and the completion of a public offering of the Company's
Common Stock.
A summary of the Company's stock option plans' activity is presented below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------------------------- THREE-MONTH PERIOD
1996 1997 ENDED JUNE 30, 1997
----------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
STOCK OPTIONS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- -------------------------------------- ---------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period.... 114,000 $ 7.50 344,266 $ 4.92 570,933 $ 4.02
Granted............................... 410,266 4.92 280,333 3.00 20,000 3.63
Canceled.............................. (114,000) 7.50 -- -- -- --
Forfeited............................. (66,000) 4.92 (53,666) 4.62 (16,667) 3.00
---------- --------- ---------
Outstanding at end of period.......... 344,266 4.92 570,933 4.02 574,266 4.02
---------- --------- ---------
---------- --------- ---------
Options exercisable at period-end..... 267,600 4.92 476,267 4.20 484,600 4.20
---------- --------- ---------
---------- --------- ---------
Weighted-average fair value of options
granted during the period........... $ 2.16 $ 1.26 $ 1.22
</TABLE>
F-20
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
In March 1996, the Company modified the exercise price on 114,000 stock
options granted in February 1994 from $7.50 to $4.92.
The following is a summary of stock options outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER OF OPTIONS
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------------------------------------- ----------- ------------------- -----------------
<S> <C> <C> <C>
$4.92....................................... 299,767 3.50 296,767
3.00....................................... 271,166 4.69 179,500
</TABLE>
The following is a summary of stock options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER OF OPTIONS
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------------------------------------- ----------- ------------------- -----------------
<S> <C> <C> <C>
$6.00....................................... 4,167 5.00 4,167
4.92....................................... 299,767 3.50 296,767
3.00....................................... 270,332 4.98 183,666
</TABLE>
In August 1997, the Company granted 1,225,000 stock options, subject to
certain contingencies, at an exercise price per share equal to the greater of
(i) the Unit Offering Price to the public in the Offering or (ii) the closing
bid price of the common stock on the date of the sale of the Units offered in
the Offering. The options are exercisable on various dates beginning in January
1998.
(16) INCOME TAXES
The Company had net deferred tax assets, primarily consisting of net
operating loss carryforwards, of approximately $3,468,000 for the year ended
March 31, 1997. Total U.S. Federal net operating loss carryforwards of
approximately $6,300,000 at March 31, 1997 expire in the years 2009 to 2012.
Total Canadian operating loss carryforwards of approximately $3,900,000 at March
31, 1997 expire in the years 2009 to 2012.
The Company has not recorded an income tax benefit in the years ended March
31, 1996 and 1997 or for the three-month periods ended June 30, 1996 and 1997
due to the recording of a valuation allowance as an offset to the net deferred
tax assets. A valuation allowance is provided due to uncertainties relating to
the realization of the deferred tax assets.
The utilization of net operating loss carryforwards may be limited due to
ownership changes that have occurred as a result of the sale of common stock.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, receivables, accounts
payable and short- and long-term borrowings. The fair value of these financial
instruments approximates their carrying amounts based on current market
indicators, such as prevailing interest rates.
F-21
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(18) LITIGATION
The Company is subject to various claims and contingencies related to
lawsuits, taxes and other matters arising in the normal course of business.
Management believes the ultimate liability, if any, arising from such claims or
contingencies is not likely to have a material adverse effect on the Company's
results of operations or financial condition.
In September 1997, the Company agreed with certain plaintiffs to settle
their litigation in consideration of the payment by the Company of $25,000 and
the issuance of such number of warrants at such exercise price as approved by
the Vancouver Stock Exchange (VSE). The Company agreed to recommend to the VSE
the issuance to the plaintiffs of two year warrants to purchase an aggregate of
32,000 shares of common stock of the Company at an exercise price equal to 80%
to 90% of the fair market value of the common stock on the date of issuance.
F-22
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(19) GEOGRAPHIC INFORMATION
The Company operates in one industry: the marketing of proprietary urinary
incontinence products for adults and children over the age of four. A summary of
the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED MARCH 31 ENDED JUNE 30
------------------------ --------------------
1996 1997 1996 1997
------------ ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
U.S............................................................ $ 914,311 1,916,263 204,569 817,188
Canada......................................................... 204,175 371,234 223,899 1,215
------------ ---------- --------- ---------
Total revenues............................................... $ 1,118,486 2,287,497 428,468 818,403
------------ ---------- --------- ---------
------------ ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED MARCH 31 ENDED JUNE 30
------------------------ --------------------
1996 1997 1996 1997
------------ ---------- --------- ---------
(UNAUDITED)
--------------------
<S> <C> <C> <C> <C>
Net loss:
U.S............................................................ $ 2,954,312 2,082,450 551,744 339,935
Canada......................................................... 1,005,628 822,436 135,906 283,574
------------ ---------- --------- ---------
Total net losses............................................. $ 3,959,940 2,904,886 687,650 623,509
------------ ---------- --------- ---------
------------ ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C>
Assets:
U.S.................................................................................. $ 4,939,873 5,806,081
Canada............................................................................... 1,448,664 1,416,853
------------ -----------
Total assets....................................................................... $ 6,388,537 7,222,934
------------ -----------
------------ -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C>
Net assets of Canadian subsidiary...................................................... $ 1,340,171 329,944
------------ -----------
------------ -----------
</TABLE>
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THIS DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Corporate History.............................. 15
Use of Proceeds................................ 16
Dividend Policy................................ 16
Capitalization................................. 17
Price Range of Common Stock.................... 18
Selected Consolidated Financial Data........... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 25
Management..................................... 35
Advisory Board................................. 42
Certain Transactions........................... 42
Principal Stockholders......................... 43
Description of Securities...................... 45
Underwriting................................... 50
Legal Matters.................................. 52
Experts........................................ 52
Additional Information......................... 53
Financial Statements........................... F-1
</TABLE>
--------------------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,500,000 UNITS
CONSISTING OF 1,500,000 SHARES OF COMMON STOCK AND 1,500,000 WARRANTS
[LOGO]
CARING PRODUCTS
INTERNATIONAL, INC.
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT COMPANY, INC.
COHIG & ASSOCIATES, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware sets
forth the conditions and limitations governing the indemnification of officers,
directors and other persons. Article VII of the Registrant's By-laws, which are
filed as an exhibit to this Registration Statement and incorporated by reference
herein, substantially tracks the provisions of Section 145 of the Delaware
General Corporation Law. Article Ninth of the Registrant's Restated Certificate
of Incorporation further provides that the Registrant shall, to the fullest
extent permitted by the General Corporation Law of Delaware, indemnify any and
all persons whom it shall have the power to indemnify from and against any and
all of the expenses, liabilities or other matters.
Section 102(b) of the General Corporation Law of the State of Delaware
permits corporations to eliminate or limit the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of the
fiduciary duty as a director. Article Eighth of the Registrant's Restated
Certificate of Incorporation provides for elimination of personal liability of
directors for breach of fiduciary duty as a director except for the following:
(i) for any breach of such director's duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Section 174 of
the General Corporation Law; or (iv) for any transaction from which such
director derived an improper personal benefit. Article Eighth further provides
that modification or repeal of such provision may not affect the elimination of
liability therein provided with respect to a director's personal liability for
any act or omission that occurs prior to such modification or repeal.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered (excluding underwriting
discounts and the non-accountable expense allowance) are estimated to be as
follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 8,579
Accounting fees and expenses...................................... 225,000
Legal fees and expenses........................................... 225,000
Blue sky legal fees and expenses.................................. 40,000
Printing and engraving expenses................................... 75,000
Transfer agent fees and expenses.................................. 3,000
NASD filing fee................................................... 3,331
Nasdaq listing application fee.................................... 10,000
Miscellaneous expenses............................................ 55,090
---------
Total............................................................. $ 645,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
No securities that were not registered under the Securities Act of 1933, as
amended (the "Act") have been issued or sold by the Registrant within the past
three years, except as described below. The share information below does not
reflect the Reverse Stock Split except as otherwise noted.
1. On April 28, 1995, the Registrant issued an aggregate of 50 units, for
aggregate gross proceeds of $2,500,000. Each unit consisted of one $50,000 12%
convertible secured promissory note and one two-year warrant entitling the
holder to purchase up to 7,000 shares of Common Stock at an exercise price of
$0.05
II-1
<PAGE>
per share until the first anniversary of issuance and $0.10 per share
thereafter. The units were issued to the following accredited investors:
<TABLE>
<CAPTION>
NUMBER OF UNITS AMOUNT
NAME OF INVESTOR PURCHASED INVESTED($)
- ---------------------------------------------------------------- --------------------- ----------
<S> <C> <C>
HUB, Inc.(1).................................................... 10 500,000
Harold G. Goodman 1984 Grantor--Trust(2)........................ 5 250,000
Thomas M. Vertin................................................ 10 500,000
Stirling Unit Trust(3).......................................... 25 1,250,000
</TABLE>
- ------------------------
(1) The beneficial owners include: Charles E. Underbrink and Douglas E. Heitne.
(2) The beneficial owners include: H. Greg Goodman and Alan D. Feinsilver.
(3) No one person holds a greater than 10% beneficial ownership interest in the
Stirling Unit Trust. The settlor of the Trust is the Blake Settlement.
Offers and sales were made in a private offering in reliance upon the
exemption provided by Section 4(2) of the Act. Each investor was furnished with
information the offering and the Registrant and each had the opportunity to
verify the information supplied. Additionally, the Registrant obtained a
representation from each investor of such investor's intent to acquire the
securities for the purpose of investment only, and not with a view toward the
subsequent distribution thereof. The securities bear appropriate restrictive
legends.
All of the foregoing offer and sales were made to individuals or entities
that had access to information enabling them to evaluate the merits and risks of
the investment by virtue of their relationship to the Company or their economic
bargaining power. The share certificates representing all shares issued in non-
public offerings were stamped with a legend restricting transfer of the Common
Stock represented thereby, and the Registrant issued stop transfer instructions
to its transfer agent.
2. On September 28, 1995, the Company borrowed $2,500,000, on a secured
basis, and issued warrants to purchase 281,190 shares of Common Stock,
exercisable at Cdn. $1.20 until October 1, 1997. The lender, Trimin Enterprises,
Inc., is a non U.S. person, the beneficial owners of which include a widely-held
Canadian public company listed on The Toronto Stock Exchange, the sole
beneficial owner of 10% or more of the outstanding shares of which is James D.
Meekison, an Ontario resident. The Company issued the securities in accordance
with Regulation S.
3. On October 5, 1995, the Registrant issued an aggregate 10,000,000
Special Warrants for aggregate gross proceeds of Cdn. $8,775,000 (approximately
U.S. $6,500,000) to a total of 11 investors, all of whom are non-U.S. persons.
The Special Warrants were deemed converted, for no additional consideration,
into 1,666,667 post-reverse split shares and warrants to purchase up to
1,666,667 additional post-reverse split shares as of February 27, 1996. The
Special Warrants were issued to the following non-U.S. investors:
<TABLE>
<CAPTION>
NUMBER OF SPECIAL
NAME OF INVESTOR WARRANTS PURCHASED AMOUNT INVESTED (CDN.$)
- ------------------------------------------------ ------------------ -----------------------
<S> <C> <C>
BPI Capital Management Corp..................... 2,577,000 $ 2,261,317.50
Comite de retraite et des assurances collectives
(MCPED)....................................... 905,000 794,137.50
Laurentian American Equity Ltd.................. 660,000 579,150.00
Laurentian International, Ltd................... 335,000 293,962.50
Robert G. Atkinson.............................. 820,000 719,550.00
James R. Tuer................................... 225,000 197,437.50
Royal Canadian Small Cap Fund................... 1,300,000 1,140,750.00
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SPECIAL
NAME OF INVESTOR WARRANTS PURCHASED AMOUNT INVESTED (CDN.$)
- ------------------------------------------------ ------------------ -----------------------
<S> <C> <C>
AGF Growth Equity Fund Ltd...................... 1,136,000 996,840.00
Montreal Trust Company of Canada................ 1,700,000 1,491,750.00
Michael Steele.................................. 171,000 150,052.50
Griffiths McBurney & Partners................... 171,000 150,052.50
------------------ -----------------------
Total......................................... 10,000,000 $ 8,775,000.00
------------------ -----------------------
------------------ -----------------------
</TABLE>
Offers and sales were made in an off-shore transaction to non-U.S. Persons
in reliance upon Regulation S promulgated under the Act. With the exception of
Messrs. Atkinson, Tuer and Steele, all of whom are individuals and purchased
their Special Warrants beneficially, and with the exception of Montreal Trust
Company of Canada, each of the purchasers is a widely-held Canadian investment
fund which, the Company believes, has purchased on behalf of specific mutual
funds. Montreal Trust Company of Canada is a widely-held, federally-chartered
Canadian trust company which, the Company believes, purchased on behalf of
fully-managed accounts for clients.
In connection with this offering, Brenark Securities Ltd., which acted as
agent, was issued a special right (the "Special Right"), which is exercisable
for warrants to purchase 133,333 post-reverse split shares of Common Stock, at
Cdn. $4.86 per share through October 5, 1996 and Cdn. $5.67 per share from
October 6, 1996 to October 5, 1997. These warrants were also issued pursuant to
Regulation S.
4. On May 8, 1997, the Company obtained an additional bank line of credit
and issued to the guarantor thereof, Bradstone Equity Partners Inc. (f/k/a H.J.
Forest Products Inc.), warrants to purchase 126,667 post-reverse stock split
shares of Common Stock at $1.86 per share at any time until May 8, 1998 and
thereafter at $2.16 per share until May 8, 1999. Bradstone Equity Partners Inc.
is a Canadian publicly held corporation. These warrants were issued pursuant to
Regulation S.
5. From time to time during the past three years, the Company has granted
options and issued warrants to officers, directors and employees of the Company.
These grants have been made at exercise prices ranging from Cdn. $0.75 to U.S.
$1.25. An aggregate of 2,718,000 shares of Common Stock have been issued upon
exercise of warrants and an aggregate of 147,000 shares of Common Stock have
been issued upon exercise of options. To the extent options or warrants have
been issued by the Company to U.S. persons, they have been issued pursuant to
the exemption for transactions not including a public offering provided in
Section 4(2) of the Act, and the securities have been appropriately legended.
ITEM 27. EXHIBITS
<TABLE>
<S> <C>
1.1(1) Form of Underwriting Agreement
3.1(2) Restated Certificate of Incorporation
3.1.1(3) Certificate of Amendment of Certificate of Incorporation
3.1.2(1) Certificate of Amendment of Certificate of Incorporation
3.2(2) By-laws, as currently in effect
4.1(2) Specimen Common Stock Certificate
4.2(3) Form of Warrants to Purchase Shares of the Registrant, including
registration rights
4.3(3) Agreement, dated October 1994, between Project 93 Management, Ltd. and the
Registrant pertaining to registration rights of certain selling
stockholders(4)
4.4(1) Warrant to Purchase Common Shares of the Registrant issued to H.J. Forest
Products Inc. dated May 12, 1997
4.5(1) Form of Representatives' Warrants
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
4.6(1) Form of Warrant Agreement between the Registrant and The Bank of Nova
Scotia Trust Company of New York, as warrant agent
5.1(5) Opinion of Bryan Cave LLP as to the legality of the securities being
registered
10.1(6) Restated and Amended Employment Agreement between the Registrant and
William H.W. Atkinson dated as of March 13, 1996
10.2(6) Restated and Amended Employment Agreement between Susan A. Schreter and
the Registrant dated as of March 13, 1996
10.3(2) Supply Agreement between the Registrant and Merfin Hygienic Products,
dated August 30, 1993
10.4(2) Assignment by Prakash Banga to the Registrant, dated January 5, 1994
10.5(2) 1993 Incentive Program and accompanying form of Stock Option Agreement(7)
10.6(2) Lease Agreement between the Registrant and First Avenue West Building
L.L.C., dated May 15, 1995 for the premises located at 200 First Avenue
West, Seattle, Washington
10.7(2) Lease Agreement between the Registrant and Holly Enterprises Ltd. for the
premises located at 5850 Byrne Road, Burnaby, British Columbia, dated
August 18, 1994
10.8(2) Form of short-term Promissory Note between the Registrant and certain
private placement investors, dated April 28, 1995(8)
10.9(3) Manufacturing Agreement between the Registrant and Le Genereux Clothing
Co., Ltd., dated November 3, 1994
10.10(3) Share Purchase Warrant Indenture dated October 5, 1995 between the
Registrant and Montreal Trust Company of Canada
10.11(3) Revolving Line of Credit Agreement and Promissory Note dated October 5,
1995 between the Registrant and Seattle-First National Bank
10.12(9) 1996 Incentive Program (7)
10.13(1) Amendment No. 1 to the Registrant's 1996 Incentive Program (7)
10.14(1) Stock Option Agreement between the Registrant and William H.W. Atkinson
(7)
10.15(1) Stock Option Agreement between the Registrant and Susan A. Schreter (7)
10.16(1) Security Agreement between the Registrant and H.J. Forest Products Inc.,
dated April 9, 1997
10.17(1) Agreement between the Registrant and Medline Industries, Inc. dated
September 5, 1996
10.18(5) Line of Credit with Toronto Dominion Bank
10.19(1) Agreement between the Registrant and Bradstone Equity Partners, Inc. dated
September 2, 1997
21.1(1) List of Subsidiaries
23.1(1) Consent of KPMG Peat Marwick LLP (see page II-8 of the Registration
Statement)
23.2(1) Consent of KPMG, Chartered Accountants (see page II-9 of the Registration
Statement)
23.3(5) Consent of Bryan Cave LLP (contained in their opinion; see Exhibit 5.1)
24.1(1) Power of Attorney (see page II-7 of the Registration Statement)
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
II-4
<PAGE>
- ------------------------
(1) Filed herewith.
(2) Filed as an exhibit to the Registration Statement on Form SB-2, File No.
33-96882-LA (the "SB-2 Registration Statement"), filed with the Commission
on September 12, 1995.
(3) Filed as an exhibit to Amendment No. 1 to the SB-2 Registration Statement,
filed with the Commission on March 20, 1996.
(4) A schedule of the specific investors who received these Warrants is
attached as an appendix to this exhibit.
(5) To be filed by amendment.
(6) Filed as an exhibit to Amendment No. 3 to the Form SB-2 Registration
Statement, filed with the Commission on November 12, 1996.
(7) Managerial contract or compensatory plan or arrangement in which the
Company's directors and officers participate.
(8) A schedule of investors and the amounts of their respective notes is
attached to this exhibit. These notes have been repaid by the Registrant
and have therefore been canceled.
(9) Filed as an exhibit to the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1997, filed with the Commission on July 15, 1997.
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING
The Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or together,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) Include any addition or changed material information on the
plan of distribution.
(2) That for purposes of determining any liability under the Securities
Act of 1933, as amended, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) REQUEST FOR ACCELERATION OF EFFECTIVE DATE
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
II-5
<PAGE>
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Burnaby, British Columbia, Canada, on September
8, 1997.
<TABLE>
<S> <C> <C>
CARING PRODUCTS INTERNATIONAL, INC.
BY: /S/ WILLIAM H.W. ATKINSON
-----------------------------------------
William H.W. Atkinson
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Caring Products International,
Inc., hereby severally constitute and appoint William H.W. Atkinson and Susan A.
Schreter, and each of them singly, our true and lawful attorneys and with full
power to them, and each of them singly, to sign for us and in our names in the
capacities indicated below, the Registration Statement on Form SB-2 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and generally to do all such things in our names and on
our behalf in our capacities as officers and directors to enable Caring Products
International, Inc. to comply with the provisions of the Securities Act of 1933,
as amended, and all requirements of the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our
attorneys, or any of them, to said Registration Statement and any and all
amendments thereto.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
Chief Executive Officer
/s/ WILLIAM H.W. ATKINSON and Chief Financial
- ------------------------------ Officer (Principal September 8, 1997
William H.W. Atkinson Executive Officer and
Principal Financial and
Accounting Officer)
/s/ SUSAN A. SCHRETER
- ------------------------------ President, Chief Operating September 8, 1997
Susan A. Schreter Officer and Director
/s/ ANTHONY A. CETRONE
- ------------------------------ Director September 8, 1997
Anthony A. Cetrone
/s/ MICHAEL M. FLEMING
- ------------------------------ Director September 8, 1997
Michael M. Fleming
/s/ PAUL STANTON
- ------------------------------ Director September 8, 1997
Paul Stanton
/s/ HERBERT SOHN
- ------------------------------ Director September 8, 1997
Herbert Sohn
II-7
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Caring Products International, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" and "Selected Consolidated Financial Data"
in the Prospectus.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
September 9, 1997
II-8
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Caring Products International, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" and "Selected Consolidated Financial Data"
in the Prospectus.
/s/ KPMG
Chartered Accountants
Vancouver, Canada
September 9, 1997
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
1.1(1) Form of Underwriting Agreement
3.1(2) Restated Certificate of Incorporation
3.1.1(3) Certificate of Amendment of Certificate of Incorporation
3.1.2(1) Certificate of Amendment of Certificate of Incorporation
3.2(2) By-laws, as currently in effect
4.1(2) Specimen Common Stock Certificate
4.2(3) Form of Warrants to Purchase Shares of the Registrant, including
registration rights
4.3(3) Agreement, dated October 1994, between Project 93 Management, Ltd. and the
Registrant pertaining to registration rights of certain selling
stockholders(4)
4.4(1) Warrant to Purchase Common Shares of the Registrant issued to H.J. Forest
Products Inc. dated May 12, 1997
4.5(1) Form of Representatives' Warrants
4.6(1) Form of Warrant Agreement between the Registrant and The Bank of Nova
Scotia Trust Company of New York, as warrant agent
5.1(5) Opinion of Bryan Cave LLP as to the legality of the securities being
registered
10.1(6) Restated and Amended Employment Agreement between the Registrant and
William H.W. Atkinson dated as of March 13, 1996
10.2(6) Restated and Amended Employment Agreement between Susan A. Schreter and
the Registrant dated as of March 13, 1996
10.3(2) Supply Agreement between the Registrant and Merfin Hygienic Products,
dated August 30, 1993
10.4(2) Assignment by Prakash Banga to the Registrant, dated January 5, 1994
10.5(2) 1993 Incentive Program and accompanying form of Stock Option Agreement(7)
10.6(2) Lease Agreement between the Registrant and First Avenue West Building
L.L.C., dated May 15, 1995 for the premises located at 200 First Avenue
West, Seattle, Washington
10.7(2) Lease Agreement between the Registrant and Holly Enterprises Ltd. for the
premises located at 5850 Byrne Road, Burnaby, British Columbia, dated
August 18, 1994
10.8(2) Form of short-term Promissory Note between the Registrant and certain
private placement investors, dated April 28, 1995(8)
10.9(3) Manufacturing Agreement between the Registrant and Le Genereux Clothing
Co., Ltd., dated November 3, 1994
10.10(3) Share Purchase Warrant Indenture dated October 5, 1995 between the
Registrant and Montreal Trust Company of Canada
10.11(3) Revolving Line of Credit Agreement and Promissory Note dated October 5,
1995 between the Registrant and Seattle-First National Bank
10.12(9) 1996 Incentive Program (7)
10.13(1) Amendment No. 1 to the Registrant's 1996 Incentive Program (7)
10.14(1) Stock Option Agreement between the Registrant and William H.W. Atkinson
(7)
10.15(1) Stock Option Agreement between the Registrant and Susan A. Schreter (7)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
10.16(1) Security Agreement between the Registrant and H.J. Forest Products Inc.,
dated April 9, 1997
10.17(1) Agreement between the Registrant and Medline Industries, Inc. dated
September 5, 1996
10.18(5) Line of Credit with Toronto Dominion Bank
10.19(1) Agreement between the Registrant and Bradstone Equity Partners, Inc. dated
September 2, 1997
21.1(1) List of Subsidiaries
23.1(1) Consent of KPMG Peat Marwick LLP (see page II-8 of the Registration
Statement)
23.2(1) Consent of KPMG, Chartered Accountants (see page II-9 of the Registration
Statement)
23.3(5) Consent of Bryan Cave LLP (contained in their opinion; see Exhibit 5.1)
24.1(1) Power of Attorney (see page II-7 of the Registration Statement)
</TABLE>
- ------------------------
(1) Filed herewith.
(2) Filed as an exhibit to the Registration Statement on Form SB-2, File No.
33-96882-LA (the "SB-2 Registration Statement"), filed with the Commission
on September 12, 1995.
(3) Filed as an exhibit to Amendment No. 1 to the SB-2 Registration Statement,
filed with the Commission on March 20, 1996.
(4) A schedule of the specific investors who received these Warrants is
attached as an appendix to this exhibit.
(5) To be filed by amendment.
(6) Filed as an exhibit to Amendment No. 3 to the Form SB-2 Registration
Statement, filed with the Commission on November 12, 1996.
(7) Managerial contract or compensatory plan or arrangement in which the
Company's directors and officers participate.
(8) A schedule of investors and the amounts of their respective notes is
attached to this exhibit. These notes have been repaid by the Registrant
and have therefore been canceled.
(9) Filed as an exhibit to the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1997, filed with the Commission on July 15, 1997.
<PAGE>
1,500,000 UNITS
CARING PRODUCTS INTERNATIONAL, INC.
UNDERWRITING AGREEMENT
________, 1997
Paulson Investment Company, Inc.
Cohig & Associates, Inc.
As Representatives of the
Several Underwriters
c/o Paulson Investment Company, Inc.
811 SW Front Avenue, Suite 200
Portland, Oregon 97204
Gentlemen:
Caring Products International, Inc., a Delaware corporation (the
"Company"), proposes to sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as Representatives (the
"Representatives") an aggregate of 1,500,000 Units (the "Firm Units"). Each Unit
will consist of one share of the Company's Common Stock, $0.01 par value
("Common Stock"), and one Common Stock Purchase Warrant substantially in the
form filed as an exhibit to the Registration Statement (hereinafter defined)
("Warrants"). The respective amounts of the Firm Units to be so purchased by the
several Underwriters are set forth opposite their names in Schedule I hereto.
The Company also proposes to grant to the Representatives an option to purchase
an aggregate up to 225,000 additional Units, identical to the Firm Units, (the
"Option Units") as set forth below. The offer and sale of the Firm Units and the
Option Units pursuant to this Agreement is referred to as the "Offering."
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement for yourself as the Representatives and
on behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the number of Firm Units
set forth opposite their respective names in Schedule I. The Firm Units and the
Option Units (to the extent the aforementioned option is exercised) are herein
collectively called the "Units."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
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1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form SB-2 (File No. 333-__________)
with respect to the Units has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements of
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, together with any
registration statement filed by the Company pursuant to Rule 462(b) of the Act,
herein referred to as the "Registration Statement," which shall be deemed to
include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under the
Act and no post-effective amendment to the Registration Statement has been filed
as of the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior to the
time it becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Units, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
(b)(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Company is duly
qualified to transact business in all jurisdictions in which the conduct of its
business requires such qualification.
(ii) Each corporation all of the equity securities of which are
directly or indirectly beneficially owned by the Company and the business of
which is material to the Company's business (a "Subsidiary") has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, with corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement. Each Subsidiary is duly qualified to transact business
as a foreign corporation in good standing in all other jurisdictions in which
the conduct of its business requires such qualification. Except with respect to
Subsidiaries described in the Prospectus, the Company does not own and never has
owned a controlling interest in any corporation or other business entity that
has or ever has had any material assets, liabilities or operations.
