<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1997
REGISTRATION NO. 333-35239
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
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 of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification 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) (1) FEE
<S> <C> <C> <C> <C>
Units (2) each consisting of:............................... 2,012,500 $5.00 $10,062,500 $3,050
(i) one share of Common Stock, par value $0.01 per share
(the "Common Stock"); and.............................. 2,012,500 -- -- --
(ii) one Warrant to purchase one share of Common Stock...... 2,012,500 -- -- --
Representatives' Warrants (3)............................... 175,000 -0- -0- -0-
Units issuable upon exercise of the Representatives'
Warrants, each consisting of:............................. 175,000 $6.00 $1,050,000 $319
(i) one share of Common Stock; and......................... 175,000 -- -- --
(ii) one Warrant to purchase one share of Common Stock...... 175,000 -- -- --
Common Stock issuable upon exercise of Warrants, including
Warrants underlying Representatives' Warrants (4)......... 2,187,500 $7.50 $16,406,250 $4,972
Totals...................................................... $27,518,750 $8,341(5)
</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) Includes 262,500 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.
(3) In connection with the sale of the Units, the Registrant is granting to the
Representatives warrants to purchase 175,000 Units (the "Representatives'
Warrants").
(4) 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.
(5) The Registrant has paid $11,438.
------------------------------
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 DECEMBER 5, 1997
<TABLE>
<CAPTION>
<S> <C>
1,750,000 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
Units will trade for a period of 30 days and, thereafter, the Common Stock and
Warrants comprising the Units will separate 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 after
separation of the Units, 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
since August 14, 1997 and is currently trading under the symbol "CGPD." The last
reported bid price of the Company's Common Stock on the OTC Bulletin Board on
December 4, 1997 was $4.00. The Company's Common Stock is also traded on the
Vancouver Stock Exchange ("VSE") under the symbol "CPM."
The Units, Common Stock and Warrants have been approved for quotation on the
Nasdaq SmallCap Market, upon notice of issuance, under the symbols "BDRYU,"
"BDRY" and "BDRYW," respectively.
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 175,000 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 $907,500, 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 262,500 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 December , 1997.
PAULSON INVESTMENT COMPANY, INC. COHIG & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS DECEMBER , 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 AND A ONE-FOR-FOUR REVERSE STOCK SPLIT (THE
"REVERSE STOCK SPLITS") OF THE COMPANY'S COMMON STOCK EFFECTED ON JUNE 16, 1997
AND OCTOBER 20, 1997, RESPECTIVELY; (II) DOES NOT INCLUDE, AS OF NOVEMBER 19,
1997, 446,900 SHARES ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS, SUBJECT TO
CERTAIN CONTINGENCIES, AND 171,813 SHARES ISSUABLE UPON EXERCISE OF OUTSTANDING
WARRANTS; (III) DOES NOT INCLUDE, AS OF NOVEMBER 19, 1997, 178,100 SHARES OF
COMMON STOCK, SUBJECT TO CERTAIN CONTINGENCIES, RESERVED FOR ISSUANCE UNDER THE
COMPANY'S 1993 AND 1996 INCENTIVE PROGRAMS (THE "STOCK OPTION PLANS"); AND (IV)
ASSUMES NO EXERCISE OF THE WARRANTS, THE REPRESENTATIVES' WARRANTS AND THE OVER-
ALLOTMENT OPTION. 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, which the Company believes
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 Company also believes that 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 substantially all of its pant production to its subcontractor in Mexico,
where pant manufacturing is more cost effective. The liner material is
manufactured in Canada by an independent contractor under an exclusive supply
3
<PAGE>
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 September 30, 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--Rite Aid, 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.................................... 1,750,000 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 30 days 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 the separation of
the Units 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)........................... 1,031,343 shares
After the Offering (1)(2)......................... 2,781,343 shares
</TABLE>
- ------------------------
(1) Excludes, as of November 19, 1997, (i) 140,650 shares of Common Stock
issuable upon exercise of outstanding options granted pursuant to the
Company's Stock Option Plans at exercise prices ranging from $12.00 to
$24.00 per share; (ii) subject to certain contingencies, 306,250 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) 171,813 shares of Common Stock issuable upon exercise of
outstanding warrants at exercise prices ranging from Cdn. $5.04 to Cdn.
$22.68 per share; and (iv) subject to certain contingencies, 178,100 shares
of Common Stock 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."
(2) Excludes (i) 262,500 shares of Common Stock issuable upon exercise of the
Over-Allotment Option; (ii) 175,000 shares of Common Stock issuable upon
exercise of the Representatives' Warrants and (iii) 2,187,500 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."
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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............... CPM
</TABLE>
<TABLE>
<S> <C> <C>
Nasdaq Symbols.............................. Units.............................. BDRYU
Common Stock....................... BDRY
Warrants........................... BDRYW
</TABLE>
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------- ---------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 1,118,486 $ 2,287,497 $ 894,643 $ 1,196,953
Gross profit (loss).................................... 86,590 559,890 (154,429) 544,791
Operating expenses..................................... 3,241,483 3,362,288 1,420,596 1,642,997
Net loss............................................... (3,959,940)(1) (2,904,886) (1,594,905) (1,343,845)
Net loss per share(2).................................. (7.35) (2.94) (1.69) (1.30)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
MARCH 31, 1997 ACTUAL AS ADJUSTED(3)
-------------- -------------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................................. $ 1,626,971 $ 52,231 $ 7,390,072
Total assets..................................................... 6,388,537 4,358,344 8,946,194
Total liabilities................................................ 4,293,335 3,443,395 844,995
Long-term obligations............................................ 30,353 13,511 13,511
Accumulated deficit.............................................. (10,631,163) (11,975,008) (11,975,008)
Stockholders' equity(4).......................................... 2,095,202 914,949 8,101,199
</TABLE>
- ------------------------
(1) Includes $864,735 in costs associated with an offering of convertible
promissory notes (Bridge Financing) completed in fiscal year 1996.
(2) 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.
(3) Adjusted to give effect to the sale of 1,750,000 Units offered hereby at an
assumed offering price of $5.00 per Unit, the receipt of the estimated net
proceeds therefrom and the anticipated application of such estimated net
proceeds. See "Use of Proceeds."