(c) The outstanding shares of Common Stock of the Company and each
Subsidiary have been duly authorized and validly issued and are fully paid and
nonassessable and have been issued and sold by the Company in compliance in all
material respects with applicable securities laws; the Common Stock and Warrants
to be included in the Units have been duly authorized and
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when issued and paid for as contemplated herein will be validly issued, fully
paid and nonassessable; and no preemptive rights of stockholders exist with
respect to any security of the Company or any Subsidiary or the issue and sale
thereof. Neither the filing of the Registration Statement nor the offering or
sale of the Units as contemplated by this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock or other securities of the Company or
any Subsidiary.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. The Common Stock and the Warrants conform to
the description thereof contained in the Registration Statement. The form of
certificates for the Common Stock and Warrants conform to the corporate law of
the jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Units nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter through the Representatives, specifically for use in the
preparation thereof.
(f) The consolidated financial statements of the Company, together
with related notes thereto as set forth in the Registration Statement, present
fairly the financial position and the results of operations and cash flows of
the Company and Subsidiaries at the indicated dates and for the indicated
periods. Such financial statements have been prepared in accordance with
generally accepted principles of accounting, consistently applied throughout the
periods involved, except as disclosed herein, and all adjustments necessary for
a fair presentation of results for such periods have been made. The summary
financial and statistical data of the Company included in the Registration
Statement present fairly the information shown therein and such data have been
compiled on a basis consistent with the financial statements presented therein
and the books and records of the Company.
(g) KPMG Peat Marwick LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any Subsidiary
before any court or administrative
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agency or otherwise which if determined adversely to the Company might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company or any Subsidiary or to prevent the consummation of the transactions
contemplated hereby, except as set forth in the Registration Statement.
(i) The Company and each Subsidiary has good and marketable title to
all of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration Statement) or
which are not material in amount. The Company and each Subsidiary occupy their
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration Statement.
(j) The Company and each Subsidiary has filed all Federal, State,
local and foreign income tax returns which have been required to be filed and
have paid all taxes indicated by said returns and all assessments received by it
to the extent that such taxes have become due and are not being contested in
good faith. All tax liabilities have been adequately provided for in the
financial statements of the Company.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Company or any Subsidiary, whether or not occurring in the
ordinary course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered into
by the Company or any Subsidiary, other than transactions in the ordinary course
of business and changes and transactions described in the Registration
Statement, as it may be amended or supplemented. The Company and each Subsidiary
has no material contingent obligations which are not disclosed in the Company's
financial statements included in the Registration Statement or elsewhere in the
Prospectus.
(l) The Company and each Subsidiary are not, nor, with the giving of
notice or lapse of time or both, will it be, in violation of or in default under
its respective certificate of incorporation or by-laws or under any agreement,
lease, contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties, is bound and which default is of
material significance in respect of the condition, financial or otherwise of the
Company or Subsidiary, as the case may be, or the business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company or Subsidiary, as the case may be. The execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or instrument
to which the Company or any Subsidiary is a party, or of the certificate of
incorporation or by-laws of the Company or any Subsidiary or any order, rule or
regulation applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
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(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Units for public offering by
the Underwriters under state securities or Blue Sky laws) has been obtained or
made and is in full force and effect.
(n) The Company or its Subsidiaries hold all material patents, patent
rights trademarks, trade names, copyrights, trade secrets and licenses of any of
the foregoing (collectively, "Intellectual Property Rights") that are necessary
to the conduct of its businesses; there is no claim pending or, to the best
knowledge of the Company or any Subsidiary, threatened against the Company or
any Subsidiary alleging any infringement of Intellectual Property Rights, or any
violation of the terms of any license relating to Intellectual Property Rights,
nor does the Company or any Subsidiary know of any basis for any such claim. The
Company and each Subsidiary know of no material infringement by others of
Intellectual Property Rights owned by or licensed to the Company or any
Subsidiary. The Company or its Subsidiaries has obtained, is in compliance in
all material respects with and maintains in full force and effect all material
licenses, certificates, permits, orders or other, similar authorizations granted
or issued by any governmental agency (collectively "Government Permits")
required to conduct its business as it is presently conducted. All applications
for additional Government Permits described in the Prospectus as having been
made by the Company or its Subsidiaries have been properly and effectively made
in accordance with the applicable laws and regulations with respect thereto and
such applications constitute, in the best judgment of the Company's management,
those reasonably required to have been made in order to carry out the Company's
business plan as described in the Prospectus. No proceeding to revoke, limit or
otherwise materially change any Government Permit has been commenced or, to the
Company's best knowledge or that of its Subsidiaries, is threatened against the
Company or any Subsidiary with respect to materials supplied to the Company or
its Subsidiaries, and the Company has no reason to anticipate that any such
proceeding will be commenced against the Company or any Subsidiary. Except as
disclosed or contemplated in the Prospectus, the Company and each Subsidiary has
no reason to believe that any pending application for a Government Permit will
be denied or limited in a manner inconsistent with the Company's business plan
as described in the Prospectus.
(o) The Company and each Subsidiary is in all material respects in
compliance with all applicable Environmental Laws. The Company and each
Subsidiary has no knowledge of any past, present or, as anticipated by the
Company or its Subsidiaries, future events, conditions, activities,
investigation, studies, plans or proposals that (i) would interfere with or
prevent compliance with any Environmental Law by the Company or any Subsidiary
or (ii) could reasonably be expected to give rise to any common law or other
liability, or otherwise form the basis of a claim, action, suit, proceeding,
hearing or investigation, involving the Company or any Subsidiary and related in
any way to Hazardous Substances or Environmental Laws. Except for the prudent
and safe use and management of Hazardous Substances in the ordinary course of
the Company's business, (i) no Hazardous Substance is or has been used, treated,
stored, generated, manufactured or otherwise handled on or at any Facility and
(ii) to the Company's best knowledge or that of its
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Subsidiaries, no Hazardous Substance has otherwise come to be located in, on or
under any Facility. No Hazardous Substances are stored at any Facility except in
quantities necessary to satisfy the reasonably anticipated use or consumption by
the Company and its Subsidiaries. No litigation, claim, proceeding or
governmental investigation is pending regarding any environmental matter for
which the Company or any Subsidiary has been served or otherwise notified or, to
the knowledge of the Company or any Subsidiary threatened or asserted against
the Company or any Subsidiary, or the officers or directors of the Company or of
any Subsidiary, in their capacities as such, or any Facility or the Company's
business. There are no orders, judgments or decrees of any court or of any
governmental agency or instrumentality under any Environmental Law which
specifically apply to the Company or any Subsidiary, any Facility or any of the
Company's operations. Neither the Company nor any Subsidiary has received from a
governmental authority or other person (i) any notice that it is a potentially
responsible person for any Contaminated site or (ii) any request for information
about a site alleged to be Contaminated or regarding the disposal of Hazardous
Substances. There is no litigation or proceeding against any other person by the
Company or any Subsidiary regarding any environmental matter. The Company has
disclosed in the Prospectus or made available to the Underwriters and their
counsel true, complete and correct copies of any reports, studies,
investigations, audits, analysis, tests or monitoring in the possession of or
initiated by the Company or any Subsidiary pertaining to any environmental
matter relating to the Company, any Subsidiary, its past or present operations
or any Facility.
For the purposes of the foregoing paragraph, "Environmental Laws" means any
applicable federal, state or local statute, regulation, code, rule, ordinance,
order, judgment, decree, injunction or common law pertaining in any way to the
protection of human health or the environment, including without limitation, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Toxic Substances Control Act, the
Clean Air Act, the Federal Water Pollution Control Act and any similar or
comparable state or local law; "Hazardous Substance" means any hazardous, toxic,
radioactive or infectious substance, material or waste as defined, listed or
regulated under any Environmental Law; "Contaminated" means the actual existence
on or under any real property of Hazardous Substances, if the existence of such
Hazardous Substances triggers a requirement to perform any investigatory,
remedial, removal or other response action under any Environmental Laws or if
such response action legally could be required by any governmental authority;
"Facility" means any property currently owned, leased or occupied by the
Company.
(p) Neither the Company or any Subsidiary, nor to the Company's best
knowledge or that of any Subsidiary, any of its affiliates, has taken or intends
to take, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Units, Common Stock or Warrants.
(q) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 and the rules and regulations
of the Commission thereunder.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's
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general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(s) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of their respective
businesses and the value of their respective properties and as is customary for
companies engaged in similar industries.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Section 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(u) The Company and each Subsidiary is in material compliance with
all laws, rules, regulations, orders of any court or administrative agency,
operating licenses or other requirements imposed by any governmental body
applicable to it, including, without limitation, all applicable laws, rules,
regulations, licenses or other governmental standards applicable to the
industries in which the Company and its Subsidiaries operates; and the conduct
of the business of the Company and each Subsidiary, as described in the
Prospectus, will not cause the Company or any Subsidiary to be in violation of
any such requirements.
(v) The Warrants have been authorized for issuance to the various
purchasers of the Units and will, when issued, possess rights, privileges, and
characteristics as represented in the most recent form of Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Warrants, when issued and delivered against payment therefor in
accordance with the terms of the Warrants, will be duly and validly issued,
fully paid, nonassessable and free of preemptive rights, and all corporate
action required to be taken for the authorization and issuance of the Warrants,
and the securities to be issued upon their exercise, have been validly and
sufficiently taken.
(w) The Representatives' Warrants (as defined in Paragraph (d) of
Section 2 hereof) have been authorized for issuance to the Representatives and
will, when issued, possess rights, privileges, and characteristics as
represented in the most recent form of Representatives' Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Representatives' Warrants, when issued and delivered against payment
therefor in accordance with the terms of the Representatives' Warrants, will be
duly and validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the authorization and
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issuance of the Representatives' Warrants, and the securities to be issued upon
their exercise, have been validly and sufficiently taken.
(x) Except as disclosed in the Prospectus, neither the Company or any
Subsidiary, nor any of their respective officers, directors or affiliates have
caused any person, other than the Underwriters, to be entitled to reimbursement
of any kind, including, without limitation, any compensation that would be
includable as underwriter compensation under the NASD's Corporate Financing Rule
with respect to the offering of the Units, as a result of the consummation of
such offering based on any activity of such person as a finder, agent, broker,
investment adviser or other financial service provider.
2. PURCHASE, SALE AND DELIVERY OF THE UNITS.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $__________ per Unit (representing a
___% discount from the initial public offering price of the Units), the number
of Firm Units set forth opposite the name of each Underwriter in Schedule I
hereof, subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Units to be sold hereunder is to be made in
New York Clearing House funds and, at the option of the Representatives, by
certified or bank cashier's checks drawn to the order of the Company or bank
wire to an account specified by the Company against either uncertificated
delivery of the securities comprising the Firm Units or of certificates therefor
(which delivery, if certificated, shall take place in such location in New York,
New York as may be specified by the Representatives) to the Representatives for
the several accounts of the Underwriters. Such payment is to be made at the
offices of Paulson Investment Company, Inc., at the address set forth on the
first page of this agreement, at 7:00 a.m., Pacific time, on the third business
day after the date of this Agreement or at such other time and date not later
than five business days thereafter as you and the Company shall agree upon, such
time and date being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.) Except to the extent uncertificated
securities comprising the Firm Units are delivered at closing, the certificates
for the securities comprising the Firm Units will be delivered in such
denominations and in such registrations as the Representatives request in
writing not later than the second full business day prior to the Closing Date,
and will be made available for inspection by the Representatives at least one
business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Representatives to purchase the Option
Units at the price per Unit as set forth in the first paragraph of this Section
2. The option granted hereby may be exercised in whole or in part by giving
written notice (i) at any time before the Closing Date and (ii) thereafter (on
one or more occasions) within 45 days after the date of this Agreement, by the
Representatives to the Company setting forth the number of Option Units as to
which the Representatives are exercising the option, the names and
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denominations in which the securities comprising the Option Units are to be
registered and the time and date at which certificates representing the
securities comprising such Units are to be delivered. The time and date at which
certificates for the securities comprising the Option Units are to be delivered
shall be determined by the Representatives but shall not be earlier than three
nor later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred to
as the "Option Closing Date"). If the date of exercise of the option is three or
more days before the Closing Date, the notice of exercise shall set the Closing
Date as the Option Closing Date. The option with respect to the Option Units
granted hereunder may be exercised only to cover over-allotments in the sale of
the Firm Units by the Underwriters. The Representatives may cancel such option
at any time prior to its expiration by giving written notice of such
cancellation to the Company. To the extent, if any, that the option is
exercised, payment for the Option Units shall be made on the Option Closing Date
in New York Clearing House funds and, at the option of the Representatives, by
certified or bank cashier's check drawn to the order of the Company for the
Option Units to be sold by the Company or bank wire to an account specified by
the Company against delivery of certificates therefor at the offices of Paulson
Investment Company, Inc. set forth on the first page of this Agreement.
(d) In addition to the sums payable to the Representatives as
provided elsewhere herein, the Representatives shall be entitled to receive at
the Closing, for themselves alone and not as the Representatives of the
Underwriters, as additional compensation for its services, purchase warrants
(the "Representatives' Warrants") for the purchase collectively of up to 150,000
Units at a price of $__________ per Unit (120% of the initial public offering
price of the Units), upon the terms and subject to adjustment and conversion as
described in the form of Representatives' Warrants filed as an exhibit to the
Registration Statement.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Units as soon as the Representatives deem it advisable to
do so. The Firm Units are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Units are purchased pursuant to
Section 2 hereof, the Representatives will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Units in accordance with an
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at
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the time of effectiveness of the Registration Statement in reliance on Rule 430A
of the Rules and Regulations, and (ii) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
or to which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Representatives promptly (i) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (ii) of receipt of any comments from the Commission, (iii) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Units for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Units.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Units as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with
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any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earnings
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earnings statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Exchange Act.
The Company will deliver to the Representatives similar reports with respect to
significant subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of one year after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of the Representatives, which
consent will not be unreasonably withheld, other than pursuant to outstanding
convertible securities, stock option and warrants or pursuant to employee
benefit plans in effect as of the date hereof, in each case as disclosed in the
Prospectus.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Units, Common Stock and Warrants on The Nasdaq SmallCap Market.
(j) The Company has caused each officer and director and each person
who owns, beneficially or of record, 5% or more of the Common Stock outstanding
immediately prior to this offering to furnish to you, on or prior to the date of
this Agreement, a letter or letters, in form and substance satisfactory to the
Underwriters ("Lockup Agreements"), pursuant to which each such person shall
agree (A) not to offer to sell, sell, contract to sell, sell short or otherwise
dispose of any shares of Common Stock or other capital stock of the Company, or
any other securities convertible, exchangeable or exercisable for Common Stock
or derivatives of Common Stock owned by such person, or request the registration
for the offer or sale of any of the foregoing (or as to which such person has
the right to direct the disposition of) for a period of one year after the date
of this Agreement (90 days in the case of 5% shareholders who are not officers
or directors of the Company), directly or indirectly, except with the prior
written consent of Paulson Investment Company, Inc., which consent shall not be
unreasonably withheld. The Lockup Agreements shall also provide that, after the
expiration of the lockup period, each person shall give you prior notice
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with respect to any offers to sell, sales, contracts to sell, short sales or
other dispositions of Common Stock pursuant to Rule 144 under the Act or any
similar provisions enacted subsequent to the date of this Agreement for a period
of five years from the date of this Agreement.
(k) The Company shall apply the net proceeds of its sale of the Units
as set forth in the Prospectus and shall file such reports with the Commission
with respect to the sale of the Units and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Units in such a manner as would
require the Company or any of the subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock and a warrant agent for the Warrants.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
5. COSTS AND EXPENSES.
(a) The Representatives shall be entitled to receive from the
Company, for themselves alone and not as the Representatives of the
Underwriters, a nonaccountable expense allowance collectively equal to __% of
the aggregate public offering price of Units sold to the Underwriters in
connection with the Offering. The Representatives shall be entitled to withhold
this allowance on the Closing Date (less the $35,000 advance against such amount
that has been previously paid by the Company) with respect to Units delivered on
the Closing Date and to require the Company to make payment of this allowance on
the Option Closing Date with respect to Units delivered on the Option Closing
Date.
(b) In addition to the payment described in Paragraph (a) of this
Section 5, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company; the cost
of electronic filing, printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Underwriters' Selling Memorandum, the
Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey
and any supplements or amendments thereto; the filing fees of the Commission;
the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Units; the Listing Fee of The Nasdaq SmallCap Market; the reasonable costs
of conducting a due diligence investigation of the principals of the Company by
a firm acceptable to the Representatives, and the expenses, including the fees
and disbursements of counsel for the Underwriters, incurred in connection with
the
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qualification of the Units under State securities or Blue Sky laws. Any transfer
taxes imposed on the sale of the Units to the several Underwriters will be paid
by the Company. The Company agrees to pay all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of directed shares of the Common
Stock by the Underwriters to employees and persons having business relationships
with the Company. The Company shall not, however, be required to pay for any of
the Underwriters' expenses (other than those related to qualification under NASD
regulation and State securities or Blue Sky laws) except that, if this Agreement
shall not be consummated, then the Company shall reimburse the several
Underwriters for reasonable accountable out-of-pocket expenses, including fees
and disbursements of counsel, reasonably incurred in connection with
investigating, marketing and proposing to market the Units or in contemplation
of performing their obligations hereunder (less the $35,000 advance that has
been paid by the Company); but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Units. In the event this Agreement is not
consummated, any nonaccountable portion of the $35,000 advance shall be promptly
returned to the Company.
(c) In the event the Company elects to redeem the Warrants at any
time commencing one year after the date of this Agreement, the Company shall
retain Paulson Investment Company Inc. as the Company's solicitation agent (the
"Warrant Solicitation Agent"). The Company shall pay to the Warrant Solicitation
Agent for its services a solicitation fee equal to 3% of the total amount paid
by the holders of the Warrants whom the Warrant Solicitation Agent solicits to
exercise the Warrants. The exercise will be presumed to be unsolicited unless
the customer states in writing that the transaction was solicited by the
Warrants Solicitation Agent and designates in writing the registered
representative of the Warrant Solicitation Agent entitled to receive
compensation for the exercise. The fee shall not be payable for the exercise of
any Warrant held by the Warrant Solicitation Agent in a discretionary account at
the time of exercise, unless the Warrant Solicitation Agent receives from the
customer prior specific written approval of such exercise.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Units
on the Closing Date and the Option Units, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of their covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any
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nature by a Federal or state court of competent jurisdiction shall have been
issued as of the Closing Date which would prevent the issuance of the Units.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Bryan Cave LLP, counsel
for the Company, dated the Closing Date or the Option Closing Date, as the case
may be, addressed to the Underwriters (and stating that it may be relied upon by
counsel to the Underwriters), substantially as follows:
(i) The Company and the Subsidiaries each has been duly organized
and is validly existing as a corporation in good standing under the laws of its
respective jurisdictions of incorporation, with corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement; each of the Company and the Subsidiaries is duly
qualified to transact business in all jurisdictions in which the conduct of its
business requires such qualification, or in which the failure to qualify would
have a materially adverse effect upon the business of the Company and its
Subsidiaries.
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the outstanding
shares of the Company's Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable; all issued and outstanding shares
of the capital stock of the Company and the Subsidiaries and all other
securities issued and sold or exchanged by the Company and its Subsidiaries have
been issued and sold or exchanged in compliance in all material respects with
applicable securities laws and regulations; all of the securities of the Company
conform to the description thereof contained in the Prospectus; the certificates
for the Common Stock and Warrants, assuming they are in the form filed with the
Commission, are in due and proper form; the shares of Common Stock to be sold by
the Company pursuant to this Agreement, including shares of Common Stock to be
sold as a part of the Option Units have been duly authorized and, upon issuance
and delivery thereof as contemplated in this Agreement and the Registration
Statement, will be validly issued, fully paid and nonassessable; no preemptive
rights of stockholders exist with respect to any of the Common Stock of the
Company or the issuance or sale thereof pursuant to any applicable statute or
the provisions of the Company's charter documents or, to such counsel's best
knowledge, pursuant to any contractual obligation. The Warrants and the
Representatives' Warrants have been authorized for issuance to the purchasers of
Units or the Representatives' Warrants, as the case may be, and will, when
issued, possess rights, privileges, and characteristics as represented in the
most recent form of Warrants or Representatives' Warrants, as the case may be,
filed as an exhibit to the Registration Statement; the securities to be issued
upon exercise of the Representatives' Warrants, when issued and delivered
against payment therefor in accordance with the terms of the Representatives'
Warrants, will be duly and validly issued, fully paid, nonassessable and free of
preemptive rights, and all corporate action required to be taken for the
authorization and issuance of the Warrants, the Representatives' Warrants, and
the securities to be issued upon their exercise, has been validly and
sufficiently taken.
(iii) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any
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character obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Units or the right to have any Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
therein).
(vi) The statements under the captions "Business - Patents,
Trademarks and Proprietary Rights," "Business - Legal Proceedings" and
"Description of Securities" in the Prospectus and in Item 24 of the Registration
Statement, insofar as such statements constitute a summary of documents referred
to therein or matters of law, fairly summarize in all material respects the
information called for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all material
respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any Subsidiary, except
as set forth in the Registration Statement.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the certificate of incorporation or by-laws of the
Company or any Subsidiary, or any agreement or instrument known to such counsel
to which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary may be bound.
(x) This Agreement has been duly authorized, executed and delivered
by the Company; the Warrant Agreement has been duly authorized, executed and
delivered by the Company; and the Representatives' Warrants have been duly
authorized, executed and delivered by the Company.
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(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and application
of the net proceeds therefrom as described in the Prospectus, required to
register as an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws of states other than Delaware or New York or Federal laws
on local counsel in such jurisdictions, provided that in each case such counsel
shall state that they believe that they and the Underwriters are justified in
relying on such other counsel. In addition to the matters set forth above, the
opinion of Bryan Cave LLP shall also include a statement to the effect that
nothing has come to the attention of such counsel that has caused them to
believe that (i) the Registration Statement, at the time it became effective
under the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements and statistical
information therein).
(c) The Representatives shall have received from Grover T.
Wickersham, P.C., counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6.
In rendering such opinion, Grover T. Wickersham, P.C. may rely as to all matters
governed other than by the laws of the State of California or Federal laws on
the opinion of counsel referred to in Paragraph (b) of this Section 6. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
that has caused them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement thereto, on
the date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances under which they
are made, not
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misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Grover T. Wickersham, P.C. may state that their belief is based upon
the procedures set forth therein, but is without independent check and
verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Grover T. Wickersham, P.C. a memorandum or summary, in form
and substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Units under the
State securities or Blue Sky laws of such jurisdictions as the Representatives
may reasonably have designated to the Company.
(e) The Representatives, on behalf of the several Underwriters, shall
have received, on each of the dates hereof, the Closing Date and the Option
Closing Date, as the case may be, a letter dated the date hereof, the Closing
Date or the Option Closing Date, as the case may be, in form and substance
satisfactory to the Representatives, of KPMG Peat Marwick LLP confirming that
they are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations and containing such other statements and information as are
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer or the President and the Chief Financial Officer of
the Company (or the executive officer performing the functions of the Chief
Financial Officer, if no person holds such office at the Closing Date or the
Option Closing Date, as the case may be) to the effect that, as of the Closing
Date or the Option Closing Date, as the case may be, each of them severally
represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for such purpose have been taken or are, to his
or her knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement and
the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or
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necessary in order to make the statements therein not misleading, and since the
effective date of the Registration Statement, no event has occurred which should
have been set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company or
the earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company, whether or not
arising in the ordinary course of business.
(g) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(h) The Units, Common Stock and Warrants have been approved for
quotation upon notice of issuance on the Nasdaq SmallCap Market.
(i) The Lockup Agreements described in Section 4(j) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Grover T.
Wickersham, P.C., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company of such termination in writing or
by telegram at or prior to the Closing Date or the Option Closing Date, as the
case may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of the
Units required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses,
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claims, damages or liabilities to which such Underwriter or any such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will reimburse each Underwriter and each such controlling person
upon demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or proceeding or in
responding to a subpoena or governmental inquiry related to the offering of the
Units, whether or not such Underwriter or controlling person is a party to any
action or proceeding; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement,
or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but
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the failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of the provisions of Section 8(a)
or (b). In case any such proceeding shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party and shall pay as incurred the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or
within 30 days of presentation) the fees and expenses of the counsel retained by
the indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel,
(ii) the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them or (iii) the indemnifying party shall
have failed to assume the defense and employ counsel acceptable to the
indemnified party within a reasonable period of time after notice of
commencement of the action. It is understood that the indemnifying party shall
not, in onnection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm for all such indemnified parties. Such firm shall be designated in
writing by you in the case of parties indemnified pursuant to Section 8(a) and
by the Company in the case of parties indemnified pursuant to Section 8(b). 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. In addition, the indemnifying party will not,
without the prior written consent of the indemnified party, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action or proceeding of which indemnification may be sought hereunder (whether
or not any indemnified party is an actual or potential party to such claim,
action or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Units. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the
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Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company bears to the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by PRO
RATA allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Units purchased by such Underwriter, and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
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<PAGE>
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Units
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
the Representatives of the Underwriters, shall use your reasonable efforts to
procure within 36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Units or Option Units, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Units or Option Units, as the
case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of Units with respect to which
such default shall occur does not exceed 10% of the Firm Units or Option Units,
as the case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Units or Option
Units, as the case may be, which they are obligated to purchase hereunder, to
purchase the Firm Units or Option Units, as the case may be, which such
defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of Firm Units or Option Units, as the case may be, with respect
to which such default shall occur equals or exceeds 10% of the Firm Units or
Option Units, as the case may be, covered hereby, the Company or you as the
Representatives of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days, as you, as the
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Paulson Investment
Company, Inc., 811 SW Front Avenue, Portland, Oregon 97204, Attention: Chester
L.F. Paulson; with a copy to Grover T. Wickersham, P.C., 430 Cambridge Avenue,
Suite 100, Palo Alto, California 94306, Attention: Debra K. Weiner; if to the
Company, to Caring Products International, Inc., 200 First Avenue West, Suite
200, Seattle, Washington 98119, Attention: Susan A. Schreter; with a copy to
Bryan Cave LLP, 245 Park Avenue, New York, New York 10167, Attention: Steven A.
Saide.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
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<PAGE>
(a) at any time prior to the earlier of (i) the time the Units are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its subsidiaries taken as
a whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company and
its subsidiaries taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency or other national or international calamity or crisis
or change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable to market the Units or to enforce contracts for the sale of the
Units, (iii) the Dow Jones Industrial Average shall have fallen by 15 percent or
more from its closing price on the day immediately preceding the date that the
Registration Statement is declared effective by the Commission, (iv) suspension
of trading in securities generally on the New York Stock Exchange or the
American Stock Exchange or limitation on prices (other than limitations on hours
or numbers of days of trading) for securities on either such Exchange, (v) the
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (vi) declaration of a banking moratorium
by United States or New York State authorities, (vii) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Exchange Act); (viii) the suspension of trading of the Common Stock by the
Commission on the Nasdaq SmallCap Market or (ix) the taking of any action by any
governmental body or agency in respect of its monetary or fiscal affairs which
in your reasonable opinion has a material adverse effect on the securities
markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Units from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph
23
<PAGE>
on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-B under the Act
and the information under the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Units under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Oregon. All disputes relating to this Underwriting
Agreement shall be adjudicated before a court located in Multnomah County,
Oregon to the exclusion of all other courts that might have jurisdiction.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
CARING PRODUCTS
INTERNATIONAL, INC.
By:
-------------------------------
24
<PAGE>
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the date
first above written.
PAULSON INVESTMENT COMPANY,
INC.
COHIG & ASSOCIATES, INC.
As Representatives of the several
Underwriters listed on Schedule I
By:
-------------------------------------
Authorized Officer of Paulson
Investment Company, Inc.
25
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Units
Underwriter To Be Purchased
----------- -------------------------
Paulson Investment Company, Inc.
Cohig & Associates, Inc.
-----------
Total 1,500,000
-----------
-----------
26
<PAGE>
EXHIBIT 3.1.2
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CARING PRODUCTS INTERNATIONAL, INC.
Caring Products International, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by
unanimous written consent of its members, filed with the minutes of
the Board, adopted a resolution proposing and declaring advisable the
following amendment to the Restated Certificate of Incorporation of
said corporation:
RESOLVED, that the Corporation's Restated
Certificate of Incorporation, as heretofore amended, be
further amended by adding a sentence at the end of the first
paragraph of Article Fourth thereof so that, as amended,
said paragraph shall be read in its entirety as follows:
"The total number of shares of stock which the Corporation
shall have authority to issue shall be 76,000,000 shares of
capital stock, of which 1,000,000 shares shall be
classified as Preferred Stock, par value $0.01 per share,
and 75,000,000 shares shall be classified as Common Stock,
par value $0.01 per share. Each six shares of Common Stock
outstanding at 9:00 a.m. daylight savings time on Monday,
June 16, 1997 shall be deemed to be one share of Common
Stock of the Corporation, par value $0.01 per share."
SECOND: That in lieu of a meeting and vote of stockholders, the
stockholders holding a majority of the outstanding shares of stock
entitled to vote on the amendment have given written consent, and
written notice of the adoption of the amendment will be given as
provided in Section 228 of the General Corporation Law of the State
of Delaware to every stockholder who has not consented to such action
in writing and is entitled to such notice.
<PAGE>
THIRD: That said amendment was duly adopted in accordance with
the provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, Caring Products International, Inc. has
caused this certificate to be signed by William H. Atkinson, its
Chairman of the Board of Directors and attested by Steven A. Saide,
its Secretary this 12th day of June, 1997.
By: /s/ William H. Atkinson
-----------------------
William H. Atkinson,
Chairman of the Board
ATTEST:
By: /s/ Steven A. Saide
--------------------
Steven A. Saide,
Secretary
<PAGE>
EXHIBIT 4.4
WARRANT TO PURCHASE COMMON SHARES
OF
CARING PRODUCTS INTERNATIONAL, INC.
Void after
May 8, 1999
This Warrant certifies that, for value received, H.J. Forest
Products, Inc. ("HJFP") is entitled, subject to the terms set forth below,
to purchase from Caring Products International, Inc. (the "Corporation"), a
Delaware corporation, up to 760,000 fully paid and non-assessable Common
Shares of the Corporation. The purchase price per Common Share shall be the
Purchase price (as hereinafter defined) from time to time from the date of
this Warrant up to and including May 8, 1999, such price and number of
Common shares being subject to adjustment as provided in this Warrant.
1. DEFINITIONS. As used in this Warrant, the following terms, unless
the context otherwise requires, shall have the following meanings:
1.1. "COMMON SHARES" means all shares, now or hereafter authorized, of
the class of the Common Shares of the Corporation have a par value of $0.01
per share presently authorized and shares of any other class into which
those shares may hereafter be changed.
1.2. "CORPORATION" includes any corporation which shall succeed to or
assume the obligations of the Corporation under this Warrant.
1.3. "PURCHASE PRICE" means for the period up to and including May 8,
198 at the price of US$0.31 per Common Share and for the period from May 9,
1998 to and including May 8, 1999 at the price of US$0.36 per Common Share.
1.4. "SUBSIDIARY" shall mean any corporation at least 50% of whose
outstanding voting shares shall at the time be owned directly or indirectly
by the Corporation or by one or more subsidiaries, or the Corporation and
one or more subsidiaries.
1.5. "TRANSFER AGENT" means Montreal Trust Company of Canada, its
successors of any other transfer agent which shall be a recognized trust
company authorized to do business in the jurisdiction in which the Common
Shares of the Corporation are registered for trading.
1.6. "WARRANTHOLDER", "HOLDER OF WARRANT", HOLDER", or similar terms
when the context refers to a holder of this Warrant, mean any person who
shall at the time be the registered holder of this Warrant, and "ORIGINAL
WARRANTHOLDER" means HJFP.
<PAGE>
2. EXERCISE PROVISIONS
2.1. FORM OF SUBSCRIPTION. The holder of this Warrant may exercise this
Warrant in whole or in part by surrender of this Warrant, with the form of
subscription at the end of this Warrant duly executed by the holder, to the
Transfer Agent at its principal office in Vancouver, British Columbia,
accompanied by payment for the Common Shares subscribed for in the amount
obtained by multiplying the Purchase Price in respect of the Common Shares
being purchased by the number of Common Shares designated in the
subscription.
2.2. PAYMENT. Payment may be in cash or by certified or official bank
cheque payable to the order of the Corporation.
2.3. PARTIAL EXERCISE. On partial exercise the Corporation shall
promptly issue and deliver to the holder of this Warrant a new Warrant or
Warrants of like tenor in the name of that holder providing for the right to
purchase that number of Common Shares as to which this Warrant has not been
exercised.
2.4. DELIVERY OF SHARE CERTIFICATES. As soon as possible after full or
partial exercise of this Warrant, the Corporation at its expense will cause
to be issued in the name of and delivered to the holder of this Warrant, a
certificate or certificates for the number of fully paid and nonassessable
Common Shares to which that holder shall be entitled upon such exercise.
3. REPRESENTATIONS AND WARRANTIES
3.1. AUTHORIZED CAPITAL. The authorized capital of the Corporation
consists of 76,000,000 shares comprised of 75,000,000 Common Shares with a
par value of $0.01 each, of which 24,752,249 shares are issued and
outstanding and 1,000,000 Preferred Shares with a par value of $0.01 each,
of which no shares are issued and outstanding.
3.2. QUALIFICATION OF SHARES. All of the Common Shares to be issued
pursuant to this Warrant will be freely tradeable without further
registration or qualification.
3.3. WARRANT DULY AUTHORIZED AND EXECUTED AND BINDING. The execution,
delivery and performance by the Corporation of this Warrant have been duly
authorized by all necessary action of the Corporation and constitutes a
legal, valid and binding obligation of the Corporation enforceable against
the Corporation in accordance with its terms.
3.4. STOCK EXCHANGE. The Common Shares of this Corporation are listed
for trading on the Vancouver Stock Exchange.
4. ANTIDILUTION PROVISIONS
4.1. SHARE SPLITS AND CONSOLIDATIONS. If the Corporation shall at any
time subdivide or consolidate its outstanding Common Shares, this Warrant
shall, after that subdivision or consolidation, evidence the right to
purchase the number of Common Shares that would have been issuable as a
result of that change with respect to the Common Shares which were
purchasable under this Warrant immediately before that subdivision or
consolidation. If the
2
<PAGE>
Corporation shall at any time subdivide the outstanding Common Shares, the
Purchase Price then in effect immediately before that subdivision shall be
proportionately decreased, and, if the Corporation shall at any time
consolidate the outstanding Common Shares, the Purchase Price then in effect
immediately before that combination shall be proportionately increased. Any
adjustment under this Section shall become effective at the close of
business in Vancouver, British Columbia, on the date the subdivision or
combination becomes effective.
EXAMPLE: For example, if the Corporation declares a 2 for 1 share split
with respect to Common Shares at a time when this Warrant is exercisable for
90,000 Common Shares at a Purchase Price of CDN$12.00 per share, after the
split this Warrant will be exercisable for 180,000 Common Shares at a
Purchase Price of CDN$6.00 per share.
4.2. RECLASSIFICATION EXCHANGE AND SUBSTITUTION. If the Common Shares
issuable upon exercise of this Warrant shall be changed into the same or a
different number of shares of any other class or classes of shares, whether
by capital reorganization, reclassification, or otherwise (other than a
subdivision or consolidation of shares provided for above), the holder of
this Warrant shall, on its exercise, be entitled to purchase, in lieu of the
Common Shares which the holder would have become entitled to purchase but
for such change, a number of shares of such other class or classes of shares
equivalent to the number of Common Shares that would have been subject to
purchase by the holder on exercise of this Warrant immediately before that
change.
4.3. SHARE DIVIDENDS. For the purpose of making any adjustment in the
Purchase Price or number of Common Shares purchasable upon exercise of this
Warrant as provided above, if the Corporation shall declare any dividend, or
make any other distribution, on or in respect of any shares of the
Corporation of any class, which dividend or distribution is payable or paid
in Common Shares (other than dividends or distributions exempted as provided
elsewhere in this Warrant or pursuant to a stock dividend make in the
ordinary course of business), and no other adjustment on account of such
distribution is otherwise specifically provided for in this Warrant, that
declaration or other distribution shall be considered to be an issue or sale
of Common Shares without consideration.
4.4. REORGANIZATIONS MERGERS CONSOLIDATIONS OR SALE OF ASSETS.
(a) If at any time there shall be a capital reorganization of the
Corporation's Common Shares (other than a consolidation,
reclassification, exchange, or subdivision of shares provided for
elsewhere in this Warrant), or merger or consolidation of the
Corporation with or into another corporation, or the sale of the
Corporation's properties and assets as, or substantially as, an
entirety to any other person, then, as a part of such
reorganization, merger, consolidation or sale, lawful provision
shall be made so that the holder of this Warrant shall thereafter
be entitled to receive upon exercise of this Warrant, during the
period specified in this Warrant and upon payment of the Purchase
Price then in effect, the number of shares or other securities or
property of the Corporation, or of the successor corporation
resulting from such merger or consolidation, to which a holder of
the Common Shares deliverable upon exercise of this Warrant would
have been entitled in such
3
<PAGE>
capital reorganization, merger, consolidation or sale if this
Warrant had been exercised immediately before that capital
reorganization, merger, consolidation, or sale.
(b) In any such case, appropriate adjustment (as determined by the
Corporation's board of directors) shall be made in the application
of the provisions of this Warrant with respect to the rights and
interests of the holder of this Warrant after the reorganization,
merger, consolidation, or sale to the end that the provisions of
this Warrant (including adjustment of the Purchase Price then in
effect and number of shares purchasable upon exercise of this
Warrant) shall be applicable after that event, as near as
reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Warrant.
(c) The Corporation shall, within 30 days after making such
adjustment, give written notice (by first class mail, postage
prepaid) to the registered holder of this Warrant at the address of
that holder shown on the Corporation's books. That notice shall
set forth, in reasonable detail, the event requiring the
adjustment and the method by which the adjustment was calculated,
and specify the Purchase Price then in effect after the adjustment
and the increased or decreased number of shares purchasable upon
exercise of this Warrant. When appropriate, that notice may be
given in advance and included as part of the notice required under
other provisions of this Warrant.
4.5. NO DILUTION OR IMPAIRMENT. The Corporation covenants that it will
not, by amendment of its memorandum or articles or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities, or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant, but will
at all times and in good faith assist in carrying out all those terms and in
taking all action necessary to protect the rights of the holder of this
Warrant against dilution or other impairment. Without limiting the
generality of the above provision, the Corporation:
(a) will take all necessary or appropriate action in order that the
Corporation may validly and legally issue fully paid and
non-assessable Common Shares upon exercise of this Warrant.
(b) will not transfer all or substantially all of its properties and
assets to any other person, or consolidate with or merge into any
other corporation or permit any corporation to consolidate with or
merge into the Corporation (if the Corporation is not the
surviving corporation), unless such other person or corporation
shall expressly assume in writing and will be bound by all of the
terms of this Warrant.
4.6. NOTICE OF ADJUSTMENTS. The Corporation shall promptly give written
notice of each adjustment or readjustment of the Purchase Price or the
number of Common Shares or other securities issuable upon exercise of this
Warrant, by first class mail, postage prepaid, to the registered holder of
this Warrant at that holder's address as shown on the Corporation's books.
4
<PAGE>
The notice shall state that adjustment or readjustment and show in
reasonable detail the facts on which that adjustment or readjustment is
based.
4.7. NO CHANGE NECESSARY. The form of this Warrant need not be changed
because of any adjustment in the Purchase Price or in the number of Common
Shares purchasable upon its exercise. A Warrant issued after any adjustment
upon any partial exercise or in replacement may continue to express the same
Purchase Price and the same number of Common Shares (appropriately reduced
in the case of partial exercise) as are stated on the face of this Warrant
as initially issued, and that Purchase Price and that number of shares shall
be considered to have been so changed as of the close of business in
Vancouver, British Columbia on the date of adjustment.
5. FURTHER COVENANTS OF THE CORPORATION
5.1. RESERVATION OF COMMON SHARES. The Corporation covenants with HJFP
that it will at all times reserve and keep available, solely for issuance
upon exercise of this Warrant, all Common Shares from time to time issuable
upon exercise of this Warrant.
5.2. LISTING ON STOCK EXCHANGE. The Corporation covenants with HJFP
that it shall at all times maintain a listing of its Common Shares on a
recognized stock exchange in Canada or the United States acceptable to HJFP.
5.3. QUALIFICATION OF COMMON SHARES ISSUABLE ON EXERCISE OF THIS
WARRANT. The Corporation covenants with HJFP that it shall ensure that the
Common Shares to be issued pursuant to this Warrant will be freely tradable
on the recognized stock exchange forthwith upon issue.
5.4. REPLACEMENT. On receipt of evidence reasonably satisfactory to the
Corporation of the loss, theft, destruction, or mutilation of this Warrant
and, in the case of loss, theft, or destruction, on delivery of any
indemnity agreement or bond reasonably satisfactory in form and amount to
the Corporation or, in the case of mutilation, on surrender and cancellation
of this Warrant, the Corporation at its expense will execute and deliver, in
lieu of this Warrant, a new Warrant of like tenor.
5.5. EXCHANGE AND TRANSFER. On surrender of this Warrant for exchange,
the Corporation at its expense will issue to the holder of this Warrant a
new Warrant or Warrants of like tenor, in the name of HJFP calling in the
aggregate on the face or faces of such Warrant or Warrants for the number of
Common Shares called for on the face of this Warrant.
5.6. TRANSFER AGENT. The Corporation shall at all times have a Transfer
Agent for the purposes of issuing Common Shares upon the exercise of this
Warrant and of replacing or exchanging this Warrant, and during the
continuance of that appointment any such issuance, replacement, or exchange
shall be made at that office by that Transfer Agent.
5
<PAGE>
6. MISCELLANEOUS PROVISIONS
6.1. NO RIGHTS AS MEMBER. No holder of this Warrant, as such, shall be
entitled to vote or receive dividends or be considered a member of the
Corporation for any purpose, nor shall anything in this Warrant be construed
to confer on any holder of this Warrant as such, any rights of a member of
the Corporation or any right to vote, give or withhold consent to any
corporate action, to receive notice of meeting of members, to receive
dividends or subscription rights or otherwise.
6.2. NEGOTIABILITY. Subject to the prior written consent of the
Vancouver Stock Exchange, title to this Warrant may be transferred by
endorsement (by the holder of this Warrant executing the form of assignment
at the end of this Warrant) and delivery in the same manner as a negotiable
instrument transferable by endorsement and delivery. Until this Warrant is
transferred on the books of the Corporation, the Corporation may treat the
registered holder of this Warrant as the absolute owner of this Warrant for
all purposes, notwithstanding any notice to the contrary.
6.3. MODIFICATION. This Warrant and any of its terms may be changed,
waived, or terminated only by a written instrument signed by the party
against whom enforcement of that change, waiver, or termination is sought.
6.4. GOVERNING LAW. This Warrant shall be governed by and construed and
enforced in accordance with the laws of British Columbia.
6.5. EXPIRATION. The right to exercise this Warrant shall expire at the
close of business in Vancouver, British Columbia on May 8, 1999. The expiry
date of the Warrant may not be extended.
IN WITNESS WHEREOF this Warrant has been duly executed by CARING
PRODUCTS INTERNATIONAL, INC., by its proper officers at Vancouver, British
Columbia this 12th day of May, 1997.
CARING PRODUCTS INTERNATIONAL, INC.
By:/s/ William H. W. Atkinson
--------------------------
William H. W. Atkinson, Chairman
NOTE:
Any share certificate issued upon the exercise of this warrant prior to
April 17, 1998 will be printed with a legend as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD PERIOD
EXPIRING AT MIDNIGHT ON APRIL 17, 1998 AND MAY NOT BE TRADED IN BRITISH
COLUMBIA UNTIL THE EXPIRY OF THE HOLD PERIOD EXCEPT AS PERMITTED BY THE
SECURITIES ACT (BRITISH COLUMBIA) AND RULES MADE THEREUNDER."
6
<PAGE>
SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
To: Montreal Trust Company of Canada
Montreal Trust Centre
510 Burrard Street, 4th Floor
Vancouver, British Columbia V6C 3B9
The undersigned, the holder of the attached Warrant, hereby
irrevocably elects to exercise the purchase right represented by that
Warrant for, and to purchase under the Warrant,_____________________Common
Shares of Caring Products International, Inc. and herewith makes payment of
$_________________________ for those Common Shares. Attached hereto is a
calculation of the purchase price for the Common Shares in respect of which
this Warrant is being exercised. The undersigned hereby requests that the
share certificate for those Common Shares be issued in the name of, and
delivered to,_______________________________________________ whose address
is____________________________________________
Dated:________________________, 19_
(Signature must conform in all respects to name of
holder as specified on the face of the attached Warrant.)
____________________________________________
Signature
____________________________________________
Address
____________________________________________
____________________________________________
7
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
CARING PRODUCTS INTERNATIONAL, INC.
PURCHASE WARRANTS
Issued to:
------------------------
Exercisable to Purchase
___________ Units
of
CARING PRODUCTS INTERNATIONAL, INC.
Void after __________, 2002
<PAGE>
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time on or after __________, 1998 and on or before
____________, 2002, up to ________ Units (hereinafter defined) at the Exercise
Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, $0.01 par value, of the
Company.
(e) "Company" means Caring Products International, Inc., a Delaware
corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in
Section 6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one complete Unit (or Securities obtainable in lieu of one complete
Unit) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $_____ per Unit (120% of the
initial public offering price of a Unit). If a Warrant is exercised for a
component of a Unit or Units, then the price payable in connection with such
exercise shall be determined by allocating $0.001 to the Unit Warrant and the
balance of the Exercise Price to the share of Common Stock, or, in each case, to
any securities obtainable in addition to or in lieu of such share of Unit
Warrant or Common Stock by virtue of the application of Section 3 of this
Warrant.
(i) "Offering" means the public offering of Units made pursuant to
the Registration Statement.
(j) "Participating Underwriter" means any underwriter participating
in the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
2
<PAGE>
(k) "Registration Statement" means the Company's registration
statement (File No.333-_________), as amended on the Closing Date.
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(n) "Unit" means, as the case may require, either one of the Units
offered to the Public pursuant to the Registration Statement or one of the Units
obtainable on exercise of a Warrant.
(o) "Unit Warrant" means a Common Stock purchase warrant included as
a component of a Unit.
(p) "Warrant Certificate" means a certificate evidencing the Warrant.
(q) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is _______________________.
(r) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering on
behalf of the Warrantholder and the denominator of which is the aggregate sales
price of all of the securities sold by such underwriter, underwriting syndicate,
or agent in such offering and (ii) all out-of-pocket expenses of the
Warrantholder, except for the reasonable fees and disbursements of one firm
retained as legal counsel on behalf of all of the Warrantholders that will be
paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
2. EXERCISE OF WARRANTS. All or any part of the Warrant may be exercised
commencing on the first anniversary of the Effective Date and ending at 5 p.m.
Pacific Time on the fifth anniversary of the Effective Date by surrendering this
Warrant Certificate, together with appropriate instructions, duly executed by
the Warrantholder or by its duly authorized attorney, at the office of the
Company, 200 First Avenue East, Suite 200, Seattle, Washington 98119, or at such
other office or agency as the Company may designate. Upon receipt of notice of
exercise, the Company shall immediately instruct its transfer agent to prepare
certificates for the Securities to be received by the Warrantholder upon
completion of the Warrant exercise. When such certificates are prepared, the
Company shall notify the Warrantholder and deliver such certificates to the
Warrantholder or as per the Warrantholder's instructions immediately upon
payment in full
3
<PAGE>
by the Warrantholder, in lawful money of the United States, of the Exercise
Price payable with respect to the Securities being purchased. If the
Warrantholder shall represent and warrant that all applicable registration and
prospectus delivery requirements for their sale have been complied with upon
sale of the Securities received upon exercise of the Warrant, such certificates
shall not bear a legend with respect to the Securities Act of 1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the Warrantholder, to the end that the provisions set
forth herein will thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant. The Company will not permit any change in its
capital structure to occur unless the issuer of the shares of stock or other
securities to be received by the holder of this Warrant Certificate, if not the
Company, agrees to be bound by and comply with the provisions of this Warrant
Certificate.
4
<PAGE>
(c) When any adjustment is required to be made in the number of
shares of Common Stock, other securities, or the property purchasable upon
exercise of the Warrant, the Company will promptly determine the new number of
such shares or other securities or property purchasable upon exercise of the
Warrant and (i) prepare and retain on file a statement describing in reasonable
detail the method used in arriving at the new number of such shares or other
securities or property purchasable upon exercise of the Warrant and (ii) cause a
copy of such statement to be mailed to the Warrantholder within thirty (30) days
after the date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will pay,
in lieu of fractional shares, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock in the over-the-counter
market or the last sale price on a national securities exchange or on The Nasdaq
National Market on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of
the Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment of
the Common Stock provided in this Section 3 will also apply to the securities to
which the Warrantholder or his assignee is entitled under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Common Stock or other
Securities purchasable upon exercise of the Warrant.
4. RESERVATION OF SECURITIES. The Company agrees that the number of
shares of Common Stock, Unit Warrants or other Securities sufficient to provide
for the exercise of the Warrant upon the basis set forth above will at all times
during the term of the Warrant be reserved for issuance upon exercise of the
Warrant.
5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT
CERTIFICATE.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "Registration Period"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the Units
were qualified for sale in the Offering or such other states as the Company and
the Warrantholder agree to. In order to
5
<PAGE>
comply with the provisions of this Section 6(a), the Company is not required to
file more than one registration statement. No registration right of any kind,
"piggyback" or otherwise, will last longer than five years from the Closing
Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its PRO RATA share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration, will be entirely
in the control and at the discretion of the Company. The Company will file such
post-effective amendments and supplements as may be necessary to maintain the
currency of the registration statement during the period of its use. In
addition, if the Warrantholder participating in the registration is advised by
counsel that the registration statement, in their opinion, is deficient in any
material respect, the Company will use its best efforts to cause the
registration statement to be amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Act, and such other documents as it may reasonably
request in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6, addressed to the Warrantholders and any Participating
Underwriter, (ii) furnish an appropriate letter from the independent public
accountants of the Company, addressed to the Warrantholders and any
Participating Underwriter, and (iii) make representations and warranties to the
Warrantholders and any Participating Underwriter. A request pursuant to this
subsection (e) may be made on three occasions. The documents required to be
delivered pursuant to this subsection (e) will be dated within ten days of the
request and will be, in form and substance, equivalent to similar documents
furnished to the underwriters in connection with the Offering, with such changes
as may be appropriate in light of changed circumstances.
7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any
6
<PAGE>
material fact contained, on the effective date thereof, in any such registration
statement or any preliminary prospectus or final prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that
the Company will not be liable in any case to the extent that any loss, claim,
damage, or liability arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in any
registration statement, preliminary prospectus, final prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with written
information furnished by a Warrantholder for use in the preparation thereof. The
indemnity agreement contained in this subparagraph (a) will not apply to amounts
paid to any claimant in settlement of any suit or claim unless such payment is
first approved by the Company, such approval not to be unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in said registration statement, any preliminary or final
prospectus, or other filing, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, preliminary or final prospectus, or other filing, or
amendment or supplement, in reliance upon and in conformity with written
information furnished by such Warrantholder for use in the preparation thereof;
PROVIDED, HOWEVER, that the indemnity agreement contained in this
subparagraph (b) will not apply to amounts paid to any claimant in settlement of
any suit or claim unless such payment is first approved by the Warrantholder,
such approval not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under
subparagraphs (a) or (b) above of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, notify the indemnifying party of the commencement thereof;
but the omission to notify the indemnifying party will not relieve it from any
liability that it may have to any indemnified party otherwise than under
subparagraphs (a) and (b).
(d) If any such action is brought against any indemnified party and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
7
<PAGE>
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period after
the Effective Date except to underwriters of the Offering or to individuals who
are either a partner or an officer of such an underwriter or by will or by
operation of law. The Warrant may be divided or combined, upon request to the
Company by the Warrantholder, into a certificate or certificates evidencing the
same aggregate number of Warrants.
9. NO RIGHTS AS A STOCKHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its stockholders.
10. NOTICE. Any notices required or permitted to be given hereunder will
be in writing and may be served personally or by mail; and if served will be
addressed as follows:
If to the Company:
200 First Avenue West, Suite 200
Seattle, Washington 98119
Attn: President
If to the Warrantholder:
at the address furnished by the
Warrantholder to the Company for
the purpose of notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
8
<PAGE>
11. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this
Warrant Certificate shall be tried before the courts of Oregon located in
Multnomah County, Oregon to the exclusion of all other courts that might have
jurisdiction.
Dated as of ___________, 1997
CARING PRODUCTS
INTERNATIONAL, INC.
By:
-------------------------------------
Its:
-------------------------------------
Agreed and Accepted as of _______, 1997.
---------------------------------------
By:
-------------------------------------
Its:
-------------------------------------
9
<PAGE>
EXHIBIT 4.6
FORM OF
WARRANT AGREEMENT
between
CARING PRODUCTS INTERNATIONAL, INC.
and
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK
Dated as of ________________, 1997
This Warrant Agreement (this "Agreement"), dated as of ______________,
1997 is between Caring Products International, Inc., a Delaware corporation (the
"Company"), and The Bank of Nova Scotia Trust Company of New York, a trust
company incorporated under the laws of New York (the "Warrant Agent").
The Company, at or about the time that it is entering into this
Agreement, proposes to issue and sell to public investors an aggregate of
1,500,000 Units ("Units"). Each Unit consists of one share of common stock,
$0.01 par value, of the Company ("Common Stock") and one Warrant (collectively,
the "Warrants"), each Warrant exercisable to purchase one share of Common Stock
for $_____, upon the terms and conditions and subject to adjustment in certain
circumstances, all as set forth in this Agreement.