(4) Excludes (i) as of March 31, 1997 and September 30, 1997, 142,733 and
140,650, 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 $16.08 and $16.08, respectively; (ii)
as of March 31, 1997 and September 30, 1997, 143,862 and 175,529,
respectively, shares of Common Stock issuable upon exercise of outstanding
warrants at exercise prices ranging from $7.44 to Cdn. $28.80; (iii) 8,000
shares of Common Stock issuable upon the exercise of warrants issued on
October 22, 1997 at an exercise price of Cdn. $5.04; (iv) as of March 31,
1997 and September 30, 1997, 65,600 and 67,683, respectively, shares of
Common Stock reserved for issuance under the Stock Option Plans; (v) subject
to certain contingencies, 306,250 shares of Common Stock issuable upon
exercise of outstanding options granted under the Stock Option Plans in
August 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, which are not included in (i) above;
and (vi) as of November 19, 1997, 178,100 shares of Common Stock (which
includes the 67,683 shares of Common Stock reserved for issuance as of
September 30, 1997, as set forth in (iv) above), 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
September 30, 1997, the Company had an accumulated deficit of $11,975,008,
incurred a net loss of $1,343,845 for the six months ended September 30, 1997
and expects to continue 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."
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POSSIBLE INABILITY TO MANAGE 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, management,
accounting and other resources. The Company has recently hired a chief financial
officer who will 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
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 obtained 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."
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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 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.
During the year ended March 31, 1997, American Stores Company (OSCO and SAVON
drug stores) and Revco accounted for approximately 12% and 21%, respectively, of
the Company's revenues. During the six-month period ended September 30, 1997,
American Stores Company accounted for approximately 61% of the Company's
revenues. The loss of this customer, without promptly substituting others in its
place, would have a severe adverse impact on the Company. During the year ended
March 31, 1996, PHAR-MOR and Hills Stores Company accounted for approximately 8%
and 17%, respectively, of the Company's revenues. During the six-month period
ended September 30, 1996, American Stores Company, Hudon et Deaudelin Itee and
Kohl & Frisch Limited accounted for approximately 28%, 9% and 7%, respectively,
of the Company's revenues. The Company does not have any supply agreements with
such customers, all of whom operate on a purchase order basis. The Company is
not currently selling to PHAR-MOR due to business concerns. Consolidation of
drug store chains, which has happened in the past, could result in the Company
having a small number of customers that, on an individual basis, account for a
significant percentage of the Company's revenues, the loss of any of which could
have a material adverse effect on the Company. 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. See "Business."
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. Revenues were $378,550
in the three month period ended September 30, 1997, compared to
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$818,403 in the three month period ended June 30, 1997, and $466,175 in the
three month period ended September 30, 1996. Gross profit margins (deficit) were
30% in the three month period ended September 30, 1997, compared to 53% in the
three month period ended June 30, 1997, and (29%) in the three month period
ended September 30, 1996. Net loss was $720,336 in the three month period ended
September 30, 1997, compared to $623,509 in the three month period ended June
30, 1997, and $907,255 in the three month period ended September 30, 1996.
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, varying unit
production costs and general economic conditions. The revenues and results from
operations of the Company for the three months ended December 31, 1997 may not
be as favorable as the revenues and results from operations for the three months
ended December 31, 1996.
Historically, the Company has had little or no backlog. Therefore, quarterly
revenues and operating results are heavily impacted by 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 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 have and 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's
management will have broad discretion to allocate the proceeds of this Offering,
and the amounts actually expended for each use may depend 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."
USE OF PROCEEDS TO REPAY DEBT. The Company expects to use approximately
$3,050,000 of the net proceeds of this Offering to repay principal and interest
on its outstanding credit facilities, including debt incurred after September
30, 1997, comprised of the principal of a $200,000 non-interest bearing loan to
the Company made in October 1997 by Paulson Investment Company, Inc.
("Paulson"), one of the Representatives, and the principal of a $350,000
non-interest bearing loan to the Company made in November 1997 by Paulson,
thereby reducing the amount of net proceeds available to the Company to expand
its business. See "Use of Proceeds."
DILUTION. Investors acquiring shares of Common Stock included in the Units
offered hereby will incur immediate and substantial net tangible value dilution
of $2.17 per share or approximately 43% per share ($2.02 per share or
approximately 40% per share if the Over-Allotment Option is exercised in full),
assuming an initial public offering price of $5.00 per Unit and 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, there will be
further dilution in ownership of the Company and, upon exercise of options or
warrants at prices below the Unit Offering Price, there will be further net
tangible value dilution to investors acquiring shares of
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Common Stock included in the Units offered hereby. In addition, there is a
disparity in the consideration paid for the Company's securities by existing
stockholders and that being paid by purchasers of the Units. As a result,
purchasers of the Units will bear most of the risk of economic loss.
POSSIBLE SUBSTANTIAL ADDITIONAL SHARE ISSUANCES. As of November 19, 1997,
the Company had outstanding (i) options to purchase up to 140,650 shares of
Common Stock at exercise prices ranging between $12.00 and $24.00 per share;
(ii) subject to certain contingencies, options to purchase up to 306,250 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
132,146 shares of Common Stock at an exercise price of Cdn. $22.68 per share
until October 5, 1998; (iv) warrants to purchase 31,667 shares of Common Stock
at an exercise price of $7.44 per share until May 8, 1998 and thereafter at an
exercise price of $8.64 until May 8, 1999; (v) warrants to purchase 8,000 shares
of Common Stock at an exercise price of Cdn. $5.04 per share until October 21,
1999; and (vi) subject to certain contingencies, 178,100 shares of Common Stock
reserved for issuance under the Stock Option Plans. Included in the Units
offered hereby are Warrants for 1,750,000 shares of Common Stock (2,012,500
shares if the Over-allotment Option is exercised in full). In addition, the
Representatives have an option to purchase up to an aggregate of 175,000 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 2,781,343 shares of Common Stock. Of
these shares, approximately 2,252,748 shares, including the 1,750,000 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. The
416,667 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 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 111,928 shares are restricted shares
("Restricted Shares") subject to the restrictions upon resale under Rule 144 of
the Securities Act. Of these shares, approximately 34,946 shares not subject to
lock-up agreements are eligible for immediate resale without restriction under
Rule 144(k). The remaining 76,982 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.
The Units, Common Stock and Warrants have been approved for quotation on the
Nasdaq SmallCap Market, pending notice of issuance, under the symbols "BDRYU,"
"BDRY" and "BDRYW," respectively.
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IMPACT OF POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; PENNY STOCK
REGULATIONS. The Units, Common Stock and Warrants have been approved for
quotation on the Nasdaq SmallCap Market, pending notice of issuance. 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 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.
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 Common Stock and Warrants contained in the Units will become separately
transferable 30 days following completion of this Offering. 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.
If securities are issued upon exercise of the Warrants in
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states where such transaction is not registered or exempt, the Company could be
subject to penalties or rescission liability. See "Description of
Securities--Warrants."
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 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).
CURRENCY FLUCTUATIONS AND OTHER UNCERTAINTIES INHERENT IN 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
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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."
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 whose shares were listed for trading on the VSE. Immediately
following the merger, FWCC Merger Corp. was an inactive corporation whose shares
were listed for trading on the VSE.
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 then existing officers and directors of FWCC Merger Corp. resigned, the then
existing officers and directors of Old Caring Products became the officers and
directors of FWCC Merger Corp. and 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.
15
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Units offered hereby, based on an
assumed offering price of $5.00 per Unit, are estimated to be $7,186,250
($8,360,937 if the Over-Allotment Option is exercised in full) after deducting
underwriting discounts and commissions and estimated offering expenses paid or
payable by the Company and assuming no exercise of the Warrants.
The Company intends to apply these net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
AMOUNT OF NET OF NET
PROCEEDS PROCEEDS
------------- ------------
<S> <C> <C>
Repayment of Credit Facilities(1)............................... $ 3,050,000 42.4%
Advertising and Other Promotional Activities.................... 2,100,000 29.2%
Training and Education(2)....................................... 500,000 7.0%
Initial International Market Entry Costs(3)..................... 250,000 3.5%
Equipment(4).................................................... 250,000 3.5%
Working Capital and Other General Purposes(5)................... 1,036,250 14.4%
------------- ------------
$ 7,186,250 100%
------------- ------------
------------- ------------
</TABLE>
- ------------------------
(1) Includes debt incurred after September 30, 1997. Of this amount,
approximately $1.25 million will be used to repay outstanding principal and
interest under the Company's bank line of credit which bears interest at the
Canadian prime rate plus .25% (5.50% at November 19, 1997) and which expires
in May 1998; approximately $1.25 million will be used to repay outstanding
principal and interest under a note which bears interest at the Canadian
prime rate plus 3% (8.25% at November 19, 1997) and which matures in May
1998, and $550,000 will be used to repay two non-interest bearing loans made
by Paulson which are due upon the earlier of the closing of the sale of the
Units offered hereby or within 30 days following demand made on and after
January 30, 1998. The debt represented by these loans was incurred to fund
working capital and used for general corporate purposes.
(2) Includes cost of training of Medline field representatives and other home
healthcare professionals.
(3) Includes costs of market research and trademark registrations.
(4) Consists primarily of upgrading computer hardware and software.
(5) Includes 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, net
proceeds may be used to acquire complementary technologies, products or
businesses, although there are no specific agreements or commitments, and
the Company is not currently engaged in any negotiations for any such
acquisitions.
The above represents the Company's best estimate based upon its current
plans. The amounts actually expended by the Company on any particular matter may
vary significantly 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. The Company reserves the right to reallocate
the net proceeds of this Offering among the various categories set forth above
as it, in its sole discretion, deems necessary or advisable.
Pending application by the Company of the net proceeds of this Offering,
such 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
September 30, 1997 (i) on an actual basis and (ii) as adjusted to reflect the
estimated net proceeds from the sale of 1,750,000 Units offered by the Company
hereby at an assumed initial public offering price of $5.00 per Unit and
application of the estimated net proceeds of this Offering. See "Use of
Proceeds." 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>
SEPTEMBER 30, 1997
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
<S> <C> <C>
Lines of credit................................................................... $ 1,171,345 $ --
Current portion of long-term obligations.......................................... 19,632 19,632
Notes payable to related parties.................................................. 1,250,000 --
Long-term obligations (less current portion)...................................... 13,511 13,511
-------------- --------------
Total debt.................................................................... $ 2,454,488 $ 33,143
-------------- --------------
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, 1,031,343
shares issued and outstanding, 2,781,343 issued and outstanding, as
adjusted(1)................................................................... 10,314 27,814
Additional paid-in capital...................................................... 12,879,643 20,048,393
Accumulated deficit............................................................. (11,975,008) (11,975,008)
-------------- --------------
Total stockholders' equity.................................................... 914,949 8,101,199
-------------- --------------
Total capitalization........................................................ $ 3,369,437 $ 8,134,342
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Does not include, as of November 19, 1997 (i) 140,650 shares issuable upon
exercise of outstanding options granted pursuant to the Company's Stock
Option Plans; (ii) subject to certain contingencies, up to 306,250 shares
issuable upon exercise of outstanding options granted pursuant to the
Company's Stock Option Plans in August 1997, which are not included in (i)
above; (iii) 171,813 shares issuable upon exercise of outstanding warrants;
and (iv) subject to certain contingencies, 178,100 shares of Common Stock
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."
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 under the symbol "CPM" since November 4,
1997, and has also traded on the OTC Bulletin Board under the symbol "CGPD"
since August 14, 1997 and under the symbol "CGPDD" from October 21, 1997 through
November 20, 1997, and commencing November 21, 1997, under the symbol "CGPD."
The Units, Common Stock and Warrants have been approved for quotation on the
Nasdaq SmallCap Market, upon notice of issuance, under the symbols "BDRYU,"
"BDRY" and "BDRYW," respectively.
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 Splits and (ii)
as adjusted, in U.S. dollars and retroactively giving effect to the Reverse
Stock Splits.
<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL (CDN.$) (US$)(1)
-------------- --------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1996
First Quarter....................................................... $ 1.61 $ 1.56 $27.80 $26.92
Second Quarter...................................................... 1.65 0.86 28.48 14.84
Third Quarter....................................................... 1.32 0.85 22.80 14.68
Fourth Quarter...................................................... 1.25 0.98 21.60 16.92
Fiscal Year Ended March 31, 1997
First Quarter....................................................... $ 1.25 $ 0.50 $21.60 $ 8.64
Second Quarter...................................................... 0.97 0.65 16.76 11.24
Third Quarter....................................................... 1.10 0.38 19.00 6.56
Fourth Quarter...................................................... 1.00 0.52 17.28 8.96
Fiscal Year Ending March 31, 1998
First Quarter through June 16, 1997................................. $ 0.85 $ 0.51 $14.68 $ 8.80
First Quarter from June 17, 1997(2)................................. 4.00 2.50 11.52 7.20
Second Quarter(2)................................................... 3.00 1.10 8.64 3.17
Third Quarter through December 4, 1997(2)(3)........................ 7.00 1.50 5.76 4.32
</TABLE>
- ------------------------
(1) Canadian dollars have been converted at the noon buying rate on October 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 Splits had occurred
prior to June 16, 1997 or October 20, 1997, as the case may be, 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 October 17, 1997 or at
any other rate.