The Company proposes to issue to the Representatives of the
Underwriters in the public offering of Units referred to above warrants to
purchase up to 225,000 additional Units.
The Company wishes to retain the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants to be issued under this Agreement (the "Warrant Certificates") and the
exercise of the Warrants.
The Company and the Warrant Agent wish to enter into this Agreement to
set forth the terms and conditions of the Warrants and the rights of the holders
thereof ("Warrantholders") and to set forth the respective rights and
obligations of the Company and the Warrant Agent. Each Warrantholder is an
intended beneficiary of this Agreement with respect to the rights of
Warrantholders herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
<PAGE>
Section 1. APPOINTMENT OF WARRANT AGENT
The Company appoints the Warrant Agent to act as agent for the
Company in accordance with the instructions in this Agreement and the Warrant
Agent accepts such appointment.
Section 2. DATE, DENOMINATION AND EXECUTION OF WARRANT CERTIFICATES
The Warrant Certificates (and the Form of Election to Purchase and
the Form of Assignment to be printed on the reverse thereof) shall be in
registered form only and shall be substantially of the tenor and purport recited
in Exhibit A hereto, and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law, or with any rule or regulation made pursuant
thereto, or with any rule or regulation of any stock exchange or any automated
quotation system on which the Common Stock or the Warrants may be listed, or to
conform to usage. Each Warrant Certificate shall entitle the registered holder
thereof, subject to the provisions of this Agreement and of the Warrant
Certificate, to purchase, on or before the close of business on __________, 2002
(the "Expiration Date"), one fully paid and non-assessable share of Common Stock
for each Warrant evidenced by such Warrant Certificate, subject to adjustments
as provided in Section 6 hereof, for the "Exercise Price," which initially shall
be $_______________, subject to adjustment as provided in Section 6 hereof.
Each Warrant Certificate issued as a part of a Unit offered to the public as
described in the recitals, above, shall be dated __________, 1997; each other
Warrant Certificate shall be dated the date on which the Warrant Agent receives
valid issuance instructions from the Company or a transferring holder of a
Warrant Certificate or, if such instructions specify another date, such other
date.
For purposes of this Agreement, the term "close of business" on
any given date shall mean 5:00 p.m., Eastern time, on such date; provided,
however, that if such date is not a business day, it shall mean 5:00 p.m.,
Eastern time, on the next succeeding business day. For purposes of this
Agreement, the term "business day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in New York are authorized or
obligated by law to be closed.
Each Warrant Certificate shall be executed on behalf of the
Company by the Chairman of the Board or its President or a Vice President,
either manually or by facsimile signature printed thereon. Each Warrant
Certificate shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any Warrant Certificate shall cease to be such
officer of the Company before countersignature by the Warrant Agent and issue
and delivery thereof by the Company, such Warrant Certificate, nevertheless, may
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificate had not
ceased to be such officer of the Company.
- 2 -
<PAGE>
Section 3. SUBSEQUENT ISSUANCE OF WARRANT CERTIFICATES
Subsequent to their original issuance, no Warrant Certificates
shall be reissued except (i) Warrant Certificates issued upon transfer thereof
in accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any
combination, split-up or exchange of Warrant Certificates pursuant to Section 4
hereof, (iii) Warrant Certificates issued in replacement of mutilated,
destroyed, lost or stolen Warrant Certificates pursuant to Section 5 hereof,
(iv) Warrant Certificates issued upon the partial exercise of Warrant
Certificates pursuant to Section 7 hereof, and (v) Warrant Certificates issued
to reflect any adjustment or change in the Exercise Price or the number or kind
of shares purchasable thereunder pursuant to Section 22 hereof. The Warrant
Agent is hereby irrevocably authorized to countersign and deliver, in accordance
with the provisions of said Sections 4, 5, 7 and 22, the new Warrant
Certificates required for purposes thereof, and the Company, whenever required
by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates
duly executed on behalf of the Company for such purposes.
Section 4. TRANSFERS AND EXCHANGES OF WARRANT CERTIFICATES
The Warrant Agent will keep or cause to be kept books for
registration of ownership and transfer of the Warrant Certificates issued
hereunder. Such registers shall show the names and addresses of the respective
holders of the Warrant Certificates and the number of Warrants evidenced by each
such Warrant Certificate.
The Warrant Agent shall, from time to time, register the transfer
of any outstanding Warrants upon the books to be maintained by the Warrant Agent
for that purpose, upon surrender of the Warrant Certificate evidencing such
Warrants, with the Form of Assignment duly filled in and executed with such
signature guaranteed by an eligible guarantor institution with membership in the
signature guarantee medallion program and such supporting documentation as the
Warrant Agent or the Company may reasonably require, to the Warrant Agent at its
stock transfer office in New York City, New York, at any time on or before the
Expiration Date, and upon payment to the Warrant Agent for the account of the
Company of any amount equal to any applicable transfer tax. Payment of the
amount of such tax may be made in cash, by wire transfer of good funds, or by
certified or official bank check, payable in lawful money of the United States
of America to the order of the Company.
Upon receipt of a Warrant Certificate, with the Form of Assignment
duly filled in and executed, accompanied by payment of an amount equal to any
applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered
Warrant Certificate and countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
PROVIDED, HOWEVER, that in case the registered holder of any Warrant Certificate
shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Warrant
Certificates for the number of full Warrants not so transferred.
- 3 -
<PAGE>
Any Warrant Certificate or Warrant Certificates may be exchanged
at the option of the holder thereof for another Warrant Certificate or Warrant
Certificates of different denominations, of like tenor and representing in the
aggregate the same number of Warrants, upon surrender of such Warrant
Certificate or Warrant Certificates, with the Form of Assignment duly filled in
and executed, to the Warrant Agent, at any time or from time to time after the
close of business on the date hereof and prior to the close of business on the
Expiration Date. The Warrant Agent shall promptly cancel the surrendered
Warrant Certificate or Warrant Certificates and deliver the new Warrant
Certificate or Warrant Certificates pursuant to the provisions of this Section.
Section 5. MUTILATED, DESTROYED, LOST OR STOLEN WARRANT CERTIFICATES
Upon receipt by the Company and the Warrant Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
any Warrant Certificate, and in the case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to them
of all reasonable expenses incidental thereto, and, in the case of mutilation,
upon surrender and cancellation of the Warrant Certificate, the Warrant Agent
shall countersign and deliver a new Warrant Certificate of like tenor for the
same number of Warrants.
Section 6. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE AND EXERCISE
PRICE
The number and kind of securities or other property purchasable
upon exercise of a Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the occurrence, after the date hereof, of any of the
following events:
A. The initial Exercise Price shall be $_____. If the Company's
audited fiscal 1999 revenues do not exceed $15 million and/or its audited fiscal
1999 net income (adjusted to exclude any expenses relating to the vesting of any
employee options or warrants) before interest expense and taxes does not exceed
$1.5 million, a one-time downward adjustment of the Exercise Price to $_____.
B. In case the Company shall (1) pay a dividend in, or make a
distribution of, shares of capital stock on its outstanding Common Stock,
(2) subdivide its outstanding shares of Common Stock into a greater number of
such shares or (3) combine its outstanding shares of Common Stock into a smaller
number of such shares, the total number of shares of Common Stock purchasable
upon the exercise of each Warrant outstanding immediately prior thereto shall be
adjusted so that the holder of any Warrant Certificate thereafter surrendered
for exercise shall be entitled to receive at the same aggregate Exercise Price
the number of shares of capital stock (of one or more classes) which such
holder would have owned or have been entitled to receive immediately following
the happening of any of the events described above had such Warrant been
exercised in full immediately prior to the record date with respect to such
event. Any adjustment made pursuant to this Subsection shall, in the case of a
stock dividend or distribution, become effective as of the record date therefor
and, in the case of a subdivision or combination, be made as of the effective
date thereof. If, as a result of an adjustment made pursuant to this
Subsection, the holder of any Warrant Certificate thereafter surrendered for
exercise shall
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become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a Board resolution filed with the Warrant
Agent) shall determine the allocation of the adjusted Exercise Price between or
among shares of such classes of capital stock.
C. In the event of a capital reorganization or a reclassification of
the Common Stock (except as provided in Subsection B above or Subsection E
below), any Warrantholder, upon exercise of Warrants, shall be entitled to
receive, in substitution for the Common Stock to which he would have become
entitled upon exercise immediately prior to such reorganization or
reclassification, the shares (of any class or classes) or other securities or
property of the Company (or cash) that he would have been entitled to receive at
the same aggregate Exercise Price upon such reorganization or reclassification
if such Warrants had been exercised immediately prior to the record date with
respect to such event. In any such case, appropriate provision (as determined
by the Board of Directors of the Company, whose determination shall be
conclusive and shall be evidenced by a certified Board resolution filed with the
Warrant Agent) shall be made for the application of this Section 6 with respect
to the rights and interests thereafter of the Warrantholders (including but not
limited to the allocation of the Exercise Price between or among shares of
classes of capital stock), to the end that this Section 6 (including the
adjustments of the number of shares of Common Stock or other securities
purchasable and the Exercise Price thereof) shall thereafter be reflected, as
nearly as reasonably practicable, in all subsequent exercises of the Warrants
for any shares or securities or other property (or cash) thereafter deliverable
upon the exercise of the Warrants.
D. Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant or the Exercise Price is adjusted as
provided in this Section 6, the Company will promptly file with the Warrant
Agent a certificate signed by a Chairman or co-Chairman of the Board or the
President or a Vice President of the Company and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the Company
setting forth the number and kind of securities or other property purchasable
upon exercise of a Warrant, as so adjusted, or the Exercise Price as so
adjusted, stating that such adjustments in the number or kind of shares or other
securities or property of such adjustments in the Exercise Price, conform to the
requirements of this Section 6, and setting forth a brief statement of the facts
accounting for such adjustments. Promptly after receipt of such certificate,
the Company, or the Warrant Agent at the Company's request, will deliver, by
first-class, postage prepaid mail, a brief summary thereof (to be supplied by
the Company) to the registered holders of the outstanding Warrant Certificates;
PROVIDED, HOWEVER, that failure to file or to give any notice required under
this Subsection, or any defect therein, shall not affect the legality or
validity of any such adjustments under this Section 6; and PROVIDED, FURTHER,
that, where appropriate, such notice may be given in advance and included as
part of the notice required to be given pursuant to Section 12 hereof.
E. In case of any consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding Common
Stock), or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially
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as an entirety, the corporation formed by such consolidation or merger or the
corporation which shall have acquired such assets, as the case may be, shall
execute and deliver to the Warrant Agent a supplemental warrant agreement
providing that the holder of each Warrant then outstanding shall have the right
thereafter (until the expiration of such Warrant) to receive, upon exercise of
such Warrant, solely the kind and amount of shares of stock and other securities
and property (or cash) receivable upon such consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock of the Company for
which such Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Section. The above provision of
this Subsection shall similarly apply to successive consolidations, mergers,
sales or transfers.
The Warrant Agent shall not be under any responsibility to
determine the correctness of any provision contained in any such supplemental
warrant agreement relating to either the kind or amount of shares of stock or
securities or property (or cash) purchasable by holders of Warrant Certificates
upon the exercise of their Warrants after any such consolidation, merger, sale
or transfer or of any adjustment to be made with respect thereto, but subject to
the provisions of Section 20 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants (who may be
the accountants regularly employed by the Company) with respect thereto.
F. Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Warrants, Warrant Certificates theretofore or
thereafter issued may continue to express the same price and number and kind of
shares as are stated in the similar Warrant Certificates initially issuable
pursuant to this Warrant Agreement.
G. The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee of
said Board, and not disapproved by the Warrant Agent, to make any computation
required under this Section, and a certificate signed by such firm shall, in the
absence of fraud or gross negligence, be conclusive evidence of the correctness
of any computation made under this Section.
H. For the purpose of this Section, the term "Common Stock" shall
mean (i) the class of stock designated as Common Stock in the Articles of
Incorporation of the Company, as amended, at the date of this Agreement, or
(ii) any other class of stock resulting from successive changes or
reclassification of such Common Stock consisting solely of changes in par value,
or from par value to no par value, or from no par value to par value. In the
event that at any time as a result of an adjustment made pursuant to this
Section, the holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of capital stock of the Company 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
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Common Stock contained in this Section, and all other provisions of this
Agreement, with respect to the Common Stock, shall apply on like terms to any
such other shares.
I. The Company may, from time to time and to the extent permitted by
law, reduce the exercise price of the Warrants by any amount for a period of not
less than 20 days. If the Company so reduces the exercise price of the
Warrants, it will give not less than 15 days' notice of such decrease, which
notice may be in the form of a press release, and shall take such other steps as
may be required under applicable law in connection with any offers or sales of
securities at the reduced price.
Section 7. EXERCISE AND REDEMPTION OF WARRANTS
Unless the Warrants have been redeemed as provided in this
Section 7, the registered holder of any Warrant Certificate may exercise the
Warrants evidenced thereby, in whole at any time or in part from time to time at
or prior to the close of business on the Expiration Date, subject to the
provisions of Section 9, at which time the Warrant Certificates shall be and
become wholly void and of no value. Warrants may be exercised by their holders
or redeemed by the Company as follows:
A. Exercise of Warrants shall be accomplished upon surrender of the
Warrant Certificate evidencing such Warrants, with the Form of Election to
Purchase on the reverse side thereof duly filled in and executed, to the Warrant
Agent at its stock transfer office in New York City, New York, together with
payment to the Company of the Exercise Price (as of the date of such surrender)
of the Warrants then being exercised and an amount equal to any applicable
transfer tax and, if requested by the Company, any other taxes or governmental
charges which the Company may be required by law to collect in respect of such
exercise. Payment of the Exercise Price and other amounts may be made in cash,
by wire transfer of good funds, or by certified or official bank check, payable
in lawful money of the United States of America to the order of the Company. No
adjustment shall be made for any cash dividends, whether paid or declared, on
any securities issuable upon exercise of a Warrant.
B. Upon receipt of a Warrant Certificate, with the Form of Election
to Purchase duly filled in and executed, accompanied by payment of the Exercise
Price of the Warrants being exercised (and of an amount equal to any applicable
taxes or government charges as aforesaid), the Warrant Agent shall promptly
request from the Transfer Agent with respect to the securities to be issued and
deliver to or upon the order of the registered holder of such Warrant
Certificate, in such name or names as such registered holder may designate, a
certificate or certificates for the number of full shares of the securities to
be purchased, together with cash made available by the Company pursuant to
Section 8 hereof in respect of any fraction of a share of such securities
otherwise issuable upon such exercise. If the Warrant is then exercisable to
purchase property other than securities, the Warrant Agent shall take
appropriate steps to cause such property to be delivered to or upon the order of
the registered holder of such Warrant Certificate. In addition, if it is
required by law and upon instruction by the Company, the Warrant Agent will
deliver to each Warrantholder a prospectus which complies with the provisions of
Section 9 of the
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Securities Act of 1933, as amended, and the Company agrees to supply the Warrant
Agent with sufficient number of prospectuses to effectuate that purpose.
C. In case the registered holder of any Warrant Certificate shall
exercise fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent shall promptly countersign and deliver to the
registered holder of such Warrant Certificate, or to his duly authorized
assigns, a new Warrant Certificate or Warrant Certificates evidencing the
number of Warrants that were not so exercised.
D. Each person in whose name any certificate for securities is issued
upon the exercise of Warrants shall for all purposes be deemed to have become
the holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon which the Warrant Certificate was duly
surrendered in proper form and payment of the Exercise Price (and of any
applicable taxes or other governmental charges) was made; PROVIDED, HOWEVER,
that if the date of such surrender and payment is a date on which the stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares as of, and the certificate for such
shares shall be dated, the next succeeding business day on which the stock
transfer books of the Company are open (whether before, on or after the
Expiration Date) and the Warrant Agent shall be under no duty to deliver the
certificate for such shares until such date. The Company covenants and agrees
that it shall not cause its stock transfer books to be closed for a period of
more than 20 consecutive business days except upon consolidation, merger, sale
of all or substantially all of its assets, dissolution or liquidation or as
otherwise provided by law.
E. The Warrants outstanding at the time of a redemption may be
redeemed at the option of the Company, in whole or in part on a pro rata basis,
at any time if, at the time notice of such redemption is given by the Company as
provided in Paragraph F below, the Daily Price has equaled or exceeded 200% of
the then-current Exercise Price for each of the twenty (20) consecutive trading
days immediately preceding the date of such notice, at a price equal to $0.25
per Warrant (the "Redemption Price"). For the purpose of the foregoing
sentence, the term "Daily Price" shall mean, for any relevant day, the closing
bid price on that day as reported by the principal exchange or quotation system
on which prices for the Common Stock are reported. On the redemption date the
holders of record of redeemed Warrants shall be entitled to payment of the
Redemption Price upon surrender of such redeemed Warrants to the Company at the
principal office of the Warrant Agent in New York City, New York.
F. Notice of redemption of Warrants shall be given at least 30 days
prior to the redemption date by mailing, by registered or certified mail,
return receipt requested, a copy of such notice to the Warrant Agent and to all
of the holders of record of Warrants at their respective addresses appearing on
the books or transfer records of the Company or such other address designated in
writing by the holder of record to the Warrant Agent not less than 40 days prior
to the redemption date.
G. From and after the redemption date, all rights of the
Warrantholders (except the right to receive the Redemption Price) shall
terminate, but only if (a) no later than one day prior
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to the redemption date the Company shall have irrevocably deposited with the
Warrant Agent as paying agent a sufficient amount to pay on the redemption date
the Redemption Price for all Warrants called for redemption and (b) the notice
of redemption shall have stated the name and address of the Warrant Agent and
the intention of the Company to deposit such amount with the Warrant Agent no
later than one day prior to the redemption date.
H. The Warrant Agent shall pay to the holders of record of redeemed
Warrants all monies received by the Warrant Agent for the redemption of Warrants
to which the holders of record of such redeemed Warrants who shall have
surrendered their Warrants are entitled.
I. Any amounts deposited with the Warrant Agent that are not required
for redemption of Warrants may be withdrawn by the Company. Any amounts
deposited with the Warrant Agent that shall be unclaimed after six months after
the redemption date may be withdrawn by the Company, and thereafter the holders
of the Warrants called for redemption for which such funds were deposited shall
look solely to the Company for payment. The Company shall be entitled to the
interest, if any, on funds deposited with the Warrant Agent, and the holders of
redeemed Warrants shall have no right to any such interest.
J. If the Company fails to make a sufficient deposit with the Warrant
Agent as provided above, the holder of any Warrants called for redemption may at
the option of the holder (a) by notice to the Company declare the notice of
redemption a nullity as to such holder, or (b) maintain an action against the
Company for the Redemption Price. If the holder brings such an action, the
Company will pay reasonable attorneys' fees of the holder. If the holder fails
to bring an action against the Company for the Redemption Price within 60 days
after the redemption date, the holder shall be deemed to have elected to declare
the notice of redemption to be a nullity as to such holder and such notice shall
be without any force or effect as to such holder. Except as otherwise
specifically provided in this Paragraph J, a notice of redemption, once mailed
by the Company as provided in Paragraph F shall be irrevocable.
Section 8. FRACTIONAL INTERESTS
The Company shall not be required to issue any Warrant Certificate
evidencing a fraction of a Warrant or to issue fractions of shares of securities
on the exercise of the Warrants. If any fraction (calculated to the nearest
one-hundredth) of a Warrant or a share of securities would, except for the
provisions of this Section, be issuable on the exercise of any Warrant, the
Company shall, at its option, either purchase such fraction for an amount in
cash equal to the current value of such fraction computed on the basis of the
closing market price (as quoted on NASDAQ) on the trading day immediately
preceding the day upon which such Warrant Certificate was surrendered for
exercise in accordance with Section 7 hereof or issue the required fractional
Warrant or share. By accepting a Warrant Certificate, the holder thereof
expressly waives any right to receive a Warrant Certificate evidencing any
fraction of a Warrant or to receive any fractional share of securities upon
exercise of a Warrant, except as expressly provided in this Section 8.
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Section 9. RESERVATION OF EQUITY SECURITIES; SECURITIES LAW MATTERS
The Company covenants that it will at all times reserve and keep
available, free from any preemptive rights, out of its authorized and unissued
equity securities, solely for the purpose of issuance upon exercise of the
Warrants, such number of shares of equity securities of the Company as shall
then be issuable upon the exercise of all outstanding Warrants ("Equity
Securities"). The Company covenants that all Equity Securities which shall be
so issuable shall, upon such issuance, be duly authorized, validly issued, fully
paid and nonassessable.
The Company covenants that if any equity securities required to be
reserved for the purpose of issuance upon exercise of the Warrants hereunder
require registration with or approval of any governmental authority under any
federal or state law before such shares may be issued upon exercise of Warrants,
the Company will use all commercially reasonable efforts to cause such
securities to be duly registered, or approved, as the case may be, and, to the
extent practicable, the Company will take all such action in anticipation of and
prior to the exercise of the Warrants, including, without limitation, filing any
and all post-effective amendments to the Company's Registration Statement on
Form SB-2 necessary to permit a public offering of the securities underlying the
Warrants at any and all times during the term of this Agreement; PROVIDED,
HOWEVER, that in no event shall such securities be issued, and the Company is
authorized to refuse to honor the exercise of any Warrant, if such exercise
would result, in the opinion of the Company's Board of Directors upon advice of
counsel, in the violation of any law. In the case of a Warrant exercisable
solely for securities listed on a securities exchange or for which there are at
least two independent market makers, in the event that a current registration
statement is not in effect at the time when a Warrant is exercised, the Company
may, at its option, in lieu of obtaining such registration or approval, elect to
redeem Warrants submitted to the Warrant Agent for exercise for a price equal to
the difference between the closing price of the securities for which such
Warrant is exercisable on the date of such submission and the Exercise Price of
such Warrants, and in the event of such redemption, the Company will pay to the
holder of such Warrants the above-described redemption price in cash within 10
business days after receipt of notice from the Warrant Agent that such Warrants
have been submitted for exercise.
Section 10. REDUCTION OF CONVERSION PRICE BELOW PAR VALUE
Before taking any action that would cause an adjustment pursuant
to Section 6 hereof reducing the portion of the Exercise Price required to
purchase one shares of capital stock below the then par value (if any) of a
share of such capital stock, the Company will use its best efforts to take any
corporate action which, in the opinion of its counsel, may be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
shares of such capital stock.
Section 11. PAYMENT OF TAXES
The Company covenants and agrees that it will pay when due and
payable any and all federal and state documentary stamp and other original issue
taxes which may be payable in respect of the original issuance of the Warrant
Certificates, or any shares of Common Stock or other securities upon the
exercise of Warrants. The Company shall not, however, be required
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(i) to pay any tax which may be payable in respect of any transfer involved in
the transfer and delivery of Warrant Certificates or the issuance or delivery of
certificates for Common Stock or other securities in a name other than that of
the registered holder of the Warrant Certificate surrendered for purchase or
(ii) to issue or deliver any certificate for shares of Common Stock or other
securities upon the exercise of any Warrant Certificate until any such tax shall
have been paid, all such tax being payable by the holder of such Warrant
Certificate at the time of surrender.
Section 12. NOTICE OF CERTAIN CORPORATE ACTIONS
In case the Company after the date hereof shall propose (i) to
offer to the holders of Common Stock, generally, rights to subscribe to or
purchase any additional shares of any class of its capital stock, any evidences
of its indebtedness or assets, or any other rights or options or (ii) to effect
any reclassification of Common Stock (other than a reclassification involving
merely the subdivision or combination of outstanding shares of Common Stock) or
any capital reorganization, or any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company is
required, or any sale, transfer or other disposition of its property and assets
substantially as an entirety, or the liquidation, voluntary or involuntary
dissolution nor winding-up of the Company, then, in each such case, the Company
shall file with the Warrant Agent and the Company, or the Warrant Agent on its
behalf, shall mail (by first-class, postage prepaid mail) to all registered
holders of the Warrant Certificates notice of such proposed action, which notice
shall specify the date on which the books of the Company shall close or a record
be taken for such offer of rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up
shall take place or commence, as the case may be, and which shall also specify
any record date for determination of holders of Common Stock entitled to vote
thereon or participate therein and shall set forth such facts with respect
thereto as shall be reasonably necessary to indicate any adjustments in the
Exercise Price and the number or kind of shares or other securities purchasable
upon exercise of Warrants which will be required as a result of such action.
Such notice shall be filed and mailed in the case of any action covered by
clause (i) above, at least ten days prior to the record date for determining
holders of the Common Stock for purposes of such action or, if a record is not
to be taken, the date as of which the holders of shares of Common Stock of
record are to be entitled to such offering; and, in the case of any action
covered by clause (ii) above, at least 20 days prior to the earlier of the date
on which such reclassification, reorganization, consolidation, merger, sale,
transfer, other disposition, liquidation, voluntary or involuntary dissolution
of winding-up is expected to become effective and the date on which it is
expected that holders of shares of Common Stock of record on such date shall be
entitled to exchange their shares for securities or other property deliverable
upon such reclassification, reorganization, consolidation, merger, sale,
transfer, other disposition, liquidation, voluntary or involuntary dissolution
or winding-up.
Failure to give any such notice or any defect therein shall not
affect the legality or validity of any transaction listed in this Section 12.
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Section 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANT CERTIFICATES, ETC.
The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all monys
received by the Warrant Agent for the purchase of securities or other property
through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available
for inspection by Warrantholders during normal business hours at its stock
transfer office. Copies of this Agreement may be obtained upon written request
addressed to the Warrant Agent at its stock transfer office in New York City,
New York.
Section 14. WARRANTHOLDER NOT DEEMED A STOCKHOLDER
No Warrantholder, as such, shall be entitled to vote, receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Warrants
represented thereby for any purpose whatever. Nothing contained herein or in
any Warrant Certificate may be construed to confer upon any Warrantholder, as
such, any of the rights of a stockholder of the Company, any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, any right to give or withhold consent to any corporate action
(whether at any meeting of stockholders or by giving or withholding consent to
any merger, recapitalization, issuance of stock, reclassification of stock,
change of par value or change of stock to no par value, consolidation,
conveyance or otherwise), or any right to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 12 hereof). No
Warrantholder shall have any right to receive dividend or subscription rights or
any other rights that any stockholders of the Company may have, until such
Warrant Certificate shall have been exercised in accordance with the provisions
hereof and the receipt of the Exercise Price and any other amounts payable upon
such exercise by the Warrant Agent and the Common Stock purchasable upon such
exercise shall have become deliverable as provided herein.
Section 15. RIGHT OF ACTION
All rights of action in respect to this Agreement are vested in
the respective registered holders of the Warrant Certificates; and any
registered holder of any Warrant Certificate, without the consent of the Warrant
Agent or of any other holder of a Warrant Certificate, may in his own behalf for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company suitable to enforce, or otherwise in respect of,
his right to exercise the Warrants evidenced by such Warrant Certificate, for
the purchase of shares of the Common Stock in the manner provided in the Warrant
Certificate and in this Agreement.
Section 16. AGREEMENT OF HOLDERS OF WARRANT CERTIFICATES
Every holder of a Warrant Certificate by accepting the same
consents and agrees with the Company, the Warrant Agent and with every other
holder of a Warrant Certificate that:
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A. the Warrant Certificates are transferable on the registry books of
the Warrant Agent only upon the terms and conditions set forth in this
Agreement; and
B. the Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the absolute owner of the
Warrant (notwithstanding any notation of ownership or other writing thereon made
by anyone other than the Company or the Warrant Agent) for all purposes
whatever, and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary.