(2) Reflects the Reverse Stock Split effected on June 16, 1997.
(3) At the request of the Company, the Common Stock was not traded on the VSE
from October 20, 1997 until November 3, 1997 in order to permit the Company
to comply with certain requirements of the VSE attendant to the Reverse
Stock Split effected on October 20, 1997.
The following table sets forth the high and low bid prices for the Common
Stock on the OTC Bulletin Board for the periods indicated. All prices are stated
in U.S. dollars and reflect the Reverse Stock Splits as indicated.
<TABLE>
<CAPTION>
ACTUAL
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ending March 31, 1998
Second Quarter from August 14, 1997 through September 30, 1997(1)............................. $ 1.88 $ 1.00
Third Quarter through October 20, 1997(1)..................................................... 1.63 1.13
Third Quarter from October 21, 1997 through December 4, 1997(2)............................... 6.00 2.00
</TABLE>
- ------------------------
(1) Reflects only the Reverse Stock Split effected on June 16, 1997.
(2) Reflects the Reverse Stock Splits effected on June 16, 1997 and October 20,
1997.
On December 4, 1997, the closing bid price of the Common Stock on the OTC
Bulletin Board was $4.00. 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 six month periods ended
September 30, 1996 and 1997 and the consolidated balance sheet data at September
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 six month period ended September 30, 1997 are
not necessarily indicative of the results to be expected for the entire year or
future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- ----------------------
1996 1997 1996 1997
--------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 1,118,486 2,287,497 894,643 1,196,953
Cost of sales..................................... 1,031,896 1,727,607 1,049,072 652,162
Gross profit (loss)............................... 86,590 559,890 (154,429) 544,791
Selling expenses.................................. 1,978,206 2,083,173 752,063 1,111,884
General and administrative expenses............... 1,126,815 1,198,148 621,357 499,371
Total operating expenses.......................... 3,241,483 3,362,288 1,420,596 1,642,997
Loss from operations.............................. (3,154,893) (2,802,398) (1,575,025) (1,098,206)
Net loss.......................................... (3,959,940)(1) (2,904,886) (1,594,905) (1,343,845)
Net loss per share(2)............................. (7.35) (2.94) (1.69) (1.30)
Weighted average common shares and common
equivalent shares outstanding................... 538,739 987,014 943,245 1,031,343
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997 SEPTEMBER 30, 1997
-------------- ------------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................................... $ 1,626,971 52,231
Cash.......................................................................... 118,573 218,929
Restricted cash............................................................... 2,694,671 --
Accounts receivable, net...................................................... 625,085 373,825
Inventories................................................................... 2,432,583 2,879,747
Total current assets.......................................................... 5,889,953 3,482,115
Total assets.................................................................. 6,388,537 4,358,344
Accounts payable.............................................................. 1,029,418 887,904
Lines of credit............................................................... 2,500,000 1,171,345
Notes payable to related parties.............................................. 571,300 1,250,000
Total current liabilities..................................................... 4,262,982 3,429,884
Total liabilities............................................................. 4,293,335 3,443,395
Total stockholders' equity.................................................... 2,095,202 914,949
</TABLE>
- --------------------------
(1) Includes $864,735 in costs associated with an offering of convertible
promissory notes (Bridge Financing) completed in fiscal year 1996.
(2) 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.
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. As the Company is completing its
relationship with this subcontractor, the Company closed 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
September 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. As of September 30, 1997, the Company has expended approximately
$75,000 specifically to enter the healthcare market, and during the next 12
months, the Company estimates it will expend an additional $500,000 out of the
net proceeds of this Offering for training and educating Medline field
representatives and other healthcare professionals. The Company anticipates that
sales to the healthcare market will increase as a percentage of the Company's
total revenues in future quarters. Gross profit margins are expected to be less
favorable in the healthcare markets than the retail markets, especially during
early periods when higher production costs are included in cost of sales using
the first-in first-out cost assumption.
20
<PAGE>
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.
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 initial purchases to stock shelves,
reflecting 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
21
<PAGE>
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.
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. As the Company closed its
factory location in Burnaby, British Columbia in September 1997, 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 $2.94 in Fiscal 1997 as compared to $7.35 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 SIX MONTHS ENDED SEPTEMBER 30, 1996 TO THE SIX MONTHS
ENDED SEPTEMBER 30, 1997
Revenues increased from $894,643 in the six month period ended September 30,
1996 (the "1996 Period") to $1,196,953 in the six month period ended September
30, 1997 (the "1997 Period"), an increase of 34%. This increase was attributable
to the maintenance of pricing and increased volume levels achieved through
securing re-orders with existing drug and retail chain customers, the expansion
into the healthcare market through hospital supply companies and other
distributor relationships, and the increase in the Company's overall customer
base.
Cost of sales decreased from $1,049,072 in the 1996 Period to $652,162 in
the 1997 Period, a decrease of 38%. The decrease in cost of sales was primarily
a result of the introduction of retail pants produced by the Company's lower
unit priced pant subcontractor in Mexico during the latter part of the Company's
fiscal year ended March 31, 1997, the realization of a significant reduction in
Canadian-based production staff and facility costs during the 1997 Period, and a
lower cost per liner obtained from the Company's liner subcontractor in the
United States during the 1997 Period. Gross profit (loss) on sales increased
from $(154,429) in the 1996 Period to $544,791 in the 1997 Period, an increase
of 453%. The improvement in gross profit margin in the 1997 Period primarily
reflected the lower unit priced pant produced by a 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 16% from $1,420,596 in the 1996 Period to
$1,642,997 in the 1997 Period. Total selling expenses increased 48% from
$752,063 in the 1996 Period to $1,111,884 in the 1997 Period. The increase was
primarily attributable to increased promotional expenses to support a larger
retail customer base, absorption of certain set-up costs for new customers, as
well as expenses associated
22
<PAGE>
with the Company's commencement of sales training and marketing activities with
the Company's primary healthcare market distributor. General and administrative
expenses decreased 20% from $621,357 in the 1996 Period to $499,371 in the 1997
Period. The decrease is primarily attributable to the consolidation of duplicate
administrative functions in the Company's offices in Canada and the United
States, resulting in a related reduction in administrative salaries, wages and
employee benefits, as well as in various expenses required to support the
Canadian office including rent, telephone and office supplies. In addition, the
Company utilized outside consulting and contract personnel during the 1996
Period, which were also eliminated with the consolidation of the Canadian and
U.S. offices. Higher legal costs were also incurred during the 1996 Period in
relation to various legal proceedings.