Section 17. CANCELLATION OF WARRANT CERTIFICATES
In the event that the Company shall purchase or otherwise acquire
any Warrant Certificate or Warrant Certificates after the issuance thereof, such
Warrant Certificate or Warrant Certificates shall thereupon be delivered to the
Warrant Agent and be canceled by it and retired. The Warrant Agent shall also
cancel any Warrant Certificate delivered to it for exercise, in whole or in
part, or delivered to it for transfer, split-up, combination or exchange.
Warrant Certificates so canceled shall be delivered by the Warrant Agent to the
Company from time to time, or disposed of in accordance with the instructions of
the Company.
Section 18. CONCERNING THE WARRANT AGENT
The Company agrees to pay to the Warrant Agent from time to time,
on demand of the Warrant Agent, reasonable compensation for all services
rendered by it hereunder and also its reasonable expenses incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Warrant Agent
for, and to hold it harmless against, any loss, liability or expense, incurred
without gross negligence, bad faith or willful misconduct on the part of the
Warrant Agent, arising out of or in connection with the acceptance and
administration of this Agreement.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT
Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 21 hereof. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the original
Warrant Agent and deliver such Warrant Certificates so countersigned; and in
case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant
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Agent; and in all such cases such Warrant Certificates shall have the full force
provided in the Warrant Certificates and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed
and at such time any of the Warrant Certificates shall have been countersigned
but not delivered, the Warrant Agent may adopt the countersignature under its
prior name and deliver Warrant Certificates so countersigned; and in case at
that time any of the Warrant Certificates shall not have been countersigned, the
Warrant Agent may countersign such Warrant Certificates either in its prior name
or in its changed name; and in all such cases such Warrant Certificates shall
have the full force provided in the Warrant Certificates and in this Agreement.
Section 20. DUTIES OF WARRANT AGENT
The Warrant Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Company and the holders of Warrant Certificates, by their acceptance thereof,
shall be bound:
A. The Warrant Agent may consult with counsel satisfactory to it (who
may be counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Warrant Agent as to any action
taken, suffered or omitted by it in good faith and in accordance with such
opinion; PROVIDED, HOWEVER, that the Warrant Agent shall have exercised
reasonable care in the selection of such counsel. Fees and expenses of such
counsel, to the extent reasonable, shall be paid by the Company.
B. Whenever in the performance of its duties under this Agreement,
the Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by a Chairman or co-Chairman of the Board or
the President or a Vice President or the Secretary of the Company and delivered
to the Warrant Agent; and such certificate shall be full authorization to the
Warrant Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
C. The Warrant Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
D. The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
E. The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant Certificate (except its
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countersignature thereof); nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any
Warrant Certificate; nor shall it be responsible for the making of any change in
the number of shares of Common Stock for which a Warrant is exercisable required
under the provisions of Section 6 or responsible for the manner, method or
amount of any such change or the ascertaining of the existence of facts that
would require any such adjustment or change (except with respect to the exercise
of Warrant Certificates after actual notice of any adjustment of the Exercise
Price); nor shall it by any act hereunder be deemed to make any representation
or warranty as to the authorization or reservation of any shares of Common Stock
to be issued pursuant to this Agreement or any Warrant Certificate or as to
whether any shares of Common Stock will, when issued, be validly issued, fully
paid and non-assessable.
F. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred. All rights of
action under this Agreement or under any of the Warrants may be enforced by the
Warrant Agent without the possession of any of the Warrants or the production
thereof at any trial or other proceeding relative thereto, and any such action,
suit or proceeding instituted by the Warrant Agent shall be brought in its name
as Warrant Agent, and any recovery of judgment shall be for the ratable benefit
of the registered holders of the Warrant Certificates, as their respective
rights or interests may appear.
G. The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
H. The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from a
Chairman or co-Chairman of the Board or President or a Vice President or the
Secretary or the Controller of the Company, and to apply to such officers for
advice or instructions in connection with the Warrant Agent's duties, and it
shall not be liable for any action taken or suffered or omitted by it in good
faith in accordance with instructions of any such officer.
I. The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
J. The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys, agents or employees and the Warrant Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents or employees or for any loss to the Company
- 15 -
<PAGE>
resulting from such neglect or misconduct; PROVIDED, HOWEVER, that reasonable
care shall have been exercised in the selection and continued employment of such
attorneys, agents and employees.
K. The Warrant Agent will not incur any liability or responsibility
to the Company or to any holder of any Warrant Certificate for any action taken,
or any failure to take action, in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument reasonably
believed by the Warrant Agent to be genuine and to have been signed, sent or
presented by the proper party or parties.
L. The Warrant Agent will act hereunder solely as agent of the
Company in a ministerial capacity, and its duties will be determined solely by
the provisions hereof. The Warrant Agent will not be liable for anything which
it may do or refrain from doing in connection with this Agreement except for its
own negligence, bad faith or willful conduct.
Section 21. CHANGE OF WARRANT AGENT
The Warrant Agent may resign and be discharged from its duties
under this Agreement upon 30 days' prior notice in writing mailed, by registered
or certified mail, to the Company. The Company may remove the Warrant Agent or
any successor warrant agent upon 30 days' prior notice in writing, mailed to the
Warrant Agent or successor warrant agent, as the case may be, by registered or
certified mail. If the Warrant Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Warrant Agent and shall, within 15 days following such appointment, give
notice thereof in writing to each registered holder of the Warrant Certificates.
If the Company shall fail to make such appointment within a period of 15 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent,
then the Company agrees to perform the duties of the Warrant Agent hereunder
until a successor Warrant Agent is appointed. After appointment and execution
of a copy of this Agreement in effect at that time, the successor Warrant Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Warrant Agent without further act or deed and
the office of the successor Warrant Agent named in the notice provided for in
this Section shall be the office to which notices shall be sent and Warrant
Certificates shall be tendered thereafter. The former Warrant Agent shall
deliver and transfer to the successor Warrant Agent, within a reasonable time,
any property at the time held by its hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Failure
to give any notice provided for in this Section, however, or any defect therein
shall not affect the legality or validity of the resignation or removal of the
Warrant Agent or the appointment of the successor Warrant Agent, as the case may
be.
Section 22. ISSUANCE OF NEW WARRANT CERTIFICATES
Notwithstanding any of the provisions of this Agreement or the
several Warrant Certificates to the contrary, the Company may, at its option,
issue new Warrant Certificates in such form as may be approved by its Board of
Directors to reflect any adjustment or change in
- 16 -
<PAGE>
the Exercise Price or the number or kind of shares purchasable under the several
Warrant Certificates made in accordance with the provisions of this Agreement.
Section 23. NOTICES
Notice or demand pursuant to this Agreement to be given or made
on the Company by the Warrant Agent or by the registered holder of any Warrant
Certificate shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
Caring Products International, Inc.
200 First Avenue West, Suite 200
Seattle, Washington 98119
Attention: Susan A. Schreter
Subject to the provisions of Section 21, any notice pursuant to
this Agreement to be given or made by the Company or by the holder of any
Warrant Certificate to or on the Warrant Agent shall be sufficiently given or
made if sent by first-class or registered mail, postage prepaid, addressed
(until another address is filed in writing by the Warrant Agent with the
Company) as follows:
The Bank of Nova Scotia Trust Company of New York
One Liberty Plaza
New York, New York 10006
Any notice or demand authorized to be given or made to the
registered holder of any Warrant Certificate under this Agreement shall be
sufficiently given or made if sent by first-class or registered mail, postage
prepaid, to the last address of such holder as it shall appear on the
registers maintained by the Warrant Agent.
Section 24. MODIFICATION OF AGREEMENT
The Warrant Agent may, without the consent or concurrence of the
Warrantholders, by supplemental agreement or otherwise, concur with the
Company in making any changes or corrections in this Agreement that the
Warrant Agent shall have been advised by counsel (who may be counsel for the
Company) are necessary or desirable to cure any ambiguity or to correct any
defective or inconsistent provision or clerical omission or mistake or
manifest error herein contained, or to make any other provisions in regard to
matters or questions arising hereunder and which shall not be inconsistent
with the provisions of the Warrant Certificates and which shall not adversely
affect the interests of the Warrantholders. As of the date hereof, this
Agreement contains the entire and only agreement, understanding,
representation, condition, warranty or covenant between the parties hereto
with respect to the matters herein, supersedes any and all other agreements
between the parties hereto relating to such matters, and may be modified or
amended only by a written agreement signed by both parties hereto pursuant to
the authority granted by the first sentence of this Section.
- 17 -
<PAGE>
Section 25. SUCCESSORS
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
Section 26. NEW YORK CONTRACT
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of New
York and for all purposes shall be construed in accordance with the laws of
said state.
Section 27. TERMINATION
This Agreement shall terminate as of the close of business on
the Expiration Date, or such earlier date upon which all Warrants shall have
been exercised or redeemed, except that the Warrant Agent shall account to
the Company as to all Warrants outstanding and all cash held by it as of the
close of business on the Expiration Date.
Section 28. BENEFITS OF THIS AGREEMENT
Nothing in this Agreement or in the Warrant Certificates shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent, and their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent, their
respective successors and assigns hereunder and the registered holders of the
Warrant Certificates.
Section 29. DESCRIPTIVE HEADINGS
The descriptive headings of the several Sections of this
Agreement are inserted for convenience only and shall not control or affect
the meaning or construction of any of the provisions hereof.
Section 30. COUNTERPARTS
This Agreement may be executed in any number of counterparts,
each of which shall be an original, but such counterparts shall together
constitute one and the same instrument.
- 18 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, all as of the day and year first above written.
CARING PRODUCTS INTERNATIONAL, INC.
By:
------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA TRUST COMPANY
OF NEW YORK
By:
------------------------------------
Name:
Title:
- 19 -
<PAGE>
EXHIBIT 10.13
AMENDMENT NO. 1
TO
CARING PRODUCTS INTERNATIONAL, INC.
1996 INCENTIVE PROGRAM
This Amendment No. 1 to the 1996 Incentive Program (the "1996
Program") of Caring Products International, Inc. (the "Company") is being made
this 27th day of August, 1997.
WHEREAS, on June 16, 1997, the issued and outstanding shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), were
subject to a reverse stock split in which each holder of shares of Common Stock
received one (1) share of Common Stock for every six (6) shares of Common Stock
then held (the "Reverse Stock Split"); and, pursuant to the terms of the
Company's 1993 Incentive Program and the 1996 Program (collectively, the
"Programs"), the number of shares of Common Stock that may be issued under the
Programs was automatically adjusted to reflect the Reverse Stock Split;
WHEREAS, the Board of Directors has authorized, subject to the
approval of the stockholders of the Company, (i) an increase in the number of
shares of Common Stock that may be issued or transferred under the 1996
Program from 833,333 shares (post-Reverse Stock Split) to 2,500,000 shares,
(ii) an increase in the maximum number of shares for which options may be
granted under the 1996 Program to any person during any calendar year from
166,667 shares (post-Reverse Stock Split) to 600,000 shares (subject to
adjustment), and (iii) an increase in the maximum percentage of the total
number of outstanding awards under the 1996 Program to the total number of
shares of Common Stock outstanding at any time, as more specifically set
forth herein;
NOW, THEREFORE, subject to the approval of the stockholders, the
Company's 1996 Program shall be amended as follows:
1. Unless otherwise specifically indicated herein, all defined terms
herein shall have the same meaning given such terms in the Company's 1996
Program.
2. The number of shares of Common Stock that may be issued under the
1996 Program is hereby increased from 833,333 shares (post- Reverse Stock Split)
to 2,500,000 shares. In addition, the maximum number of shares for which
options may be granted under the 1996 Program to any person during any calendar
year is hereby increased from 166,667 shares (post-Reverse Stock Split) to
600,000 shares (subject to adjustment). In order to reflect the
above-referenced increases in the number of shares subject to issuance,
Paragraph (a) of Section
<PAGE>
4 of the 1996 Program, entitled "Shares Subject to Issuance or Transfer," is
hereby deleted in its entirety and the following is substituted in lieu thereof:
"(a) SHARES SUBJECT TO ISSUANCE OR TRANSFER. Subject to
adjustment as provided in Section 4(b), the aggregate number of shares
of Common Stock (the "Shares") that may be issued or transferred under
the Program is 2,500,000 Shares, plus (i) any Shares which are
forfeited under the Program or the Company's 1993 Incentive Program
(the "1993 Program") after the adoption of the Program by the
Company's Board of Directors (the "Adoption Date"); plus (ii) the
number of Shares repurchased by the Company in the open market and
otherwise with an aggregate price no greater than the cash proceeds
received by the Company from the sale of Shares under the Program or
the 1993 Program; plus (iii) any Shares surrendered to the Company in
payment of the exercise price of options issued under the Program or
the 1993 Program. However, no award may be issued that would bring
the total of all outstanding awards under the Program to more than 35%
of the total number of Shares of Common Stock of the Company at the
time outstanding. The Shares may be authorized but unissued Shares or
treasury Shares. The number of Shares available for Grants at any
given time shall be reduced by the aggregate of all Shares previously
issued or transferred pursuant to the Program or the 1993 Program plus
the aggregate of all Shares which may become subject to issuance or
transfer under then-outstanding and then-currently exercisable Grants
under the Program or the 1993 Program. The maximum number of Shares
for which options may be granted under the Program to any person
during any calendar year is 600,000 (subject to appropriate adjustment
in the event of any changes in capitalization of the Company). On and
after the Adoption Date, no further Grants shall be made under the
1993 Incentive Program unless the Program, as amended, shall not be
approved by the Company's stockholders as provided in Section 9(g)
hereof."
3. This Amendment No. 1 to the 1996 Program shall become effective
upon (i) its approval by the Company's stockholders under applicable law and
regulatory requirements, and (ii) the completion of a public offering of the
Company's equity securities (the "Public Offering"). Grants may be made prior
to such approval and completion of the Public Offering, but in no event may such
Grants be exercised until such approval is obtained and the Public Offering is
consummated.
4. Except as specifically amended hereby, the terms and provisions
of the 1996 Program shall remain in full force and effect.
2
<PAGE>
EXHIBIT 10.14
CARING PRODUCTS INTERNATIONAL, INC.
STOCK OPTION AGREEMENT
(Executive Officers and Directors)
- --------------------------------------------------------------------------------
Optionee Name: William H.W. Atkinson
--------------------------------------
Optionee Address: 5850 Byrne Road, Unit 8
--------------------------------------
Burnaby, British Columbia
--------------------------------------
Canada V5J 3J3
--------------------------------------
Number of Shares of Exercise Price per
Common Stock: 450,000 Share: Determined in
------- ----------------
(subject to accordance with
adjustment in ----------------
accordance with Section 4 hereof
Section 3.2 hereof) ----------------
Date of Grant: August 27, 1997
---------------
- --------------------------------------------------------------------------------
STOCK OPTION AGREEMENT (this "Agreement") made as of the Date of Grant
set forth above, between CARING PRODUCTS INTERNATIONAL, INC., a Delaware
corporation (collectively, with any wholly-owned subsidiaries, the "Company"),
and the Optionee identified above ("Optionee"), residing at the address set
forth above.
WHEREAS, the Optionee is the Chief Executive Officer and the Chairman
of the Board of the Company;
WHEREAS, the Board of the Directors of the Company, subject to the
approval of the stockholders, has authorized certain amendments (the
"Amendments") to the Company's 1996 Incentive Program (the "Program"), (i) to
increase the number of shares of Common Stock that may be issued or
transferred under the Program, (ii) to increase the maximum number of shares
for which options may be granted under the Program to any person during any
calendar year and (iii) to increase the maximum percentage of the total
number of outstanding awards under the Program to the total number of shares
of Common Stock (defined below) oustanding at any time;
WHEREAS, pursuant to the Program, as amended, the Company desires to
grant stock options to Optionee to purchase certain shares of its common stock,
par value $.01 per share (the "Common Stock");
WHEREAS, the Options (hereinafter defined) being granted by the
Company hereunder and the shares of Common Stock issuable upon the exercise of
such Options, if any, have not been registered under the Securities Act of 1933,
as amended (the "Act"), in reliance on an exemption from registration contained
in Section 4(2) of the Act;
<PAGE>
WHEREAS, this Agreement consists of this document, the Program and
Amendment No. 1 to the Program, attached hereto as Exhibit A and Exhibit B,
respectively;
NOW, THEREFORE, the Company and the Optionee hereby agree as follows:
W I T N E S S E T H:
1. DEFINITIONS. In this Agreement, except where the context
otherwise indicates, the following definitions apply:
1.1 Terms defined in the Program shall have the same meanings
when used herein as defined therein.
1.2 The term "Optionee" when used herein shall include the
Optionee's legal representative when the context requires.
2. REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS OF THE OPTIONEE.
2.1 The Optionee's address set forth above is true and correct.
2.2 The Optionee has had an opportunity to ask questions and
receive answers from the officers and directors of the Company, or a person or
persons acting on its behalf, concerning the terms and conditions of this
Agreement and the business and affairs of the Company. The Optionee has a
sufficient business and personal relationship with one or more of the officers
and directors of the Company, and has sufficient business or financial
experience, so as to be able to protect his or her own interests in connection
with the issuance of the Options (as hereinafter defined) and the issuance of
any Common Stock upon any exercise of the Options.
2.3 The Optionee acknowledges that the Options and the Common
Stock to be issued upon the exercise of the Options, if any, are speculative
investments and involve a substantial degree of risk of loss by the Optionee.
The Optionee represents and warrants to the Company that he or she is acquiring
the Options, and the Common Stock to be issued upon the exercise of the Options
(if the Options are exercisable and exercised) solely for investment purposes
and not with a view towards distribution or transfer. The Optionee acknowledges
that the Options may or may not become exercisable, and accordingly may or may
not be of any value, based on numerous circumstances and conditions, many of
which may be beyond the control of Optionee.
2.4 The Optionee acknowledges that the Options and the Common
Stock to be issued upon the exercise of the Options constitute a part of the
Optionee's compensation arrangement with the Company.
2.5 The Optionee confirms that neither the Company nor any
officer, director or representative thereof has made any representation,
prediction, or forecast as to the value or possible future value of the Options
or the Common Stock. The Optionee has not been induced to accept the Options by
any representation or promise by or on behalf of the Company.
2.6 The Optionee has had an opportunity to consult with his or
her legal, tax and investment advisors, to the extent the Optionee deems
necessary, concerning the Options.
2
<PAGE>
2.7 This Agreement consists of this document and the terms and
provisions contained in the Program, as it may be amended from time to time,
which are hereby incorporated by reference herein and made a part hereof.
Unless otherwise expressly stated herein, in the case of any conflict or
inconsistency between the terms of this document and the terms of the Program,
the terms of the Program shall control.
3. GRANT OF OPTIONS.
3.1 The Company, subject to the terms of the Program, hereby
grants to the Optionee as of the date hereof, as a matter of separate inducement
and agreement and not in lieu of salary or other compensation for services,
100,000 incentive stock options ("Incentive Options") and 350,000 non-qualified
stock options (collectively, the "Options") to purchase in the aggregate 450,000
shares of Common Stock of the Company, as set forth in the box on the first page
hereof (the "Shares"), or such lesser number as may be required by the terms of
Section 3.2 below.
3.2 In the event that either (i) the number of shares of Common
Stock issuable to the Optionee upon the exercise of the Options granted
hereunder, plus the number of shares of Common Stock issuable upon the exercise
of all other stock options held by the Optionee ("Optionee's Total Options"), or
(ii) the number of shares of Common Stock issuable upon the exercise of stock
options granted to Susan A. Schreter on the date hereof, plus the number of
shares of Common Stock issuable upon the exercise of all other stock options
held by Ms. Schreter (Schreter's Total Options"), exceeds 7.7% of the total
number of shares of Common Stock issued and outstanding (excluding shares
issuable upon exercise of outstanding options and warrants) upon completion of a
public offering of the Company's equity securities (the "Public Offering"), then
the number of Options to be granted to the Optionee hereunder and the number of
options to be granted to Ms. Schreter shall be reduced pro rata in order that
neither the Optionee's Total Options nor Schreter's Total Options shall exceed
7.7% of the total number of shares of Common Stock issued and outstanding upon
completion of the Public Offering.
4. EXERCISE PRICE. The exercise price (the "Exercise Price") of
the Options is the greater of (i) the price to the public in the Public
Offering or (ii) the closing bid price on the principal U.S. securities
exchange on which the Common Stock is trading on the date of the Public
Offering, subject to adjustment as provided in Section 4(b) of the Program.
5. TAX TREATMENT. The Optionee understands that certain of the
Incentive Options granted under this Agreement may qualify for special tax
treatment under Section 422 of the Internal Revenue Code of 1986, as amended to
date and as may be amended from time to time (the "Code"). It is the intention
of the parties hereto that the maximum number of Incentive Options granted
hereunder be treated as Incentive Stock Options within the meaning of Section
422 of the Code. To the maximum extent possible, and subject to Section
422(d)(2) of the Code, such of the Incentive Options granted hereunder which are
the earliest to become exercisable, shall be deemed the Incentive Options as to
which Section 422 of the Code shall apply. The Company makes no representation
to Optionee regarding the tax treatment of the Incentive Options or of the
effect of any exercise of the Incentive Options.
6. OPTIONS NON-TRANSFERABLE. The Options shall not be transferable
by the Optionee otherwise than by will, or by the laws of descent and
distribution, and shall be exercised during the lifetime of the Optionee only by
the Optionee. Neither the Options nor any interest therein may be transferred,
sold, assigned, pledged or hypothecated by the Optionee during the Optionee's
lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
3
<PAGE>
7. VESTING DATE OF OPTIONS. The Options shall be and become
exercisable at such time as the Amendments to the Program become effective.
The Amendments will become effective only upon satisfaction of the following:
(i) the approval of the Amendments by the Company's stockholders under
applicable law and regulatory requirements, and (ii) the completion of the
Public Offering.
8. EXERCISE OF OPTIONS. The Options may be exercised only in
accordance with the provisions of the Program. The Options may be exercised
before or after the exercise of any other options granted to the Optionee under
the Program or any of the Company's other stock option programs or compensation
plans.
9. TERMINATION OF OPTIONS. Subject to the terms hereof, all rights
of the Optionee in and to the Options, to the extent that they have not been
exercised, shall terminate on the date which is the fifth annual anniversary of
the Date of Grant set forth above, or, if sooner, three (3) months after the
Optionee's termination as an employee of the Company for any reason, including
voluntary resignation (or such shorter period as required by the Vancouver Stock
Exchange (the "VSE")), if any. Notwithstanding the foregoing, in the event of
the death of Optionee or the termination of his or her employment by the Company
by reason of disability (within the meaning of Section 22(e)(3) of the Code),
the three (3) month period referenced in the preceding sentence shall be one (1)
year (or such shorter period as required by the VSE, if any). The Optionee
acknowledges that, notwithstanding the provisions of this paragraph authorizing
the Options to be exercised within one (1) year after death, under applicable
laws, regulations and rules now in effect, the Options shall not qualify for
special tax treatment under Section 422 of the Code if they are exercised later
than three (3) months after the termination of Optionee's employment on account
of death.
10. DEATH OF OPTIONEE. Options granted hereunder and outstanding on
the date of Optionee's death may be exercised, to the extent otherwise
exercisable pursuant to Section 7, by Optionee's personal representative or his
or her transferees by will or intestate distribution at any time prior to the
termination of such Options pursuant to Section 9 above. The Plan Administrator
may require an indemnity and/or such evidence or other assurances as it may deem
necessary in connection with an exercise by a legal representative, guardian, or
beneficiary.
11. FRAUD, DISHONESTY, OR SIMILAR ACTS. Notwithstanding anything
contained herein to the contrary, if Optionee's employment by the Company is
terminated for cause or it is determined by the Plan Administrator that fraud,
dishonesty, or similar acts were committed by Optionee at any time while in the
employ of the Company, or that the Optionee has at any time disclosed to any
person, firm, corporation or other entity any of the Company's "proprietary
information" (defined below) without the express written consent of the Board of
Directors or except as such disclosure may have been required in connection with
the Optionee's service as an employee of the Company, all option and other
rights with respect to all Options granted to Optionee hereunder shall
immediately terminate and be null and void. For the purposes of this Section
11, the term "proprietary information" shall mean all confidential or secret
customer lists, prospective customer lists, trade secrets, processes, computer
programs, object codes, source codes, inventions, improvements, manufacturing or
systems techniques, formulas, development or experimental work, work in process,
business, data disclosed to the Company by or for the benefit of the Company's
customers, information relating to the Company's business contracts (including
without limitation contracts with service providers, medical insurers and claims
administrators), marketing and competitive strategies, and any other secret or
confidential matter relating or pertaining to the products, services, sales or
other business of the Company.
4
<PAGE>
12. RESTRICTION ON EXERCISE AFTER TERMINATION. Notwithstanding
anything herein to the contrary, the exercise of the Options after termination
of employment by Optionee shall be subject to satisfaction of the conditions
precedent that the Optionee neither (i) takes other employment with or renders
services to any business in contravention of any then-applicable Non-Competition
Agreement with the Company or any Affiliate of the Company, nor (ii) conducts
himself or herself in a manner adversely affecting the Company.
13. RESERVE. The Company shall at all times during the term of the
Options reserve such number of shares of its Common Stock as will be sufficient
to satisfy the requirements of this Agreement.
14. WITHHOLDING TAXES. The Optionee acknowledges that it is a
condition to the obligation of the Company to deliver the Shares, upon the
exercise of the Options, to pay the Company such amount, if any, as may be
requested by the Company for the purpose of satisfying any liability for any
federal, state or local income, or other taxes required by law to be withheld
with respect to such delivery; provided that the Optionee may elect, in
accordance with applicable law, to pay a portion or all of such withholding
taxes in shares of Common Stock held by the Optionee for at least six (6) months
and the Optionee hereby authorizes the Company to withhold and agrees to
surrender back to the Company, on or about the date such withholding tax is
determinable, shares previously owned by the Optionee or a portion of the shares
that were or otherwise would be distributed to the Optionee pursuant hereto so
qualifying and having a fair market value equal to the amount of such
withholding taxes to be paid in shares.
15. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing contained herein shall
be construed to require the Company to continue to employ the Optionee for any
particular period of time and the Optionee shall not be deemed to have any right
to continued employment or to employment for any particular period of time by
virtue hereof.
16. GOVERNING LAW. The Program, this Agreement and all action taken
under each shall be governed, as to construction and administration, by the laws
of the State of Delaware.
17. RESTRICTED SHARES. The Optionee acknowledges that the Options
and Shares have not been registered in accordance with the Act or applicable
state Blue Sky laws, and that the Options and Shares may not be sold or
transferred and must be held indefinitely, unless they are subsequently
registered under the Act or an exemption from registration is available. The
Optionee understands and acknowledges that the Company is under no obligation to
register the Options and Shares or to comply with any exemption under the Act or
to supply or file any information which would facilitate sales of the Shares.
The Optionee acknowledges that stop transfer instructions will be given to the
Company's transfer agent(s) with respect to the Shares and that there will be
affixed to the certificates evidencing ownership of the Shares, or any
substitutions therefor, appropriate restrictive legends.