The Company also generated $46,648 in interest income during the 1997 Period
as compared to $89,304 in interest income generated during the 1996 Period. The
decrease in interest income is attributable to lower average deposit balances.
Interest income was offset by interest expense of $221,376 in the 1997 Period
and $90,307 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 $1,343,845 as compared to $1,594,905
for the 1996 Period, a decrease of 19%. The net loss per share was $1.30 in the
1997 Period as compared to $1.69 per share in the 1996 Period.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE MONTHS
ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996
The Company has experienced significant fluctuations in revenues, gross
profit margins and operating results and expects these fluctuations to continue
in the future.
Revenues were $378,550 in the three month period ended September 30, 1997
(the "1997 Second Quarter"), compared to $818,403 in the three month period
ended June 30, 1997 (the "1997 First Quarter"), and $466,175 in the three month
period ended September 30, 1996 (the "1996 Second Quarter"). The decrease in
revenues in the 1997 Second Quarter as compared to the 1996 Second Quarter was
primarily the result of a spike in revenues during the 1996 Second Quarter from
an initial order from a 900-store chain. The decrease in revenues in the 1997
Second Quarter as compared to the 1997 First Quarter was primarily the result of
no initial orders being shipped to large retail chains, a reduction in re-
orders, and reduced levels of advertising.
Gross profit margins (deficit) were 30% in the 1997 Second Quarter, compared
to 53% in the 1997 First Quarter and (29%) in the 1996 Second Quarter. The
decrease in gross profit margins in the 1997 Second Quarter as compared to the
1997 First Quarter is attributable to a higher percentage of non-retail sales,
which reflect higher costs of Canadian-based production, as well as a lower
gross sales price for healthcare products. The increase in gross profit margins
in the 1997 Second Quarter as compared to the 1996 Second Quarter is primarily
attributable to reduced production costs as a result of moving production from a
Canadian contractor to a lower priced contractor.
Net loss was $720,336 in the 1997 Second Quarter, compared to $623,509 in
the 1997 First Quarter and $907,255 in the 1996 Second Quarter. The increase in
net loss in the 1997 Second Quarter as compared to the 1997 First Quarter is
primarily attributable to lower sales, offset by improved gross margins and
lower interest expense. The decrease in net loss in the 1997 Second Quarter as
compared to the 1996 Second Quarter is primarily attributable to improved gross
profit margins offset by decreased sales and a reduction in interest income.
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 416,667 special warrants (the "Private Placement").
During Fiscal 1996, the
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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
July 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 approximately $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% (5.50% at November 19, 1997) and
are due on demand. The Company issued to the guarantor warrants to purchase
31,667 shares of Common Stock exercisable at $7.44 per share at any time until
May 8, 1998 and thereafter at $8.64 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 is being 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. In July 1997, the
Company received the remaining $470,000 under the note payable to Bradstone.
Interest is payable thereunder at the Canadian prime rate plus 3% (8.25% at
November 19, 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 approximately $2.5 million. Substantially
all of the Company's assets are pledged as security for its various
indebtedness.
In October 1997, Paulson made a $200,000 non-interest bearing loan to the
Company and, in November 1997, Paulson made a $350,000 non-interest bearing loan
to the Company, each of which are to be repaid out of the net proceeds of this
Offering; provided, however, if this Offering has not occurred on or before
January 30, 1998, the Company must repay the loans within 30 days following
Paulson's demand.
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 September 30, 1997, the Company's principal sources of liquidity
included cash of $218,929, net accounts receivable of $373,825, inventories of
$2,879,747, and available borrowing capacity of Cdn.
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$1,750,000 under the lines of credit. The Company's operating activities used
cash of $1,770,963 during the 1997 Period. 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.
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--Rite Aid, Thrifty-Pay Less, Long's Drug Stores, Bartell's, Genovese, Hills
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 Bladder Health Council (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
pads for home consumers who manage bladder control problems on a daily basis.
According to the 1995 Frost & Sullivan report on the U.S. Incontinence and
Ostomy Product Markets (the "F&S Report"), the
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total size of the incontinence supply market in 1994 was $1.45 billion,
including ostomy products. Approximately 91% 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, the Company believes 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 Company estimates that the European
incontinence market consists of approximately 18 million people out of a
population base of 350 million. Although the Company believes that 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. 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."
- 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
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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 believes its 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 Company believes that 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 which the Company believes
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 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 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."
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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 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.
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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, OSCO,
Revco, K&B--Rite Aid, 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 on a purchase order basis. As is customary in the industry,
the Company does not have any supply agreements with any of such stores. 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. Consolidation of drug store
chains, which has happened in the past, could result in the Company having a
small number of customers that, on an individual basis, account for a
significant percentage of the Company's revenues, the loss of any of which could
have a material adverse effect on the Company.
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.
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
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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 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. In
March 1996, the Company's Vancouver subcontractor 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
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<PAGE>
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 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
32
<PAGE>
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 competitive position is based
primarily on the characteristics of its products which 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 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
33
<PAGE>
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 from First Avenue West Building LLC,
which firm, to the best of the Company's knowledge, has no affiliation with any
of the officers, directors or principal stockholders of the Company. The lease
expires in July 2000, and the annual base rent is $72,163 ($6,013 per month).
EMPLOYEES
As of November 19, 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 originally
sought liquidated damages in the amount of $913,607, plus interest and costs. In
August 1997, Le 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. 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. Despite the litigation, Le Genereux continues to
assemble pants for the Company, and the Company continues to be current on its
payment obligations. 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.
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<PAGE>
MANAGEMENT
The following table sets forth information concerning the directors and
executive officers of the Company as of November 15, 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
Sandra L. Sternoff................. 40 Chief Financial Officer
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.
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 Beta International Inc., a 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. From February 1992 to
January 1995, Ms. Schreter served as a director of Omnicorp Limited, a provider
of environmental services.
SANDRA L. STERNOFF joined the Company as Chief Financial Officer on October
1, 1997. From October 1994 to September 1997, she served as Vice President of
Finance for John J. Throne & Co., a firm providing insurance brokerage services
to the aviation and transportation industries. From October 1993 to September
1994, she was Controller for Jones/Rodolfo Corporation, a designer and
manufacturer of men's and women's golf and casual apparel. From September 1990
through September 1993, Ms. Sternoff was managing partner of Sternoff
Development Company, a real estate development and management company.
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
35
<PAGE>
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.
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
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<PAGE>
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 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 Securities 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.
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<PAGE>
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 13,583
Chief Executive Officer and Chairman 1996 96,000 11,075
1995 96,000 7,333
Susan A. Schreter .......................................................... 1997 $ 125,000 13,583
President and Chief Operating Officer 1996 96,000 11,075
1995 96,000 7,333
</TABLE>
- ------------------------
* Columns in the Summary Compensation Table that were not relevant to the
compensation paid to the Named Executive Officers were omitted.
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
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<PAGE>
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 EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(1) ($/SHARE) DATE
- -------------------------------------------------------- ------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C>
William H.W. Atkinson................................... 13,583(2) 19.4% $ 12.00 11/13/01
Susan A. Schreter....................................... 13,583(2) 19.4% $ 12.00 11/13/01
</TABLE>
- ------------------------
(1) Based on options to purchase 70,083 shares of Common Stock granted to
employees, directors and consultants, 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.
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 31,992(1)/0(2) $ 0(1)/$0(2)
Susan A. Schreter................................ 0 $ 0 31,992(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 112,500 shares of Common Stock (the "Schreter Options") and William
H.W. Atkinson stock options to purchase 112,500 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 and subsequently approved by the requisite
vote of the stockholders. 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
39
<PAGE>
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.
Under the 1993 Stock Option Plan, 87,167 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 September 30, 1997, a total of 89,733 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 208,333 (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 41,667 (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 208,333 shares to 625,000 shares, the Annual Amount was increased
from 41,667 shares to 150,000 shares and the Maximum Percentage was increased
from 25% to 35%. The Amendment was approved by the Company's stockholders on
October 6, 1997, as required, but is subject by its terms and under applicable
regulatory requirements to the completion of a public offering such as this
Offering. Pursuant to the Amendment, stock option grants may be made prior to
40
<PAGE>
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 November 19, 1997, a total of 357,167 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, which has agreed not to grant non-qualified options that have an exercise
price less than 85% of the fair market value of the Common Stock subject to the
option on the date of the option grant.
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 six months ended September 30, 1997.
41
<PAGE>
ADVISORY BOARD
In April 1997, the Company formed an advisory board which currently 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>
42
<PAGE>
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 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.
In October 1997, Paulson Investment Company, Inc. ("Paulson"), one of the
Representatives, loaned the Company $200,000 and, in November 1997, Paulson
loaned the Company an additional $350,000. The loans are non-interest bearing
and will be repaid by the Company out of the net proceeds of this Offering;
provided, however, if this Offering has not occurred on or before January 30,
1998, the Company must repay the loans within 30 days following Paulson's
demand.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of November 15, 1997
(adjusted to reflect the Reverse Stock Split effected on October 20, 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>
PERCENT OWNED
------------------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(1) OFFERING OFFERING
- ---------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
AGF Growth Equity Fund Ltd.(2) ................................................... 71,000 6.88% 2.55%
443 Queen Street West, 31st Fl.
Toronto, ON M5K 1E9
Canada
BPI Canadian Small Cap Fund(2) ................................................... 103,458 10.03% 3.72%
161 Bay Street, Suite 9000
Toronto, ON M5J 2S1
Canada
Canagex Associates(2) ............................................................ 97,713 9.47% 3.51%
800 Victoria Square, Suite 4500
Montreal, PQ H4Z 1C3
Canada
Royal Canadian Small Cap Fund (Royal Bank Investments)(2) ........................ 84,583 8.20% 3.04%
77 King Street West, Suite 3800
Toronto, ON M5K 1H1
Canada
Sagit Investment Management Ltd.(2) .............................................. 95,825 9.29% 3.45%
789 West Pender Street
Vancouver, BC V6C 1H2
Canada
Susan A. Schreter(3)(4) .......................................................... 70,887 6.68% 2.55%
200 First Avenue West, Suite 200
Seattle, Washington 98119
William H.W. Atkinson(5)(6) ...................................................... 69,892 6.57% 2.51%
5850 Byrne Road, Unit 8
Burnaby, British Columbia
Canada V5J 3J3
Anthony A. Cetrone(7)............................................................. 9,511 * *
Michael M. Fleming(8)............................................................. 9,511 * *
Paul Stanton(9)................................................................... 7,292 * *
All Executive Officers and Directors as a Group (6 persons)(10)................... 167,092 14.90% 6.01%
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
44
<PAGE>
- ------------------------
* 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 October 6, 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.
(2) The stockholder is a large Canadian institution with shares widely held by
its clients.
(3) These 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 30,200 shares issuable upon exercise of currently outstanding
stock options.
(5) These 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 31,992 shares issuable upon exercise of currently exercisable
stock options.
(7) Includes 9,416 shares issuable upon exercise of currently exercisable stock
options.
(8) Includes 9,416 shares issuable upon exercise of currently exercisable stock
options.
(9) Includes 7,292 shares issuable upon exercise of currently exercisable stock
options.
(10) Includes 90,107 shares issuable upon exercise of currently exercisable
stock options.
45
<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 November 19, 1997, the Company had outstanding
1,031,343 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 become separately transferable 30 days following
completion of this Offering 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 after the separation
of the Units 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
46
<PAGE>
closing bid price (as defined in the Warrant Agreement described below) per
share of Common Stock for the 20 consecutive trading days 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. 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.
OTHER WARRANTS
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 416,667 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 416,667
47
<PAGE>
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. $19.44
until October 5, 1996 and Cdn. $22.68 until October 5, 1997. In October 1997,
for no consideration, the Company agreed to extend the exercise period for the
Unit Warrants until October 5, 1998 at an exercise price of Cdn. $22.68. 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 33,333 shares of Common Stock on
the same terms as the Unit Warrants. As of November 19, 1997, a total of 132,146
Unit Warrants (including the warrants issued to the placement agent) remain
outstanding to purchase 132,146 shares of Common Stock at any time until October
5, 1998 at Cdn. $22.68 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 31,667
shares of Common Stock at $7.44 per share at any time until May 8, 1998 and
thereafter at $8.64 per share until May 8, 1999.
In connection with the settlement of certain litigation in October 1997, the
Company issued to the plaintiffs warrants to purchase an aggregate of 8,000
shares of Common Stock at an exercise price of Cdn. $5.04 per share. The
warrants expire on October 21, 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 November 19, 1997, the
Company will have outstanding 2,781,343 shares of Common Stock. Of these shares,
approximately 2,252,748 shares, including the 1,750,000 shares of Common Stock
included in the Units and sold in this Offering (or 2,515,248 shares if the
Over-Allotment Option is exercised in full) by the Company and, subject to
certain conditions, up to 2,012,500 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
175,000 shares of Common Stock that are issuable upon exercise of the
Representatives' Warrants (plus an additional 175,000 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
48
<PAGE>
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.