5
<PAGE>
IN WITNESS WHEREOF, the Company and the Optionee have duly executed
this Agreement as of the day and year first above written.
CARING PRODUCTS INTERNATIONAL, INC.
By: /s/ William H.W. Atkinson
----------------------------------
Name: William H.W. Atkinson
Title: Chief Executive Officer and Chairman
ACCEPTED AND AGREED:
/s/ William H.W. Atkinson
-------------------------------------
William H.W. Atkinson
6
<PAGE>
EXHIBIT 10.15
CARING PRODUCTS INTERNATIONAL, INC.
STOCK OPTION AGREEMENT
(Executive Officers and Directors)
- --------------------------------------------------------------------------------
Optionee Name: Susan A. Schreter
--------------------------------
Optionee Address: 200 First Avenue West, Suite 200
--------------------------------
Seattle, Washington 98119
--------------------------------
Number of Shares of Exercise Price per
Common Stock: 450,000 Share: Determined in
------- ----------------
(subject to accordance with
adjustment in ----------------
accordance with Section 4 hereof
Section 3.2 hereof) ----------------
Date of Grant: August 27, 1997
---------------
- --------------------------------------------------------------------------------
STOCK OPTION AGREEMENT (this "Agreement") made as of the Date of Grant
set forth above, between CARING PRODUCTS INTERNATIONAL, INC., a Delaware
corporation (collectively, with any wholly-owned subsidiaries, the "Company"),
and the Optionee identified above ("Optionee"), residing at the address set
forth above.
WHEREAS, the Optionee is the President and a director of the Company;
WHEREAS, the Board of the Directors of the Company, subject to the
approval of the stockholders, has authorized certain amendments (the
"Amendments") to the Company's 1996 Incentive Program (the "Program"), (i) to
increase the number of shares of Common Stock that may be issued or
transferred under the Program, (ii) to increase the maximum number of shares
for which options may be granted under the Program to any person during any
calendar year and (iii) to increase the maximum percentage of the total
number of outstanding awards under the Program to the total number of shares
of Common Stock (defined below) oustanding at any time;
WHEREAS, pursuant to the Program, as amended, the Company desires to
grant stock options to Optionee to purchase certain shares of its common stock,
par value $.01 per share (the "Common Stock");
WHEREAS, the Options (hereinafter defined) being granted by the
Company hereunder and the shares of Common Stock issuable upon the exercise of
such Options, if any, have not been registered under the Securities Act of 1933,
as amended (the "Act"), in reliance on an exemption from registration contained
in Section 4(2) of the Act;
<PAGE>
WHEREAS, this Agreement consists of this document, the Program and
Amendment No. 1 to the Program, attached hereto as Exhibit A and Exhibit B,
respectively;
NOW, THEREFORE, the Company and the Optionee hereby agree as follows:
W I T N E S S E T H:
- - - - - - - - - -
1. DEFINITIONS. In this Agreement, except where the context
otherwise indicates, the following definitions apply:
1.1 Terms defined in the Program shall have the same meanings
when used herein as defined therein.
1.2 The term "Optionee" when used herein shall include the
Optionee's legal representative when the context requires.
2. REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS OF THE OPTIONEE.
2.1 The Optionee's address set forth above is true and correct.
2.2 The Optionee has had an opportunity to ask questions and
receive answers from the officers and directors of the Company, or a person or
persons acting on its behalf, concerning the terms and conditions of this
Agreement and the business and affairs of the Company. The Optionee has a
sufficient business and personal relationship with one or more of the officers
and directors of the Company, and has sufficient business or financial
experience, so as to be able to protect his or her own interests in connection
with the issuance of the Options (as hereinafter defined) and the issuance of
any Common Stock upon any exercise of the Options.
2.3 The Optionee acknowledges that the Options and the Common
Stock to be issued upon the exercise of the Options, if any, are speculative
investments and involve a substantial degree of risk of loss by the Optionee.
The Optionee represents and warrants to the Company that he or she is acquiring
the Options, and the Common Stock to be issued upon the exercise of the Options
(if the Options are exercisable and exercised) solely for investment purposes
and not with a view towards distribution or transfer. The Optionee acknowledges
that the Options may or may not become exercisable, and accordingly may or may
not be of any value, based on numerous circumstances and conditions, many of
which may be beyond the control of Optionee.
2.4 The Optionee acknowledges that the Options and the Common
Stock to be issued upon the exercise of the Options constitute a part of the
Optionee's compensation arrangement with the Company.
2.5 The Optionee confirms that neither the Company nor any
officer, director or representative thereof has made any representation,
prediction, or forecast as to the value or possible future value of the Options
or the Common Stock. The Optionee has not been induced to accept the Options by
any representation or promise by or on behalf of the Company.
2.6 The Optionee has had an opportunity to consult with his or
her legal, tax and investment advisors, to the extent the Optionee deems
necessary, concerning the Options.
2
<PAGE>
2.7 This Agreement consists of this document and the terms and
provisions contained in the Program, as it may be amended from time to time,
which are hereby incorporated by reference herein and made a part hereof.
Unless otherwise expressly stated herein, in the case of any conflict or
inconsistency between the terms of this document and the terms of the Program,
the terms of the Program shall control.
3. GRANT OF OPTIONS.
3.1 The Company, subject to the terms of the Program, hereby
grants to the Optionee as of the date hereof, as a matter of separate inducement
and agreement and not in lieu of salary or other compensation for services,
100,000 incentive stock options ("Incentive Options") and 350,000 non-qualified
stock options (collectively, the "Options") to purchase in the aggregate 450,000
shares of Common Stock of the Company, as set forth in the box on the first page
hereof (the "Shares"), or such lesser number as may be required by the terms of
Section 3.2 below.
3.2 In the event that either (i) the number of shares of Common
Stock issuable to the Optionee upon the exercise of the Options granted
hereunder, plus the number of shares of Common Stock issuable upon the exercise
of all other stock options held by the Optionee ("Optionee's Total Options"), or
(ii) the number of shares of Common Stock issuable upon the exercise of stock
options granted to William H.W. Atkinson on the date hereof, plus the number of
shares of Common Stock issuable upon the exercise of all other stock options
held by Mr. Atkinson (Atkinson's Total Options"), exceeds 7.7% of the total
number of shares of Common Stock issued and outstanding (excluding shares
issuable upon exercise of outstanding options and warrants) upon completion of a
public offering of the Company's equity securities (the "Public Offering"), then
the number of Options to be granted to the Optionee hereunder and the number of
options to be granted to Mr. Atkinson shall be reduced pro rata in order that
neither the Optionee's Total Options nor Atkinson's Total Options shall exceed
7.7% of the total number of shares of Common Stock issued and outstanding upon
completion of the Public Offering.
4. EXERCISE PRICE. The exercise price (the "Exercise Price") of
the Options is the greater of (i) the price to the public in the Public
Offering or (ii) the closing bid price on the principal U.S. securities
exchange on which the Common Stock is trading on the date of the Public
Offering, subject to adjustment as provided in Section 4(b) of the Program.
5. TAX TREATMENT. The Optionee understands that certain of the
Incentive Options granted under this Agreement may qualify for special tax
treatment under Section 422 of the Internal Revenue Code of 1986, as amended to
date and as may be amended from time to time (the "Code"). It is the intention
of the parties hereto that the maximum number of Incentive Options granted
hereunder be treated as Incentive Stock Options within the meaning of Section
422 of the Code. To the maximum extent possible, and subject to Section
422(d)(2) of the Code, such of the Incentive Options granted hereunder which are
the earliest to become exercisable, shall be deemed the Incentive Options as to
which Section 422 of the Code shall apply. The Company makes no representation
to Optionee regarding the tax treatment of the Incentive Options or of the
effect of any exercise of the Incentive Options.
6. OPTIONS NON-TRANSFERABLE. The Options shall not be transferable
by the Optionee otherwise than by will, or by the laws of descent and
distribution, and shall be exercised during the lifetime of the Optionee only by
the Optionee. Neither the Options nor any interest therein may be transferred,
sold, assigned, pledged or hypothecated by the Optionee during the Optionee's
lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
3
<PAGE>
7. VESTING DATE OF OPTIONS. The Options shall be and become
exercisable at such time as the Amendments to the Program become effective. The
Amendments will become effective only upon satisfaction of the following: (i)
the approval of the Amendments by the Company's stockholders under applicable
law and regulatory requirements, and (ii) the completion of the Public Offering.
8. EXERCISE OF OPTIONS. The Options may be exercised only in
accordance with the provisions of the Program. The Options may be exercised
before or after the exercise of any other options granted to the Optionee under
the Program or any of the Company's other stock option programs or compensation
plans.
9. TERMINATION OF OPTIONS. Subject to the terms hereof, all rights
of the Optionee in and to the Options, to the extent that they have not been
exercised, shall terminate on the date which is the fifth annual anniversary of
the Date of Grant set forth above, or, if sooner, three (3) months after the
Optionee's termination as an employee of the Company for any reason, including
voluntary resignation (or such shorter period as required by the Vancouver Stock
Exchange (the "VSE"), if any). Notwithstanding the foregoing, in the event of
the death of Optionee or the termination of his or her employment by the Company
by reason of disability (within the meaning of Section 22(e)(3) of the Code),
the three (3) month period referenced in the preceding sentence shall be one (1)
year (or such shorter period as required by the VSE, if any). The Optionee
acknowledges that, notwithstanding the provisions of this paragraph authorizing
the Options to be exercised within one (1) year after death, under applicable
laws, regulations and rules now in effect, the Options shall not qualify for
special tax treatment under Section 422 of the Code if they are exercised later
than three (3) months after the termination of Optionee's employment on account
of death.
10. DEATH OF OPTIONEE. Options granted hereunder and outstanding on
the date of Optionee's death may be exercised, to the extent otherwise
exercisable pursuant to Section 7, by Optionee's personal representative or his
or her transferees by will or intestate distribution at any time prior to the
termination of such Options pursuant to Section 9 above. The Plan Administrator
may require an indemnity and/or such evidence or other assurances as it may deem
necessary in connection with an exercise by a legal representative, guardian, or
beneficiary.
11. FRAUD, DISHONESTY, OR SIMILAR ACTS. Notwithstanding anything
contained herein to the contrary, if Optionee's employment by the Company is
terminated for cause or it is determined by the Plan Administrator that fraud,
dishonesty, or similar acts were committed by Optionee at any time while in the
employ of the Company, or that the Optionee has at any time disclosed to any
person, firm, corporation or other entity any of the Company's "proprietary
information" (defined below) without the express written consent of the Board of
Directors or except as such disclosure may have been required in connection with
the Optionee's service as an employee of the Company, all option and other
rights with respect to all Options granted to Optionee hereunder shall
immediately terminate and be null and void. For the purposes of this Section
11, the term "proprietary information" shall mean all confidential or secret
customer lists, prospective customer lists, trade secrets, processes, computer
programs, object codes, source codes, inventions, improvements, manufacturing or
systems techniques, formulas, development or experimental work, work in process,
business, data disclosed to the Company by or for the benefit of the Company's
customers, information relating to the Company's business contracts (including
without limitation contracts with service providers, medical insurers and claims
administrators), marketing and competitive strategies, and any other secret or
confidential matter relating or pertaining to the products, services, sales or
other business of the Company.
4
<PAGE>
12. RESTRICTION ON EXERCISE AFTER TERMINATION. Notwithstanding
anything herein to the contrary, the exercise of the Options after termination
of employment by Optionee shall be subject to satisfaction of the conditions
precedent that the Optionee neither (i) takes other employment with or renders
services to any business in contravention of any then-applicable Non-Competition
Agreement with the Company or any Affiliate of the Company, nor (ii) conducts
himself or herself in a manner adversely affecting the Company.
13. RESERVE. The Company shall at all times during the term of the
Options reserve such number of shares of its Common Stock as will be sufficient
to satisfy the requirements of this Agreement.
14. WITHHOLDING TAXES. The Optionee acknowledges that it is a
condition to the obligation of the Company to deliver the Shares, upon the
exercise of the Options, to pay the Company such amount, if any, as may be
requested by the Company for the purpose of satisfying any liability for any
federal, state or local income, or other taxes required by law to be withheld
with respect to such delivery; provided that the Optionee may elect, in
accordance with applicable law, to pay a portion or all of such withholding
taxes in shares of Common Stock held by the Optionee for at least six (6) months
and the Optionee hereby authorizes the Company to withhold and agrees to
surrender back to the Company, on or about the date such withholding tax is
determinable, shares previously owned by the Optionee or a portion of the shares
that were or otherwise would be distributed to the Optionee pursuant hereto so
qualifying and having a fair market value equal to the amount of such
withholding taxes to be paid in shares.
15. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing contained herein shall
be construed to require the Company to continue to employ the Optionee for any
particular period of time and the Optionee shall not be deemed to have any right
to continued employment or to employment for any particular period of time by
virtue hereof.
16. GOVERNING LAW. The Program, this Agreement and all action taken
under each shall be governed, as to construction and administration, by the laws
of the State of Delaware.
17. RESTRICTED SHARES. The Optionee acknowledges that the Options
and Shares have not been registered in accordance with the Act or applicable
state Blue Sky laws, and that the Options and Shares may not be sold or
transferred and must be held indefinitely, unless they are subsequently
registered under the Act or an exemption from registration is available. The
Optionee understands and acknowledges that the Company is under no obligation to
register the Options and Shares or to comply with any exemption under the Act or
to supply or file any information which would facilitate sales of the Shares.
The Optionee acknowledges that stop transfer instructions will be given to the
Company's transfer agent(s) with respect to the Shares and that there will be
affixed to the certificates evidencing ownership of the Shares, or any
substitutions therefor, appropriate restrictive legends.
5
<PAGE>
IN WITNESS WHEREOF, the Company and the Optionee have duly executed
this Agreement as of the day and year first above written.
CARING PRODUCTS INTERNATIONAL, INC.
By: /s/ William H.W. Atkinson
--------------------------------------------
Name: William H.W. Atkinson
Title: Chief Executive Officer and Chairman
ACCEPTED AND AGREED:
/s/ Susan A. Schreter
------------------------------------
Susan A. Schreter
6
<PAGE>
SECURITY AGREEMENT
BETWEEN
CARING PRODUCTS INTERNATIONAL INC.
AND
H.J. FOREST PRODUCTS INC.
<PAGE>
SECURITY AGREEMENT
TABLE OF CONTENTS
Section 1. SECURITY INTEREST...................................................1
1.1 Creation of Security Interest.......................................1
1.2 Floating Charge.....................................................2
1.3 Nature of Security Interests........................................2
1.4 Attachment..........................................................3
1.5 Exceptions..........................................................3
1.6 Statement...........................................................3
1.7 Where Consent Required..............................................3
1.8 Pending Consent.....................................................3
Section 2. DEFINITIONS.....................................................3
2.1 Collateral..........................................................4
2.2 Defined Terms.......................................................4
2.3 General Terms.......................................................4
Section 3. OBLIGATIONS SECURED.............................................4
3.1 Obligations Secured.................................................4
3.2 Reduction of Obligations............................................5
Section 4. DEBTOR'S REPRESENTATIONS AND WARRANTIES.........................5
4.1 General.............................................................5
4.2 Incorporation, Licenses and Qualifications..........................5
4.3 Corporate Power.....................................................5
4.4 Enforceability......................................................5
4.5 No Actions or Material Adverse Changes..............................5
4.6 Non-Conflict........................................................5
4.7 No Default..........................................................6
4.8 Ownership and Collateral Free of Encumbrances.......................6
4.9 No Other Corporate Names or Styles..................................6
4.10 Places of Business of Debtor.......................................6
4.11 Serial Numbered Goods..............................................6
4.12 Insurance..........................................................6
4.13 Account Debtor.....................................................6
4.14 Amounts Due From Account Debtor....................................6
4.15 Financial Information..............................................6
4.16 Survival and Reliance..............................................7
i
<PAGE>
Section 5. DEBTOR'S COVENANTS.............................................7
5.1 General............................................................7
5.2 Keep Collateral in Good Repair.....................................7
5.3 Conduct of Business................................................7
5.4 Servicing of Payables..............................................7
5.5 Compliance with Agreements and Laws................................7
5.6 Notice of Encumbrances and Proceedings.............................7
5.7 No Accessions or Fixtures..........................................7
5.8 Marking the Collateral.............................................7
5.9 Disposition of Collateral..........................................8
5.10 Encumbrances......................................................8
5.11 Change of Places of Business, Collateral and Names................8
5.12 Serial Numbered Goods.............................................8
5.13 Notice of Loss of Collateral......................................8
5.14 Inspection of Records and Collateral..............................8
5.15 Access to Computer Information....................................8
5.16 Delivery of Documents.............................................9
5.17 Risk and Insurance................................................9
5.18 Proceeds in Trust.................................................9
5.19 No Amalgamation..................................................10
5.20 Dividends........................................................10
5.21 Performance and Default by Debtor................................10
5.22 Default under Agreements.........................................10
5.23 Environmental Law................................................10
Section 6. COLLECTION OF ACCOUNTS........................................11
6.1 Collection of Accounts............................................11
6.2 Trust Provision...................................................11
Section 7. DEFAULT.......................................................11
7.1 Default...........................................................11
7.2 Crystallization...................................................13
7.3 Demand Obligations................................................13
7.4 Waiver not to Affect Subsequent Breach............................13
Section 8. SECURED PARTY'S REMEDIES ON DEFAULT...........................13
8.1 Indebtedness Due and Rights and Remedies..........................13
8.2 Assemble the Collateral...........................................15
8.3 Secured Party Not Liable for Failure to Exercise Remedies.........15
8.4 Allocation of Proceeds............................................15
8.5 Extension of Time.................................................15
8.6 Forbearance is not Waiver.........................................16
8.7 Effect of Appointment of Receiver.................................16
8.8 Limitation of Liability...........................................16
ii
<PAGE>
8.9 Release by Debtor.................................................16
8.10 Performance by Secured Party.....................................16
Section 9. MISCELLANEOUS.................................................16
9.1 Costs.............................................................16
9.2 Appointment of Attorney...........................................17
9.3 No Obligation to Make Advances....................................17
9.4 Security Interests Effective Immediately..........................18
9.5 Security in Addition and not in Substitution, Remedies Cumulative.18
9.6 Statutory Waivers.................................................18
9.7 Provisions Reasonable.............................................18
9.8 Further Assurances................................................18
9.9 Notices...........................................................18
9.10 Discharge........................................................19
9.11 Delivery of Copy/Waiver..........................................19
9.12 Release of Information...........................................19
9.13 Inspection, Management and Repairs...............................19
9.14 Hazardous Materials and Environmental Laws.......................20
9.15 Authorization of Inquiries.......................................20
9.16 Indemnification..................................................20
Section 10.INTERPRETATION................................................21
10.1 Entire Agreement/Amendment.......................................21
10.2 Severability.....................................................21
10.3 Joint and Several Liability......................................21
10.4 Headings.........................................................21
10.5 Included Words...................................................21
10.6 Applicable Law...................................................21
10.7 Binding Effect...................................................22
iii
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT dated for reference April 9, 1997
SECTION 1. SECURITY INTEREST
1.1 CREATION OF SECURITY INTEREST CARING PRODUCTS
INTERNATIONAL INC. (the "Debtor"), having its chief executive
office at 200 First Avenue West, Suite 200, Seattle,
Washington, 98119, as continuing security for the repayment
and the performance of each of the Obligations (as defined
herein) of the Debtor to H.J. FOREST PRODUCTS INC. (the
"Secured Party") having an office at Suite 638, 375 Water
Street, Vancouver, British Columbia, V6B 5C6, grants to the
Secured Party a continuing, specific and fixed assignment,
transfer, mortgage, charge and security interest in all of the
Debtor's property, assets, rights and undertaking of every
nature, item and kind, now or at any time and from time to
time, wherever situate, including those described in this
clause 1.1, namely:
(a) ACCESSIONS. All increases, additions, accretions and
accessions to, and all extensions, reversions, renewals,
continuations or replacement of any of the Collateral (as
defined in Section 2.1) (collectively the "Accession");
(b) ACCOUNTS. All debts, accounts, claims and monies which
now are, or which may at any time hereafter, be, due or
owing to or owned by the Debtor or in which the Debtor
now or hereafter has any other interest, and also all
securities, bills, notes and other documents now held or
owned or which may be hereafter taken, held or owned by
the Debtor or anyone on behalf of the Debtor in respect
of the said debts, accounts, claims and monies, and any
part thereof (collectively, the "Accounts");
(c) CHATTEL PAPER. All chattel paper in which the Debtor now
or hereafter has an interest, any part thereof (the
"Chattel Paper");
(d) DOCUMENTS OF TITLE. All documents of title, whether
negotiable or non-negotiable, including, without
limitation, all warehouse receipts and bills of lading,
in which the Debtor now or hereafter has an interest, and
any part thereof (collectively, the "Documents of Title");
(e) EQUIPMENT. All goods in which the Debtor now or
hereafter has an interest other than Inventory or
consumer goods and any part thereof, including, without
limitation, all tools apparatus, fixture, plant
machinery, furniture, chattels, vehicles, vessels, air
conditioning, heating, ventilating, electrical,
mechanical, plumbing, communications and data systems,
elevators, escalators and other conveyancing devices,
boilers, furnaces, carpets, blinds, window coverings,
curtains, awnings, lighting fixtures, doors, windows,
demising walls and partitions, wiring, pipes, conduits,
seasonal decorations, and the equipment
1
<PAGE>
described in Schedule A hereto, if any, or any schedule
hereafter annexed hereto (collectively, the "Equipment");
(f) INSTRUMENTS. All letters of credit, advices of credit
and all other instruments in which the Debtor now or
hereafter has an interest, and any part thereof
(collectively, the "Instruments");
(g) INTANGIBLES. All intangible property of whatever kind in
which the Debtor now or hereafter has an interest,
including, without limitation, all of the Debtor's choses
in action, contractual rights, agreements, leases of
personal property, license rights, licenses, permits,
goodwill, patents, trade marks, trade names, quotas,
industrial designs, copyrights and other industrial or
intellectual property (collectively, the "Intangibles");
(h) INVENTORY. All personal property of whatever kind and
wherever situated, which now or hereafter forms part of
the inventory of the Debtor, in which the Debtor now or
hereafter has an interest, including without limitation,
all goods, merchandise, raw materials, goods in process,
work in progress, finished goods and other tangible
personal property now or hereafter held for sale, lease,
resale or exchange or furnished or to be furnished under
contracts for service or that are used or consumed in the
business of the Debtor, and any part thereof
(collectively, the "Inventory");
(i) MONEY. All money in which the Debtor now or hereafter
has an interest and any part thereof (the "Money");
(j) PROCEEDS. All proceeds and personal property in any form
derived directly or indirectly from any dealing with the
Collateral or any part thereof and all proceeds of
proceeds and any part thereof (collectively, the
"Proceeds");
(k) RECORDS. All books, papers, documents, writings, tapes,
magnetic or other machine readable data and records, and
all other information, however stored, recording or
relating to any of the Collateral (collectively, the
"Records"); and
(l) SECURITIES. All shares, stock, warrants, bonds,
debentures, debenture stock, mortgages and other
securities in which the Debtor now or hereafter has an
interest, and any part thereof (collectively, the
"Securities").
1.2 FLOATING CHARGE. As security for the repayment and the
performance of each of the Obligations (as defined herein),
the Debtor grants a floating charge to the Secured Party on
all the Debtor's interest in real property, including without
limitation, all fixtures, crops and improvements, both present
and future, other than such as are validly and effectively
charged under Section 1.1 or excluded under Section 1.5.
1.3 NATURE OF SECURITY INTERESTS. Notwithstanding the
Debtor's right to deal with the Inventory in the ordinary
course of business as provided herein, the security interests
created hereby shall operate as fixed and specific mortgages
and charges of all of the
2
<PAGE>
Collateral presently existing, and with respect to all future
Collateral, shall operate as fixed and specific mortgages and
charges of such future Collateral which shall attach at the
moment the Debtor acquires any right or interest therein. The
security interest created by Section 1.2 is intended as a
floating charge which shall attach at the time provided in
Section 1.4.
1.4 ATTACHMENT. The Debtor acknowledges that value has been
given. The security interests created hereby are intended to
attach, as to all of the Collateral in which the Debtor has an
interest, forthwith when the Debtor executes this Security
Agreement, and, as to all Collateral in which the Debtor
acquires any right or interest after the execution of this
Security Agreement, when the Debtor acquires such right or
interest.
1.5 EXCEPTIONS. The last day of any term reserved by any
lease, verbal or written, or any agreement therefor, now held
or hereafter acquired by the Debtor is hereby excepted out of
the security interests created hereby. The Debtor shall assign
and dispose of such last day of any term reserved by any such
lease in such manner as the Secured Party may from time to
time direct in writing. Upon any sale, assignment, sublease
or other disposition of such lease or agreement to lease, the
Secured Party shall, for the purpose of vesting the aforesaid
residue of any such term in any purchaser, assignee, sublessee
or such other acquirer of the lease, agreement to lease or any
interest therein, be entitled by deed or other written
instrument to assign to such other person, the aforesaid
residue of any such term in place of the Debtor and to vest
the same freed and discharged from any obligation whatsoever
respecting the same.
1.6 STATEMENT. The Debtor acknowledges that a security
interest is taken in all of the Debtor's present and after
acquired property.
1.7 WHERE CONSENT REQUIRED. Nothing herein shall constitute
an assignment or attempted assignment of any right, privilege,
benefit, contract, permit, policy or other document or
instrument which by the provisions thereof or by law is not
assignable or which requires the consent of any third party to
its assignment unless such is obtained or is waived by the
third party. In each such case the Debtor shall, unless the
Secured Party otherwise agrees in writing, forthwith obtain
the consent of any necessary third party to its assignment
hereby and for its further assignment by the Secured party to
any third party who may acquire same as a result of the
Secured Party's exercise of remedies after an Event of
Default. Upon such consents being obtained or waived, this
Security Agreement shall apply thereto without regard to this
Section 1.7 and without the necessity of any further assurance
to effect the assignment thereof.
1.8 PENDING CONSENT. In any case to which Section 1.7
applies, unless and until consent to assignment is obtained as
therein provided, the Debtor shall, to the extent it may do so
by law or pursuant to the provisions of the document or
interest therein referred to, hold all benefit to be derived
therefrom in trust for the Secured Party as additional
security for performance of the Obligations and shall deliver
up all such benefit to the Secured Party forthwith upon demand
by the Secured Party.
SECTION 2. DEFINITIONS
3
<PAGE>
2.1 COLLATERAL. The property, assets, rights and undertaking
charged hereunder including all of such Accessions, Accounts,
Chattel Paper, Documents of Title, Equipment, Instruments,
Intangibles, Inventory, Money, Proceeds, Records and
Securities together with all increases, additions,
improvements and accessions thereto, and all substitutions or
any replacements thereof are, unless otherwise specified,
herein referred to as the "Collateral".
2.2 DEFINED TERMS. Unless the context otherwise requires or
unless otherwise specified, all the terms used herein without
initial capitals which are defined in the PERSONAL PROPERTY
SECURITY ACT, 1989 (British Columbia) or the regulations
thereunder, as they may be amended, restated or replaced by
successor legislation of comparable effect (collectively, the
"PPSA"), have the same meaning herein as in the PPSA.
2.3 GENERAL TERMS.
(a) "AGREEMENT" means any contract, instrument, permit,
policy or other document forming part of the Collateral,
or creating or evidencing any right, privilege or benefit
forming part of the Collateral;
(b) "BUSINESS PREMISES" means real property which the Debtor
uses in its business, if any;
(c) "ENVIRONMENTAL LAWS" means any laws, regulations, order,
by-laws, permits or lawful requirements of any
governmental authority with respect to environmental
protection or regulating hazardous materials; and
(d) "HAZARDOUS MATERIALS" means any asbestos material, urea
formaldehyde, explosives, radioactive materials,
pollutants, contaminants, hazardous substances, corrosive
substances, toxic substances, special waste or waste of
any kind including, without limitation, compounds known
as chlorobiphenyls and any substance the storage,
manufacture, disposal, treatment, generation, use,
transport, remediation or release of which into the
environment is prohibited, controlled or licensed under
Environmental Laws.
SECTION 3. OBLIGATIONS SECURED
3.1 OBLIGATIONS SECURED. The Collateral constitutes and will
constitute continuing security for the following obligations
(collectively, the "Obligations") of the Debtor to the Secured
Party:
(a) INDEBTEDNESS. The prompt payment, as and when due and
payable, of all amounts now or hereafter owing by the
Debtor to the Secured Party, including by way of
guarantee or indemnity, whether now existing or hereafter
incurred, matured or unmatured, direct, indirect, joint
or several, or contingent including any extensions and
renewals thereof, and all future advances and
re-advances; and
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(b) PERFORMANCE OF AGREEMENTS. The strict performance and
observance by the Debtor of all agreements, warranties,
representations, covenants and conditions of the Debtor
made pursuant to this Security Agreement or any other
agreement between the Debtor and the Secured Party all as
now in effect or as hereafter entered into or amended.
3.2 REDUCTION OF OBLIGATIONS. The Obligations may be reduced
to zero from time to time without affecting the validity,
perfection or enforceability of this Security Agreement or the
security interests created hereby until this Security
Agreement is discharged in accordance with Section 9.10.
SECTION 4. DEBTOR'S REPRESENTATIONS AND WARRANTIES
4.1 GENERAL. The Debtor represents and warrants to and for
the benefit of the Secured Party and so long as this Security
Agreement remains in effect shall be deemed to continuously
represent and warrant as set out in this Section 4.
4.2 INCORPORATION, LICENSES AND QUALIFICATIONS. The Debtor
is a body corporate, duly incorporated, properly organized and
validly existing under the laws of British Columbia and is
duly registered and qualified to do business under the laws of
each other jurisdiction in which the character of the
properties owned by it or the nature of the activities
conducted by it make such registration or qualification
advisable or necessary.
4.3 CORPORATE POWER. The Debtor has full power and lawful
authority to enter this Security Agreement and to grant the
security interests hereby created.
4.4 ENFORCEABILITY. This Security Agreement constitutes a
valid and legally binding obligation of the Debtor enforceable
against the Debtor in accordance with its terms, subject only
to bankruptcy, insolvency or other statutes or judicial
decisions affecting the enforcement of creditors' rights
generally and to general principles of equity.
4.5 NO ACTIONS OR MATERIAL ADVERSE CHANGES. There is no
action or proceeding pending or to the knowledge of the Debtor
threatened against the Debtor before any court, administrative
agency, tribunal, arbitrator, government or governmental
agency or any fact known to the Debtor and not disclosed to
the Secured Party which might involve any material adverse
change in the properties, business, prospects or condition of
the Debtor, or which question the validity of this Security
Agreement or any other material agreement to which the Debtor
is a party (or the Debtor's ability to perform its obligations
under this Security Agreement) and there are no outstanding
judgments, writs of execution, work orders, injunctions,
directives against the Debtor or its properties.
4.6 NON-CONFLICT. Neither the execution nor the performance
of this Security Agreement requires the approval of any
regulatory agency having jurisdiction over the Debtor nor is
this Security Agreement in contravention of or in conflict
with the articles, by-laws or resolutions of the directors or
shareholders of the Debtor or of the provisions of any
agreement to which the Debtor is a party or by which any of
its property may be
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bound or of any statute, regulation, by-law, ordinance or
other law, or of any judgment, decree, award, ruling or order
to which the Debtor or any of its property may by subject.
4.7 NO DEFAULT. The Debtor is not in breach of any breach of
any agreement to which it is a party.
4.8 OWNERSHIP AND COLLATERAL FREE OF ENCUMBRANCES. The
Debtor is the owner of or has rights in the collateral free
and clear of all other security interests, mortgages,
hypothecs, pledges, liens, claims, charges, whether fixed or
floating, or other encumbrances whatsoever (collectively the
"Encumbrances") other than the permitted encumbrances, if any,
set forth in Schedule B hereto (the "Permitted Encumbrances").
4.9 NO OTHER CORPORATE NAMES OR STYLES. The Debtor does not
now carry on business under or use any name or style other
than the name(s) specified in this Security Agreement.
4.10 PLACES OF BUSINESS OF DEBTOR. The locations specified in
Schedule C hereto are the Debtor's only places of business
(the "Places of Business") where the Debtor conducts its
business operations or keeps or stores the collateral and
records in respect thereof and of the Debtor's business.
4.11 SERIAL NUMBERED GOODS. The complete, accurate and
appropriate serial number (as specified in the regulations
under the PPSA) for each item of Equipment that is serial
numbered goods in which the Debtor now has any interest, is
set out in Schedule A hereto.
4.12 INSURANCE. The Collateral is insured in accordance with
the terms hereof.
4.13 ACCOUNT DEBTOR. Each Account, Chattel Paper, Security
and Instrument constituting Collateral is genuine and
enforceable in accordance with its terms against the party
obligation to pay thereunder (the "Account Debtor").
4.14 AMOUNTS DUE FROM ACCOUNT DEBTOR. The amount represented
by the Debtor to the Secured Party from time to time as owing
by each Account Debtor or by all Account Debtors shall, to the
best of the Debtor's knowledge be the correct amount actually
and unconditionally owing by such Account Debtor or Account
Debtors, save and except for normal cash discounts where
applicable.
4.15 FINANCIAL INFORMATION. In all information and financial
statements supplied for the benefit of the Secured Party, the
Debtor has made no untrue statement of any material fact, and
has revealed all material facts the omission of which would
make such information and statements misleading. The Debtor
has disclosed all facts which materially adversely affect or,
so far as the Debtor can reasonably foresee, will materially
adversely affect the business, properties, prospects or
financial condition of the Debtor or the ability of the Debtor
to perform its obligations hereunder. All accounting
information and financial statements supplied for the benefit
of the Secured Party have been prepared in accordance with
generally accepted accounting principles.
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4.16 SURVIVAL AND RELIANCE. All representations and
warranties of the Debtor made herein or in any certificate or
other document delivered by or on behalf of the Debtor for the
benefit of the Secured Party are material, shall survive the
execution and delivery of this Security Agreement and shall
continue in full force and effect without time limit. The
Secured Party is deemed to have relied upon each such
representation and warranty notwithstanding any investigation
made by or on behalf of the Secured Party at any time.
SECTION 5 DEBTOR'S COVENANTS
5.1 GENERAL. Unless compliance with the following covenants
is waived by the Secured Party in writing or unless
non-compliance with any such covenants is otherwise consented
to by the Secured Party by written agreement with the Debtor,
the Debtor covenants and agrees with the Secured Party to
observe and perform each of the covenants set out in this
Section 5.
5.2 KEEP COLLATERAL IN GOOD REPAIR. The Debtor will keep the
Collateral in good order, condition and repair.
5.3 CONDUCT OF BUSINESS. The Debtor will carry on and
conduct its business in a proper and efficient manner so as to
protect and preserve the Collateral.
5.4 SERVICING OF PAYABLES. The Debtor will pay when due all
amounts which are payable by it howsoever arising, including
without limiting the generality of the foregoing, all rents,
charges, taxes, rates, levies, assessments, fees and duties of
every nature which may be levied, assessed or imposed against
or in respect of the Collateral or Debtor and will provide the
Secured Party with evidence of such payment upon request.
5.5 COMPLIANCE WITH AGREEMENTS AND LAWS. The Debtor will not
use the collateral in violation of this Security Agreement or
any other agreement relating to the Collateral or any policy
insuring the Collateral or any applicable statute, law,
by-law, rule, regulation, court order or ordinance.
5.6 NOTICE OF ENCUMBRANCES AND PROCEEDINGS. The Debtor will
promptly notify the Secured Party of any Encumbrance made or
asserted against any of the Collateral, and of any suit,
action or proceeding affecting any of the Collateral or which
could affect the Debtor. The Debtor will, at its own expense,
defend the Collateral against any and all such Encumbrances
and against any and all such suits, actions or proceedings.
5.7 NO ACCESSIONS OR FIXTURES. The Debtor will prevent the
Collateral from becoming an accession to any property other
than the Collateral or from becoming a fixture unless the
security interests hereby created rank prior to the interests
of all other persons in the realty.
5.8 MARKING THE COLLATERAL. The Debtor will, at the request
of the Secured Party, mark, or otherwise take appropriate
steps to identify, the Collateral to indicate clearly that it
is subject to the security interests hereby created.
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5.9 DISPOSITION OF COLLATERAL. The Debtor will not assign,
transfer, sell, lease, exchange, or otherwise dispose of the
Collateral or any interest therein except for:
(a) Inventory in the ordinary course of business on customary
trade terms; and
(b) Equipment which has become worn out, damaged or otherwise
unsuitable for its purpose, on condition that the Debtor
substitute for such Equipment property of equal value
free from all Encumbrances, except in favour of the
Secured Party. Such substituted property shall become
part of the Collateral as soon as the Debtor acquires any
interest in it.
5.10 ENCUMBRANCES. Except for the Permitted Encumbrances, the
Debtor will not create, assume or suffer to exist any
Encumbrance in, of or on any of the Collateral.
5.11 CHANGE OF PLACES OF BUSINESS, COLLATERAL AND NAMES. The
Debtor will not change its Places of Business, chief executive
office, the location of any of the Collateral, or the records
in respect thereof or change its name or any name or style
under which it carries on business without giving to the
Secured Party 20 day's prior written notice of the change or
of the new name or style, applicable.
5.12 SERIAL NUMBERED GOODS. The Debtor will, at or before the
time that it acquires any interest in any item of Equipment
that is serial numbered goods, give the Secured Party a
written notice setting out the complete, accurate and
appropriate serial number (as specified in the regulations
under the PPSA) of such item of Equipment.
5.13 NOTICE OF LOSS OF COLLATERAL. The Debtor will give
immediate written notice to the Secured Party of:
(a) all loss or damage to or loss or possession of the
Collateral otherwise than by disposition in accordance
with the terms hereof; and
(b) any failure of any Account Debtor in payment or
performance of obligations due to the Debtor which may
affect the Collateral.
5.14 INSPECTION OF RECORDS AND COLLATERAL. The Debtor will at
all times deep accurate and complete records of the Collateral
as well as proper books of account for its business all in
accordance with generally accepted accounting principles,
consistently applied. The Debtor will permit the Secured
Party or its authorized agents to have access to all premises
occupied by the Debtor or any place where the Collateral may
be found to inspect the Collateral and to examine the books of
accounts, financial records and reports of the Debtor and to
have temporary custody of, make copies of and take extracts
from such books, records and reports.
5.15 ACCESS TO COMPUTER INFORMATION. In the event that the
use of a computer system is required to access any information
and data which the Secured Party is entitled to access and
examine hereunder, the Debtor will allow the secured Party the
use of its computer system for such purpose and will provide
assistance in that regard. If for any
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reason such information and data cannot be accessed and
retrieved at the Debtor's premises the Secured Party may
remove the medium in which such information or data is stored
from the Debtor's premises to any other place which has a
computer system that will give the Secured Party the
opportunity to retrieve, record or copy such information and
data. The Secured Party is hereby authorized to reproduce and
retain a copy of any such information and data in any format
whatsoever.
5.16 DELIVERY OF DOCUMENTS. The Debtor will promptly deliver
to the Secured Party upon request:
(a) DOCUMENTS OF TITLE. Any Chattel Paper, Instruments,
Securities, and Documents of Title, and upon such
delivery, where applicable, duly endorse the same for
transfer in blank or as the Secured Party may direct;
(b) BOOKS OF ACCOUNT. All computer software, tapes, discs,
drums and cards, all books of account and all records,
ledgers, reports, correspondence, schedules, documents,
statements, lists and other writings relating to the
Collateral or the Debtor's business for the purpose of
inspecting, auditing or copying the same;
(c) FINANCIAL STATEMENTS. All financial statements prepared
by or for the Debtor regarding the Debtor's business;
(d) POLICIES OF INSURANCE. All policies and certificates of
insurance relating to the Collateral.
(e) AGREEMENTS. All agreements, licenses, permits and
consents relating to the Collateral and the Debtor's
business; and
(f) OTHER INFORMATION. Such information concerning the
Collateral, the Debtor and the Debtor's business and
affairs as the Secured Party may request.
5.17 RISK AND INSURANCE. The Debtor will bear the sole risk
of any loss, damage, destruction or confiscation of or to the
Collateral during the Debtor's possession thereof or
otherwise. The Debtor will insure the Collateral with
insurers acceptable to the Secured Party against loss or
damage by fire, theft or other insurable perils customarily
insured against by persons having an interest in such
Collateral for the full insurable value thereof with the
Secured Party as a named insured and with loss payable to the
Secured Party as its interest may appear. All such policies
of insurance shall provide that the insurance coverage
provided thereunder shall not be changed or cancelled except
on 30 days' prior written notice to the Secured Party. If the
Debtor shall fail to so insure, the Secured Party may, but
shall not be required to, insure the Collateral and the
premiums for such insurance shall be added to the Obligations
and be secured hereby.
5.18 PROCEEDS IN TRUST. The Debtor will and shall be deemed
to hold all Proceeds in trust, separate and apart from other
Money, Instruments or property, for the benefit of the Secured
Party until all amounts owing by the Debtor to the Secured
Party have been paid in full.
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5.19 NO AMALGAMATION. The Debtor will not change the nature
of its business or amalgamate or otherwise merge with any
person or permit all of or a substantial portion of its
property to become the property of any other person, whether
in one or a series of transactions, and the Debtor shall not
do any act or thing that would materially adversely affect its
business, property, prospects or financial condition.
5.20 DIVIDENDS. The Debtor will not pay any dividends to the
shareholders of any of the classes of shares in the capital of
the Debtor, and the Debtor shall not repurchase or redeem any
of the shares in the capital of the Debtor without the prior
written approval of the Secured Party, which approval will not
be unreasonably withheld.
5.21 PERFORMANCE AND DEFAULT BY DEBTOR. The Debtor will
observe and perform all the obligations imposed on the Debtor
by or in respect of the Collateral, maintain the Collateral in
good standing and not do or permit to be done anything to
impair, and not omit to do anything that would prevent the
impairment of, the security interest hereby created. The
Debtor will give to the Secured Party prompt notice of any
default by the Debtor in the performance of its covenants to
the Secured Party under this Security Agreement.
5.22 DEFAULT UNDER AGREEMENTS. The Debtor will not default
under any provision of any Agreement or any other agreement
which creates a security interest in or otherwise affects the
Collateral or, without the prior written consent of the
Secured Party, amend any Agreement or give any consent,
concession or waiver of the terms of, or exercise any option
of the Debtor permitted under such terms, or cancel or
terminate any Agreement or accept the surrender thereof. The
Debtor will give to the Secured Party notice of any default by
the Debtor under any Agreement or any other agreement which
creates a security interest in or otherwise affects the
Collateral, promptly upon becoming aware of the occurrence of
such default, but in all events, if the Debtor is aware of the
default, in sufficient time to afford the Secured Party an
opportunity to cure any such default prior to any other party
to any Agreement or any such other agreement terminating or
otherwise enforcing its rights and remedies under the
Agreement or such other agreement.
5.23 ENVIRONMENTAL LAW. The Debtor covenants and agrees with
the Secured Party to:
(a) develop and use the Business Premises only in compliance
with all Environmental Laws;
(b) permit the Secured Party to investigate the Business
Premises, any goods on the Business Premises and the
Debtor's records at any time and from time to time to
verify such compliance with Environmental Laws and this
Security Agreement;
(c) upon the request of the Secured Party, obtain from time
to time at the Debtor's cost a report from an independent
consultant designated or approved by the Secured Party
verifying compliance with Environmental Laws and this
Security Agreement or the extent of any non-compliance
therewith;
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(d) not store, manufacture, dispose, treat, generate, use,
transport, remediate or release Hazardous Materials on or
from the Business Premises without notifying the Secured
Party in writing;
(e) promptly remove any Hazardous Materials from the Business
Premises in a manner which conforms to Environmental Laws
governing their removal; and,
(f) notify the Secured Party in writing of:
(i) any enforcement, clean-up, removal, litigation or
other governmental, regulatory, judicial or
administrative action instituted, contemplated
or threatened against the Debtor or the
Business Premises pursuant to any Environmental
Laws;
(ii) all claims, actions, orders or investigations,
made or threatened by any third party against
the Debtor or the Business Premises relating
damage, contribution, cost recovery,
compensation, loss or injuries resulting from
any Hazardous Materials or any breach of the
Environmental Laws; and
(iii) the discovery of any Hazardous Materials or any
occurrence or condition on the Business
Premises or any real property adjoining or in
the vicinity of the Business Premises which
could subject the Debtor or the Business
Premises to any fines, penalties, orders or
proceedings under any Environmental Laws.
SECTION 6 COLLECTION OF ACCOUNTS
6.1 COLLECTION OF ACCOUNTS. The Secured Party may, whether
before or after default under this Security Agreement, notify
and direct any Account Debtor to make all payments whatever to
the Secured Party. The Secured party may hold all amounts
acquired from any Account Debtor and any Proceeds as part of
the Collateral.
6.2 TRUST PROVISION. Any payments received by the Debtor
whether before or after notification to Account Debtors, shall
be held by the Debtor in trust for the Secured party in the
same medium in which received, shall not be commingled with
any assets of the Debtor and shall, at the request of the
Secured Party, be turned over to the Secured party not later
than the next business day following the day of their receipt.
SECTION 7 DEFAULT
7.1 DEFAULT. The Debtor shall be in default under this
Security Agreement upon the occurrence of any of the following
events ("Events of Default"):
(a) PERFORMANCE OF OBLIGATIONS. The Debtor defaults in the
payment or performance of any of the Obligations;
(b) BREACH OF AGREEMENT. The Debtor breaches any term,
provision, warranty, representation or covenant under
this Security Agreement or any other agreement
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between the Debtor and the Secured party, all as in effect
or as hereafter entered into or amended;
(c) GUARANTOR OR INDEMNITOR DEFAULT. Any person who from
time to time guarantees, assumes or otherwise becomes
liable for the Obligations or who covenants and agrees to
indemnify the Secured Party for any loss, costs or
damages as a result of the Debtor's failure to perform
the Obligations (the "Guarantor/Indemnitor"), commits a
breach of, or fails to observe or perform, any covenant,
representation or warranty in favor of the Secured Party;
(d) CEASE TO CARRY ON BUSINESS. The Debtor or
Guarantor/Indemnitor ceases or threatens to cease to
carry on business;
(e) BANKRUPTCY, INSOLVENCY. The dissolution, termination of
existence, insolvency, bankruptcy or business failure of
the Debtor or Guarantor/Indemnitor, or upon the
appointment of a receiver, receiver-manager or receiver
and manager of any part of the property of the Debtor or
Guarantor/Indemnitor, or the commencement by or against
the Debtor or Guarantor/Indemnitor of any proceeding
under any bankruptcy, arrangement, reorganization,
dissolution, liquidation, insolvency or similar law for
the relief of or otherwise affecting creditors of the
Debtor or Guarantor/Indemnitor, or by or against any
guarantor or surety for the Debtor or
Guarantor/Indemnitor, or upon the issue of any writ of
execution, warrant, attachment, sequestration, levy,
third party demand, notice of intention to enforce
security or garnishment or similar process against the
Debtor, Guarantor/Indemnitor or any part of the
Collateral;
(f) COMMIT ACT OF BANKRUPTCY. The Debtor or
Guarantor/Indemnitor commits or threatens to commit an
act of bankruptcy;
(g) DISSOLUTION, WINDING UP. The institution by or against
the Debtor or Guarantor/Indemnitor of any formal or
informal proceeding for the dissolution or liquidation
of, settlement of claims against or winding up of affairs
of the Debtor or Guarantor/Indemnitor;
(h) SALE IN BULK. The Debtor or Guarantor/Indemnitor makes
or proposes to make any sale of its assets in bulk;
(i) CHARGE AGAINST COLLATERAL. If any right of distress is
levied or is threatened to be levied against the
Collateral or if any Encumbrance affecting the Collateral
becomes enforceable against the Collateral or any part
thereof;
(j) DESTRUCTION OF COLLATERAL. Any material portion of the
Collateral is damaged or destroyed;
(k) OTHER DEFAULT. The Debtor or any Guarantor/Indemnitor
defaults under any agreement with respect to any
indebtedness or other obligation to any person other than
the Secured Party, if such default has resulted in, or
may result, with notice
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or lapse of time or both, in, the acceleration of any
such indebtedness or obligation or the right of such
person to realize upon any Collateral; and
(l) PERFORMANCE IMPAIRED. The Secured Party in good faith
believes the prospect of payment or performance of the
Obligations hereunder is or is about to be impaired or
that any Collateral is or is about to be placed in
jeopardy.
7.2 CRYSTALLIZATION. The floating charge created by Section
1.2 shall become a fixed charge as soon as:
(a) the Secured Party gives notice to that effect to the Debtor;
(b) the Secured Party takes any step to accelerate or demand
payment of the Obligations, or gives notice of its
intention or takes any steps to enforce its security; or
(c) an Event of Default described in Subsection 7.1(e) or (g)
occurs in respect of the Debtor.
7.3 DEMAND OBLIGATIONS. The fact that this Security
Agreement provides for Events of Default and rights of
acceleration shall not derogate from the demand nature of any
Obligation payable on demand.
7.4 WAIVER NOT TO AFFECT SUBSEQUENT BREACH. The Secured
party may waive default or any breach by the Debtor of any of
the provisions contained in this Security Agreement. No
waiver shall extend to a subsequent breach or default, whether
or not the same as or similar to the breach or default waived.
No act or omission of the Secured Party shall extend to or be
taken in any manner whatsoever to affect any subsequent breach
or default of the Debtor or the rights of the Secured Party
resulting therefrom. Any such waiver must be in writing and
signed by the Secured Party to be effective.
SECTION 8 SECURED PARTY'S REMEDIES ON DEFAULT
8.1 INDEBTEDNESS DUE AND RIGHTS AND REMEDIES. Upon the
occurrence of an Event of Default all of the Obligations shall
become immediately due and payable without notice to the
Debtor, the Secured Party may, at its option, proceed to
enforce payment of same and to exercise any or all of the
rights and remedies contained herein, including, without
limitation, the signification and collection of the Debtor's
Accounts, or otherwise afforded by law, in equity or
otherwise. The Secured Party shall have the right to enforce
one or more remedies successively or concurrently in
accordance with applicable law and the Secured Party expressly
retains all rights and remedies not inconsistent with the
provisions herein including all the rights it may have under
the PPSA, and, without restricting the generality of the
foregoing, the Secured Party may upon such Event of Default:
(a) APPOINTMENT OF RECEIVER. Appoint by instrument in
writing a receiver, receiver-manager or receiver and
manager (herein a "Receiver") of the Debtor and of all or
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any part of the Collateral and remove or replace such
Receiver from time to time or may institute proceedings
in any court of competent jurisdiction for the
appointment of a Receiver. Any Receiver appointed by the
Secured Party so far as concerns responsibility for its
acts shall be deemed the agent of the Debtor and not of
the Secured Party. Where the Secured Party is referred
to in this Section the reference includes, where the
context permits, any Receiver so appointed and the
officers, employees, servants or agents of such Receiver;
(b) ENTER AND REPOSSESS. Immediately and without notice
enter the Debtor's premises and repossess, disable or
remove the Collateral and the Debtor hereby grants to the
Secured Party a license to occupy any premises of the
Debtor for the purpose of storage of the Collateral;
(c) RETAIN THE COLLATERAL. Retain and administer the
Collateral in the Secured Party's sole and unfettered
discretion, which the Debtor hereby acknowledges is
commercially reasonable;
(d) DISPOSE OF THE COLLATERAL. Dispose of any Collateral by
public auction, private tender or private contract with
or without notice, advertising or any other formality,
all of which are hereby waived by the Debtor. The
Secured party may, at its discretion establish the terms
of such disposition, including, without limitation, terms
and conditions as to credit, upset, reserve bid or price.
The Secured Party may also lease the Collateral on such
terms as it deems appropriate. The payments for
Collateral, whether on a disposition or lease, may be
deferred. All payments made pursuant to such
dispositions shall be credited against the Obligations
only as they are actually received. The Secured Party
may buy in, rescind or vary any contract for the
disposition of any Collateral and may dispose of any
Collateral again without being answerable for any loss
occasioned thereby. Any such disposition may take place
whether or not the Secured Party has taken possession of
the Collateral;
(e) FORECLOSE. Foreclose upon the Collateral in satisfaction
of the Obligations. The Secured Party may designate any
part of the Obligations to be satisfied by the
foreclosure of particular Collateral which the Secured
party considers to have a net realizable value
approximating the amount of the designated part of the
Obligations, in which case only the designated part of
the Obligations shall be deemed to be satisfied by the
foreclosure of the particular Collateral;
(f) CARRY ON BUSINESS. Carry on or concur in the carrying on
of all or any part of the business of the Debtor and may,
in any event, to the exclusion of all others, including
the Debtor, enter upon, occupy and use all premises of or
occupied or used by the Debtor and use any of the
personal property (which shall include fixtures) of the
Debtor for such time and such purposes as the Secured
Party sees fit. The Secured Party shall not be liable to
the Debtor for any neglect in so doing or in respect of
any rent, costs, charges, depreciation or damages in
connection therewith;
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(g) PAYMENT OF ENCUMBRANCES. Pay any Encumbrance that may
exist or be threatened against the Collateral. In any
such case the amounts so paid together with costs,
charges and expenses incurred in connection therewith
shall be added to the Obligations secured by this
Security Agreement;
(h) PAYMENT OF DEFICIENCY. If the proceeds of realization
are insufficient to pay all monetary Obligations, the
Debtor shall forthwith pay or cause to be paid to the
Secured Party any deficiency and the Secured Party may
sue the Debtor to collect the amount of such deficiency;
and
(i) DEALING WITH COLLATERAL. Subject to applicable law
seize, collect, realize, borrow money on the security of,
release to third parties, sell (by way of public or
private sale), lease or otherwise deal with the
Collateral in such manner, upon such terms and
conditions, at such time or times and place or places and
for such consideration as may seem to the Secured Party
advisable and without notice to the Debtor. The Secured
Party may charge on its own behalf and pay to others sums
for expenses incurred and for services rendered
(expressly including legal services, consulting,
receivers and accounting fees) in or in connection with
seizing, collecting, realizing, borrowing on the security
of, selling or obtaining payment of the Collateral and
may add such sums to the Obligations secured by this
Security Agreement.