The 416,667 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 111,928 shares of Common Stock are "restricted" shares within
the meaning of Rule 144 (the "Restricted Shares"). Of these shares,
approximately 34,946 shares not subject to lock-up agreements are eligible for
immediate resale without restriction under Rule 144(k). The remaining 76,982
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 76,982
shares of Common Stock, and have agreed with the Representatives not to sell or
otherwise dispose of any shares of Common Stock without the prior written
consent of the Representatives for a period of one year 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.
PUBLIC TRADING
The Company's Common Stock is traded on the VSE under the trading symbol
"CPM" and has been trading on the OTC Bulletin Board since August 14, 1997 and
is currently trading under the symbol "CGPD." The Units, Common Stock and
Warrants have been approved for quotation on the Nasdaq SmallCap Market, upon
notice of issuance, under the symbols "BDRYU," "BDRY" and "BDRYW," respectively.
See "Risk Factors--Limited Public Market for Common Stock; Volatility of
Securities Prices; Lack of Active U.S. Public Trading Market."
TRANSFER AGENT, REGISTRAR AND WARRANT 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. The Bank of Nova Scotia Trust Company of New York is
serving as Warrant Agent for the Warrants.
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........................................................................................ 1,750,000
---------------
---------------
</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 1,750,000 Units offered by this Prospectus, but
not the 262,500 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 262,500 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 175,000
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 and directors have agreed that for a period of one year
following the closing of this Offering, 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, 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
51
<PAGE>
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.
In October 1997, Paulson loaned the Company $200,000 and, in November 1997,
Paulson loaned the Company an additional $350,000. The loans are non-interest
bearing and will be repaid out of the net proceeds of this Offering; provided,
however, if this Offering has not occurred on or before January 30, 1998, the
Company must repay the loans within 30 days following Paulson's demand.
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: Citicorp
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: Citicorp 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
September 30, 1997 (unaudited)................................................ F-4
Consolidated Statements of Operations for the years ended
March 31, 1996 and 1997, and the six-month periods
ended September 30, 1996 and 1997 (unaudited)................................. F-5
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1996 and 1997, and the six-month period
ended September 30, 1997 (unaudited).......................................... F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1996 and 1997, and the six-month periods
ended September 30, 1996 and 1997 (unaudited)................................. F-7
Notes to Consolidated Financial Statements...................................... F-8
</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 SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER
MARCH 31, 30,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 118,573 218,929
Restricted cash................................. 2,694,671 --
Accounts receivable, less allowance for doubtful
accounts of $91,694 at March 31, 1997 and
$93,176 at September 30, 1997 (unaudited)..... 625,085 373,825
Inventories..................................... 2,432,583 2,879,747
Prepaid expenses................................ 19,041 9,614
------------- ------------
Total current assets.......................... 5,889,953 3,482,115
Equipment, net.................................... 251,503 231,753
Intangible assets, net............................ 238,146 219,089
Deferred financing costs.......................... -- 401,591
Other assets...................................... 8,935 23,796
------------- ------------
$ 6,388,537 4,358,344
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ 1,029,418 887,904
Accrued liabilities............................. 137,092 101,003
Lines of credit................................. 2,500,000 1,171,345
Notes payable to related parties................ 571,300 1,250,000
Current portion of lease obligations............ 13,046 8,770
Current portion of long-term debt............... 12,126 10,862
------------- ------------
Total current liabilities..................... 4,262,982 3,429,884
Lease obligations, less current portion........... 24,868 13,511
Long-term debt, less current portion.............. 5,485 --
------------- ------------
Total liabilities............................. 4,293,335 3,443,395
------------- ------------
Stockholders' equity:
Preferred stock, no shares outstanding.......... -- --
Common stock, 1,031,343 shares outstanding at
March 31, 1997 and September 30, 1997
(unaudited)................................... 10,314 10,314
Additional paid-in capital...................... 12,716,051 12,879,643
Accumulated deficit............................. (10,631,163) (11,975,008)
------------- ------------
Total stockholders' equity.................... 2,095,202 914,949
Commitments, contingencies and subsequent
events..........................................
$ 6,388,537 4,358,344
------------- ------------
------------- ------------
</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 SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED MARCH 31 ENDED SEPTEMBER 30
--------------------------- -----------------------
1996 1997 1996 1997
------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,118,486 2,287,497 894,643 1,196,953
Cost of sales..................................... 1,031,896 1,727,607 1,049,072 652,162
------------ ------------ ---------- ----------
Gross profit (loss)....................... 86,590 559,890 (154,429) 544,791
------------ ------------ ---------- ----------
Operating expenses:
Selling......................................... 1,978,206 2,083,173 752,063 1,111,884
General and administrative...................... 1,126,815 1,198,148 621,357 499,371
Research and development........................ 74,704 8,679 -- --
Amortization and depreciation................... 61,758 72,288 47,176 31,742
------------ ------------ ---------- ----------
Total operating expenses...................... 3,241,483 3,362,288 1,420,596 1,642,997
------------ ------------ ---------- ----------
Loss from operations...................... (3,154,893) (2,802,398) (1,575,025) (1,098,206)
------------ ------------ ---------- ----------
Other income (expense):
Interest income................................. 112,671 163,986 89,304 46,648
Interest expense................................ (92,314) (204,203) (90,307) (221,376)
Costs associated with Bridge Financing.......... (864,735) -- -- --
Other, net...................................... 39,331 (62,271) (18,877) (70,911)
------------ ------------ ---------- ----------
(805,047) (102,488) (19,880) (245,639)
------------ ------------ ---------- ----------
Net loss.................................. $ (3,959,940) (2,904,886) (1,594,905) (1,343,845)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Net loss per share................................ $ (7.35) (2.94) (1.69) (1.30)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Weighted average common shares and common
equivalent shares outstanding................... 538,739 987,014 943,245 1,031,343
</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 SIX-MONTH PERIOD ENDED SEPTEMBER 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.................. 493,717 $ 4,937 $ 5,071,092 $ (3,766,337) $ 1,309,692
Issuance of common stock for cash on
exercise of warrants..................... 9,167 92 21,437 -- 21,529
Issuance of common stock and warrants for
cash on private placement, net of
$697,986 of issuance costs............... 416,667 4,167 5,702,956 -- 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................ 919,551 9,196 11,208,485 (7,726,277) 3,491,404
Issuance of common stock for cash on
exercise of warrants..................... 111,792 1,118 1,507,566 -- 1,508,684
Net loss................................... -- -- -- (2,904,886) (2,904,886)
---------- --------- ------------- -------------- -------------
Balance at March 31, 1997.................. 1,031,343 10,314 12,716,051 (10,631,163) 2,095,202