8.2 ASSEMBLE THE COLLATERAL. To assist the Secured Party in
the implementation of such rights and remedies the Debtor
will, at its own risk and expense and at the Secured Party's
request, assemble prepare for removal such items of the
Collateral as are selected by the Secured Party as shall, in
the Secured Party's sole judgment, have a value sufficient to
cover all the Obligations.
8.3 SECURED PARTY NOT LIABLE FOR FAILURE TO EXERCISE
REMEDIES. The Secured Party shall not be liable or
accountable for any delay or failure to exercise its remedies,
take possession of, seize, collect, realize, sell, lease or
otherwise dispose of or obtain payment for the Collateral. The
Secured Party shall not be bound to institute proceedings for
such purpose or for the purpose of preserving any rights,
remedies or powers of the Secured Party, the Debtor or any
other person in respect of the Collateral or against any
Account Debtor.
8.4 ALLOCATION OF PROCEEDS. All monies collected or received
by the Secured Party in respect of the Collateral may be held
by the Secured Party and may be applied on account of such
parts of the Obligations at the sole discretion of the Secured
Party.
8.5 EXTENSION OF TIME. The Secured Party may grant
extensions of time and other indulgences, take and give up
securities, accept compositions, grant releases and
discharges, release the Collateral to third parties and
otherwise deal with the Debtor's guarantors or sureties and
others and with the Collateral and other securities as the
Secured Party may see fit without prejudice to the liability
of the Debtor to the Secured Party, or the Secured Party's
rights, remedies and powers under this Security Agreement.
15
<PAGE>
8.6 FORBEARANCE IS NOT WAIVER. No extension of time,
forbearance, indulgence or other accommodation now, heretofore
or hereafter given by the Secured Party to the Debtor shall
operate as a waiver, alteration or amendment of the rights of
the Secured Party or otherwise preclude the Secured Party from
enforcing such rights.
8.7 EFFECT OF APPOINTMENT OF RECEIVER. As soon as the
Secured Party takes possession of any Collateral or appoints a
Receiver, all powers, functions, rights and privileges of the
directors and officers of the Debtor with respect to that
Collateral shall cease, unless specifically continued by the
written consent of the Secured Party or the Receiver.
8.8 LIMITATION OF LIABILITY. The Secured Party shall not be
liable by reason of any entry into or taking possession of any
of the Collateral hereby charged or intended so to be or any
part thereto, to account as mortgagee in possession or for
anything except actual receipts or be liable for any loss or
realization or any act or omission for which a Secured Party
in possession might be liable. The Debtor acknowledges and
agrees that any and all payments, responsibilities,
obligations and liabilities in respect of the Collateral shall
remain those of the Debtor and no such payments,
responsibilities, obligations or liabilities are assigned
hereby nor are assumed or incurred by the Secured Party
hereunder.
8.9 RELEASE BY DEBTOR. The Debtor hereby releases and
discharges the Secured Party and the Receiver from every claim
of every nature, whether sounding in damages or not, which may
arise or be caused to the Debtor or any person claiming
through or under the Debtor by reason or as a result of any
act or omission of the Secured Party or any successor or
assign claiming through or under the Secured Party or the
Receiver under the provisions of this Security Agreement
unless such claim is the result of dishonesty or gross neglect.
8.10 PERFORMANCE BY SECURED PARTY. Nothing herein shall
obligate the Secured Party to assume or perform any obligation
of the Debtor to any third party in respect or arising out of
the Collateral. The Debtor agrees to indemnify and save
harmless the Secured Party from any and all claims of such
third parties. The Secured Party may however at its option
assume or perform any such obligations which the Secured Party
considers necessary or desirable to obtain the benefit of the
Collateral, or any part thereof, free of any set off,
deduction or abatement and any money so expended by the
Secured Party shall form part of the Obligations and shall
bear interest at the highest rate per annum from time to time
charged by the Secured Party on any of the other Obligations.
SECTION 9 MISCELLANEOUS
9.1 COSTS. The Debtor will indemnify and reimburse the
Secured Party on demand for all interest, commissions, costs
of realization and other costs and expenses (including the
full amount of all legal fees and expenses paid by the Secured
Party) incurred by the Secured Party or any Receiver in
connection with:
16
<PAGE>
(a) the perpetual registration of any financing statement
registered in connection with the security interests
hereby created;
(b) the preparation, execution, perfection, protection,
enforcement of and advice with respect to this Security
Agreement;
(c) the realization, disposition of, retention, protection,
insuring or collection of any Collateral;
(d) the protection or enforcement of the rights, remedies and
powers of the Secured Party or any Receiver, including,
without limitation, participation, preparation and advice
with respect to any actions or proceedings commenced or
threatened by or against the Debtor or any
Guarantor/Indemnitor;
(e) the inspection of the Collateral;
(f) investigating title to the Collateral;
(g) the compliance by the Secured Party with all demands made
upon the Secured Party to amend, extend, cancel or
discharge any registrations and filing related hereto; and
(h) any other cost related hereto.
All amounts of which the Debtor is required hereunder to reimburse the Secured
Party or any Receiver shall, from the date of disbursement until the date the
Secured Party or the Receiver receives reimbursement, be deemed advanced to the
Debtor by the Secured Party, shall be deemed to be Obligations and shall bear
interest at the highest rate per annum from time to time charged by the Secured
Party on any of the other Obligations.
9.2 APPOINTMENT OF ATTORNEY. The Debtor hereby constitutes
and appoints the Secured Party, or any Receiver, the true and
lawful attorney of the Debtor irrevocably with full power of
substitution to do, make and execute all such assignments,
documents, acts, matters or things with the right to use the
name of the Debtor whenever and wherever it may be deemed
necessary or expedient. The Debtor hereby declares that the
irrevocable power of attorney granted hereby, being coupled
with an interest, is given for valuable consideration.
9.3 NO OBLIGATION TO MAKE ADVANCES. Nothing herein shall
obligate the Secured Party to make any advance or loan or
further advance or extend credit to the Debtor and, in
particular, nothing herein shall obligate the Secured Party to
advance any unadvanced portion of any loan or credit to the
Debtor after the occurrence of an Event of Default. Except to
the extent that the Secured Party:
(a) by accepting bills of exchange drawn on it by the Debtor; or
(b) by issuing letters of credit or letters of guarantee on
the application of the Debtor,
17
<PAGE>
is required to advance monies on the maturity of those bills or pursuant to
those letters of credit or letters of guarantee, as the case may be, none of the
preparation, execution, perfection or registration of this Security Agreement or
the advance of any monies by the Secured Party shall bind the Secured Party to
make any further advance.
9.4 SECURITY INTERESTS EFFECTIVE IMMEDIATELY. Neither the
execution of, nor any filing with respect to, this Security
Agreement shall bind the Secured Party to grant any credit to
the Debtor, but the security interests hereby created shall
take effect forthwith upon the execution of this Security
Agreement by the Debtor.
9.5 SECURITY IN ADDITION AND NOT IN SUBSTITUTION, REMEDIES
CUMULATIVE. The rights, remedies and powers conferred by this
Security Agreement are in addition to, and not in substitution
for, any other rights, remedies or powers the Secured Party
may have under this Security Agreement, at law, in equity or
by or under the PPSA or any other statute. The Secured Party
may proceed by way of any action, suit or other proceeding at
law or in equity and no right, remedy or power of the Secured
Party shall be exclusive of or dependent on any other. The
Secured Party may exercise any of its rights, remedies or
powers separately or in combination and at any time.
9.6 STATUTORY WAIVERS. To the fullest extent permitted by
law, the Debtor waives all of the rights, benefits and
protection given by the provisions of any existing or future
statute which imposes limitations upon the rights, remedies or
powers of a Secured Party or upon the methods of realization
of security, including any seize or sue or anti-deficiency
statute or any similar provisions of any other statute. In
particular, the Debtor waives all rights, benefits and
protection given by the SEIZURE ACT and sections 47 and 50 of
the LAW OF PROPERTY ACT of the Province of Alberta insofar as
they extend to or relate to any of the Collateral. The
LIMITATION OF CIVIL RIGHTS ACT of the Province of Saskatchewan
shall not apply to the security interests hereby created or
any of the rights, remedies or powers of the Secured Party or
any Receiver.
9.7 PROVISIONS REASONABLE. The Debtor acknowledges that the
provision of this Security Agreement and, in particular, those
respecting rights, remedies and powers of the Secured Party
and any Receiver against the Debtor, its business and any
Collateral upon an Event of Default, are commercially
reasonable and not manifestly unreasonable.
9.8 FURTHER ASSURANCES. The Debtor shall at all times, do,
execute, acknowledge and deliver or cause to be done,
executed, acknowledged or delivered all such further acts,
deeds, transfers, assignments, security agreements and
assurances as the Secured Party may reasonably require in
order to give effect to the provisions hereof and for the
better granting, transferring, assigning, charging, setting
over, assuring, confirming or perfecting the security
interests hereby created and the priority accorded to them by
law or under this Security Agreement.
9.9 NOTICES.
(a)Every notice, demand and other communication in connection
with this Security Agreement (including, without limitation, notices required
or permitted under the BANKRUPTCY
18
<PAGE>
AND INSOLVENCY ACT) and all legal process in regard hereto shall be validly
given, made or served if in writing and delivered to, or mail, postage prepaid,
or telecopied or telexed or sent by other similar form of communication
(collectively "Electronic Communication") to the intended recipient at its
address first written above and if to the Debtor to the attention of Mr. William
H. W. Atkinson and if to the Secured Party to the attention of Mr. W.G. Kanke or
to such other address or person as the other party may from time to time
designate by notice.
(b)Any notice, requisition, demand or other instrument,
(including, without limitation, notice required or permitted under the
BANKRUPTCY AND INSOLVENCY ACT) if delivered, shall be deemed to have been
given or made on the day on which it was delivered and if sent by Electronic
Communication shall be deemed to have been given or made on the business day
next following the day on which it was so sent, and if mailed shall be deemed
to have been given or made on the third business day following the day on
which it was so mailed. Any party hereto may given written notice of a
change of address in the same manner, in which event any notice shall
thereafter be given to it as above provided at such changed address.
9.10 DISCHARGE. Upon payment and performance by the Debtor of
the Obligations secured hereby the Secured Party shall upon
request in writing by the Debtor deliver up this Security
Agreement to the Debtor and shall at the expense of the Debtor
cancel and discharge the security interests hereby created and
execute and deliver to the Debtor such documents as shall be
requisite to discharge the security interests hereby created.
9.11 DELIVERY OF COPY/WAIVER. The Debtor hereby acknowledges
receiving a copy of this Security Agreement. The Debtor
waives all rights to receive from the Secured Party a copy of
any financing statement or financing change statement
registered or verification statement issued at any time in
respect of this Security Agreement.
9.12 RELEASE OF INFORMATION. The Debtor hereby authorizes the
Secured Party to provide a copy of this Security Agreement and
such other information (including full details of the
Obligations) as may be requested of the Secured Party by
persons entitled thereto under the PPSA.
9.13 INSPECTION, MANAGEMENT AND REPAIRS. The Debtor covenants
and agrees that the Secured Party may, but shall be under no
obligation to, at such time or times as the Secured Party
deems necessary and without the concurrence of the Debtor or
any other person make such arrangements for the repairing,
finishing and putting in order of the Business Premises,
including, without limitation, such repairs, replacements and
improvements as are necessary so that the Debtor and the
Business Premises comply with Environmental Laws, and all
reasonable costs, charges and expenses including an allowance
for the time and services of the Secured Party, the Secured
Party's servants or agents or any other person or persons
appointed for the above purposes including, without
limitation, the full amount of all legal fees, disbursements,
costs, charges and expenses incurred by the Secured Party and
any amount due hereunder shall be payable forthwith to the
Secured Party, shall be deemed an advance to the Debtor by the
Secured party, shall be deemed to be Obligations, and shall
bear interest at the highest rate per annum from time to time
charged by the Secured Party on any of the other Obligations
until paid.
19
<PAGE>
9.14 HAZARDOUS MATERIALS AND ENVIRONMENTAL LAWS. The Debtor
represents and warrants to the Secured Party that:
(a) the Business Premises are not insulated with urea
formaldehyde and do not contain any asbestos material or
underground tanks;
(b) the Business Premises are free of any Hazardous Materials;
(c) the Business Premises are not currently used in a manner,
and, to the Debtor's knowledge, after having made due
inquiry, no prior use has occurred, which is contrary to
any laws, regulations, orders, bylaws, permits or lawful
requirements of any Environmental Laws; and
(d) there are no existing or threatened claims, actions,
orders or investigations under any Environmental Laws
against the Debtor or against the Business Premises.
9.15 AUTHORIZATION OF INQUIRIES. The Debtor hereby authorizes
the Secured Party to make enquiries from time to time of any
governmental authority with respect to the Debtor's compliance
with Environmental Laws and the Debtor agrees that the Debtor
will from time to time provide to the Secured Party with such
written authorization as the Secured Party may reasonably
require in order to facilitate the obtaining of such
information.
9.16 INDEMNIFICATION
(a) The Debtor shall indemnify, reimburse and save harmless
the Secured Party, any receiver, its directors, officers,
employees, agents, and successors and assigns, from any
and all liabilities, actions, damages, claims, losses,
costs and expenses whatsoever (including without
limitation, the full amount of all legal fees, costs,
charges and expenses and the cost of removal, treatment,
storage and disposal of any Hazardous materials and
remediation of the Business Premises) which may be paid,
incurred or asserted against the Secured Party for, with
respect to or as a direct or indirect result of the
presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission or release from, the
Business Premises or into or upon any other land, the
atmosphere or any watercourse, body of water or wetland
of any Hazardous Materials.
(b) Any amount owing by the Debtor hereunder shall, from the
date of disbursement until the date the recipient
receives reimbursement, be deemed advanced to the Debtor
by the Secured Party, shall be deemed to be obligations
and shall bear interest at the highest rate per annum
from time to time charged by the Secured Party on any of
the other Obligations until paid.
(c) The Debtor agrees that the indemnity obligations
hereunder shall survive the release of the security of
this Security Agreement and the payment and satisfaction
of the indebtedness and liabilities hereby secured, but
only insofar as such indemnity obligations relate to
liabilities, actions, damages, claims, losses,
20
<PAGE>
costs and expenses arising in connection with Hazardous
Material that were on the Business Premises prior to such
release, payment and satisfaction.
SECTION 10 INTERPRETATION
10.1 ENTIRE AGREEMENT/AMENDMENT. This Security Agreement
contains the entire agreement between the parties relating to
the security interests hereby created. Any amendment of this
Security Agreement shall not be binding unless in writing and
signed by the Secured Party and the Debtor. The Debtor
confirms that there are not representations, warranties,
covenants or acknowledgments affecting, or relied upon in
entering this Security Agreement.
10.2 SEVERABILITY. Any provision of this Security Agreement
prohibited by law or otherwise ineffective shall be
ineffective only to the extent of such prohibition or
ineffectiveness and shall be severable without invalidating or
otherwise affecting the remaining provisions hereof.
10.3 JOINT AND SEVERAL LIABILITY. If more than one person
executes this Security Agreement as Debtor, their obligations
hereunder and the liability resulting therefrom shall be joint
and several.
10.4 HEADINGS. All headings and titles in this Security
Agreement are for reference only and are not to be used in the
interpretation of the terms hereof.
10.5 INCLUDED WORDS. Wherever the singular or the masculine
are used herein, the same shall be deemed to include the
plural or the feminine or the body politic or corporate where
the context or the parties so require.
10.6 APPLICABLE LAW. This Security Agreement shall be
construed and enforceable under an in accordance with the laws
of British Columbia. The Debtor hereby irrevocably submits
and attorns to the jurisdiction of the British Columbia
Supreme Court sitting at Vancouver, British Columbia.
21
<PAGE>
10.7 BINDING EFFECT. This Security Agreement shall be binding
on the Debtor and its successors, heirs, administrators and
executors and shall ensure to the benefit of the Secured Party
and its successors and assigns.
Officer Signature(s) Transferor(s) Signature(s)
- -------------------------------- CARING PRODUCTS
INTERNATIONAL, INC.
By its authorized signatory
/S/ WILLIAM H.W. ATKINSON
-------------------------
William H.W. Atkinson
LIST OF SCHEDULES
Schedule A - Specific Equipment Description
Schedule B - Permitted Encumbrances
Schedule C - Debtor's Places of Business
22
<PAGE>
Schedule A
Specific Equipment Description
None
<PAGE>
Schedule B
Permitted Encumbrances
1. financing statement in favour of Toronto Dominion with respect to a
security agreement charging proceeds from deposit account 0902-310240 and
2. financing statement in favour of Toronto Dominion with respect to a
security agreement charging demand account 0902-310240 as amended by a
financing change statement registered on March 21, 1996 being a one-year
renewal.
<PAGE>
EXHIBIT 10.17
CARING PRODUCTS INTERNATIONAL, INC.
[LOGO]
September 5, 1996
Mr. Dan Love
President, Personal Care Division
Medline Industries
One Medline Place
Mundelein, IL 60060
RE: DISTRIBUTION OF REJOICE-TM- PRODUCTS
Dear Dan:
This letter is intended to confirm the agreement between Medline Industries,
Inc. ("Medline") and Caring Products International, Inc. ("Caring Products")
with respect to distribution of "Rejoice" incontinence products produced by
Caring Products. The terms of the agreement are as follows:
1. GRANT AND DISTRIBUTION RIGHTS. Medline is granted the exclusive
right to distribute the Rejoice Wellness Care Kit (the "Kit") and the
nonexclusive right to sell other Rejoice products into healthcare markets in the
United States. The Kit is composed of two (2) Rejoice brand cotton fabric
incontinence pants, twenty-four (24) Rejoice brand 11" liners and a booklet.
Other Rejoice products include pants and liners packaged other than as the Kit.
"Healthcare markets" is defined to mean providers of healthcare supplies and
services directly to patients; i.e., hospitals, rehabilitation clinics, nursing
homes, hospice centers, home healthcare agencies and skilled nursing facilities.
"Healthcare markets" does not include sales directly to individual consumers or
to parties whose primary business is retail sales; i.e., retail chains, drug
wholesalers, pharmacies, mass merchants, military outlets, catalog sales and
other retail oriented outlets ("retail markets"). Medline shall use its best
efforts to sell the Kit and other Rejoice products to "healthcare markets"
throughout the United States, but shall not sell the Kit or other Rejoice
products to any markets outside the United States without the prior written
consent of Caring Products.
2. TERM. The term of this agreement is from September 1, 1996 through
March 31, 2000. At or prior to March 31, 1997 the parties shall negotiate in
good faith to determine (i) the annual minimum sales requirement to retain
exclusivity of the Kit and, (ii) territory exclusivity and the related annual
minimum sales requirement for other Rejoice products, as may be agreed.
<PAGE>
If at the end of the term the parties do not reach agreement with respect to
future sales by Medline of the kit and Rejoice products, Caring Products shall
repurchase all unsold, undamaged resalable product in Medline's possession.
Delivery costs and a re-stocking charge will be applied if Medline chooses to
end the sales relationship.
3. SALES AND PROMOTION RESPONSIBILITIES. Medline agrees to honestly and
vigorously support and promote the Kit through the term of this agreement.
Medline shall provide time to train all of its nursing home, hospital and home
healthcare sales reps during its upcoming regional and national sales training
meetings this fall and in early 1997. Medline shall include the Kit in its
upcoming catalogs. Caring Products and Medline shall mutually agree the terms
of all quarterly promotion programs. Caring Products will agree to fund such
quarterly promotion programs. Caring Products shall also provide educational
and general product promotional materials and personnel support to assist in
training Medline sales personnel as well as make available sales management for
key sales presentations and key trade shows as agreed.
4. SUPPLY OF PRODUCT. Caring Products agrees to use its best efforts to
supply product to Medline during the term hereof. In so supplying the
requirements of Medline, Caring Products agrees to supply such varieties, styles
and types of the products against approved purchase orders to Caring Products.
Medline agrees to provide Caring Products reasonable notice on a quarterly basis
of its anticipated sales requirements.
5. CONFIDENTIALITY. Medline agrees not to disclose or use, directly or
indirectly, any confidential information provided by Caring Products. If the
disclosure of confidential information is required by law, Medline agrees to use
its best efforts to provide Caring Products an opportunity to object to the
disclosure with as much prior written notice as is possible under the
circumstances. For purposes of this paragraph, "confidential information" means
all information belonging to, used by, or which is in the possession of Medline
relating to Caring Product's business, the Kit, or Rejoice products to the
extent such information is not intended to be disseminated to the public or is
otherwise not generally known to competitors of Caring Products, including, but
not limited to, information relating to services, strategies, pricing,
customers, representatives, suppliers, distributors, technology, finances,
computer software and hardware, inventions, developments, or trade secrets.
Medline acknowledges that such confidential information is the exclusive
proprietary property of Caring Products, whether or not disclosed to or
entrusted to the custody of Medline.
Caring Products agrees not to disclose or use, directly or indirectly, any
confidential information provided by Medline. If the disclosure of confidential
information is required by law, Caring Products agrees to use its best efforts
to provide Medline an opportunity to object to the disclosure with as much prior
written notice as is possible under the circumstances. For purposes of this
paragraph, "confidential information" means all information belonging to, used
by, or which is in the possession of Caring Products relating to Medline's
business or Medline Products to the extent such information is not intended to
be disseminated to the public or is otherwise not generally known to competitors
of Medline Products, including, but not limited to, information relating to
services, strategies, pricing, customers, representatives, suppliers,
distributors, technology, finances, computer software and hardware, inventions,
developments, or trade
<PAGE>
secrets. Caring Products acknowledges that such confidential information is the
exclusive proprietary property of Medline, whether or not prepared in whole or
in part by Caring Products and whether or not disclosed to or entrusted to the
custody of Caring Products.
6. INDEMNIFICATION. Medline shall indemnify, hold harmless and defend
Caring Products, its directors, officers, agents, and employees and Caring
Products shall indemnify, hold harmless and defend Medline, its directors,
officers, agents and employees for and from any and all losses, claims
liability, damage, action, judgment recovered from or asserted against the other
or other expenses (including, without limitation, attorneys' fees and expenses)
arising out of or relating to the conduct of the indemnifying party's business
or from any activity, work, or things which may be permitted or suffered by the
indemnifying party or from any breach or default in the performance of any
obligation on the indemnifying part's part to be performed under any provision
of this Agreement or arising from any negligence of the indemnifying party or
any of its agents, contractors, employees, or invitees, including but not
limited to the use of patented, trademarked or copyrighted materials, equipment,
devices, processes, or rights.
7. INSURANCE. Caring Products shall provide to Medline such
certificates of insurance as agreed by Medline and Caring Products including
naming Medline as an additional insured on its product liability insurance.
Medline shall provide to Caring Products such certificates of insurance as
agreed by Caring Products and Medline. Certificates of insurance and "loss
payee" forms shall be exchanged within 60 days of the commencement of the
Agreement.
8. PACKAGING/MARKETING LITERATURE AND WARRANTIES. Kit packaging will
include the words "Distributed exclusively by Medline" or such other creative as
provided by Medline and approved by Caring Products. All marketing literature
to be used by Medline with respect to the Kit or other Rejoice products shall be
subject to the prior approval of Caring Products for purposes of insuring that
the Kit and other Rejoice products are accurately described for Caring Products'
own product liability insurance coverage. Medline shall not provide any express
warranty with respect to the Kit or Rejoice products without the prior approval
of Caring Products.
9. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder, may be assigned, transferred or delegated to another party by Medline
without first obtaining the written consent of Caring Products. Neither this
Agreement nor any rights or obligations hereunder, may be assigned, transferred
or delegated to another party by Caring Products without first obtaining the
written consent of Medline.
10. GOVERNING LAW; VENUE. This Agreement, including all matters of
construction, validity and performance, shall be governed by and construed and
enforced in accordance with the laws of the State of Illinois as applied to
contracts made, executed and to be fully performed in such state by citizens of
such state, without regard to conflict of laws principles.
<PAGE>
If the terms set forth above are acceptable to Medline, please sign below and
provide an additional signed copy of this letter and return it to me.
Very truly yours,
CARING PRODUCTS INTERNATIONAL, INC.
/s/ Susan A. Schreter
- ---------------------------------------------------
Susan A. Schreter, President
The terms of the above Agreement are approved and
accepted this 5th day of September 1996.
MEDLINE PRODUCTS, INC.
/s/ Dan Love
- ---------------------------------------------------
Dan Love, President Personal Care Division
<PAGE>
EXHIBIT 10.19
[Bradstone Equity Partners, Inc.]
September 2, 1997
William H.W. Atkinson
Caring Products International Inc.
Suite 200
200 First Avenue West
Seattle, WA
98109
Dear Bill,
In anticipation of your Company's financial requirements for the period ending
April 1, 1998 and in light of your need to file your Company's registration
statement as quickly as possible, Bradstone Equity Partners, Inc. ("Bradstone")
agrees to fund Caring Products International Inc. ("Caring Products") for any
cash shortfalls it might incur up to April 1, 1998.
These infusions of capital would be in addition to the existing loans and
guarantees presently in place between our two companies:
- US$1.25 million term loan, as amended August 7, 1997
- S$2.50 million guarantee of a US$2.50 million credit facility with the
Toronto Dominion Bank, as amended August 7, 1997.
It is understood and agreed that this additional infusion of capital would be
necessary if, and only if, your company's proposed public underwriting with
Paulson Investment Corporation is not completed in an amount and time sufficient
to meet your cash shortfalls up to April 1, 1998. This additional infusion of
capital by Bradstone will not exceed US$1.25 million. Such proceeds would be
funded on the same terms as the existing US$1.25 million term loan between
Bradstone and Caring Products, as amended August 7, 1997.
If these additional funds are required, Caring Products agrees, in addition to
the existing loan and guarantee covenants already in place, to take the
following steps:
1. Appoint Alex Blodgett or other designate of Bradstone to the Board of
Directors of Caring Products;
2. Begin immediately to prepare a mutually acceptable survival business
program to insure the continued operations of the Company. This plan would
be agreed upon by Bradstone and Caring Products on or before December 31,
1997;
<PAGE>
[Bradstone Equity Partners, Inc.]
3. All cheques written by the Company must be co-signed by Bradstone, which
signatures will not be unduly withheld, so Caring Products can meet its
obligations as they become due;
4. The company will immediately pursue additional sources of financing with
the assistance of Bradstone.
If you are in agreement with the above terms, please sign all three copies and
return to us for signature. Each party to this irrevocable agreement
acknowledges that they have the authority to enter into this agreement without
additional approvals and do so after completion of any due diligence considered
necessary by each party.
Yours truly,
/s/ Alex W. Blodgett /s/ William H.W. Atkinson
- ---------------------------------------- ----------------------------------
Alex W. Blodgett William H.W. Atkinson
Director Chairman & C.E.O.
Bradstone Equity Partners, Inc. Caring Products International Inc.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CARING PRODUCTS INTERNATIONAL, INC.
Name State/Jurisdiction of Incorporation
---- -----------------------------------
Caring Products Industries, Ltd. British Columbia
C.P. International, Inc. Delaware