Fair value of warrants issued with line of
credit guarantee (unaudited)............. -- -- 163,592 -- 163,592
Net loss (unaudited)....................... -- -- -- (1,343,845) (1,343,845)
---------- --------- ------------- -------------- -------------
Balance at September 30, 1997
(unaudited).............................. 1,031,343 $ 10,314 $ 12,879,643 $ (11,975,008) $ 914,949
---------- --------- ------------- -------------- -------------
---------- --------- ------------- -------------- -------------
</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............................................................. -- 1,031,343
Outstanding........................................................ -- 1,031,343
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
PREFERRED
STOCK COMMON STOCK
---------- ------------
(UNAUDITED)
<S> <C> <C>
Par value.......................................................... $0.01 $0.01
Authorized......................................................... 1,000,000 75,000,000
Issued............................................................. -- 1,031,343
Outstanding........................................................ -- 1,031,343
</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 SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED MARCH 31 SEPTEMBER 30
-------------------------- ------------------------
1996 1997 1996 1997
------------ ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (3,959,940) (2,904,886) (1,594,905) (1,343,845)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization and depreciation................. 107,170 127,821 53,738 55,209
Loss (gain) on disposal of equipment.......... 11,819 -- -- (1,311)
Deemed interest............................... 413,000 -- -- 74,980
Write-off of deferred financing costs......... 162,737 -- -- --
Change in operating assets and liabilities:
Decrease (increase) in accounts
receivable................................ (114,828) (344,407) (98,488) 251,260
Decrease (increase) in inventories.......... (584,502) (623,591) 612,425 (447,164)
Decrease in prepaid expenses................ 117,860 103,683 87,090 9,427
Increase in other assets.................... -- (8,935) -- (14,861)
Increase (decrease) in accounts payable..... (394,703) 609,257 (114,728) (318,569)
Increase (decrease) in accrued
liabilities............................... (86,642) 58,122 -- (36,089)
------------ ----------- ---------- -----------
Net cash used in operating activities..... (4,328,029) (2,982,936) (1,054,868) (1,770,963)
------------ ----------- ---------- -----------
Cash flows from investing activities:
Capital expenditures............................ (46,264) (43,555) (34,573) (16,402)
Acquisition of intangible assets................ (5,688) -- -- --
Proceeds from disposition of equipment.......... 4,214 -- -- 1,311
------------ ----------- ---------- -----------
Net cash used in investing activities..... (47,738) (43,555) (34,573) (15,091)
------------ ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and
capital contributions......................... 5,728,652 1,508,684 1,390,333 --
Decrease (increase) in restricted cash, net..... (2,701,350) 6,679 (722,313) 2,694,671
Net proceeds (repayment) of lines of credit..... 2,500,000 -- -- (1,240,043)
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 25,998 --
Repayment of long-term debt..................... (10,597) (38,374) (32,310) (6,749)
Proceeds from notes payable to related
parties....................................... -- 571,300 -- 1,420,400
Repayment of notes payable to related parties... -- -- -- (741,700)
Repayment of lease obligations.................. (10,690) (11,642) (6,913) (15,633)
Repayment of short-term loans................... (250,000) -- -- --
Increase in deferred financing costs............ -- -- -- (224,536)
------------ ----------- ---------- -----------
Net cash provided by financing
activities.............................. 5,256,015 2,062,645 654,795 1,886,410
------------ ----------- ---------- -----------
Increase (decrease) in cash............... 880,248 (963,846) (434,646) 100,356
Cash at beginning of period....................... 202,171 1,082,419 1,082,419 118,573
------------ ----------- ---------- -----------
Cash at end of period............................. $ 1,082,419 118,573 647,773 218,929
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
Supplemental disclosure of cash flow
information--cash paid during the period for
interest........................................ $ 92,314 168,401 61,146 147,468
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
Supplemental schedule of noncash investing and
financing activities:
Capital expenditures included in accounts
payable at end of period...................... $ -- 68,849 68,849 --
Assets acquired through capital leases.......... $ -- 32,075 -- --
Estimated fair market value of warrants issued
recorded as deemed interest................... $ 413,000 -- -- 88,612
Deferred offering costs included in accounts
payable at end of period...................... $ -- -- -- 177,055
</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 SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 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 September 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 which was held as security against a line
of credit. In addition, $194,671 of short-term Canadian government
securities included in restricted cash are held as collateral for
guarantees made by the Company at March 31, 1997.
(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.
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.
F-8
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
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) DEFERRED FINANCING COSTS
Costs relating to the Offering have been deferred until the proceeds are
received by the Company, at which time they will be charged against the
proceeds of the Offering, or, if the Offering is not completed, against
operations.
(F) 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.
(G) 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.
(H) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(I) 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
six-month periods ended September 30 were $23,070 for 1996 and $36,705
for 1997.
F-9
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(J) 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.
(K) 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.
(L) 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.
(M) 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 SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(N) 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.
(O) 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.
(P) 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 SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 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
approximately 45% for the six-month period ended September 30, 1996. Sales to
Canadian customers for the six month period ended September 30, 1997 were 5% of
total sales.
Approximately 33% of the Company's revenues were from two customers during
the year ended March 31, 1997, and approximately 61% were from one customer
during the six-month period ended September 30, 1997. During the year ended
March 31, 1996, two customers accounted for approximately 25% of revenues and
for the six-month period ended September 30, 1996, one customer accounted for
approximately 28% 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 September 30, 1997, four customers accounted for
approximately 57% 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, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
Finished goods................................................... $ 1,848,802 2,515,186
Raw materials.................................................... 553,466 357,719
Packaging........................................................ 30,315 6,842
------------ -------------
$ 2,432,583 2,879,747
------------ -------------
------------ -------------
</TABLE>
F-12
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(6) EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Computer equipment................................................. $ 103,592 103,592
Office equipment................................................... 43,795 43,795
Plant equipment.................................................... 234,251 285,292
Leasehold improvements............................................. 5,670 5,670
Capital leases:
Plant equipment.................................................. 36,950 --
Office equipment................................................. 40,076 40,076
---------- -------------
464,334 478,425
Less accumulated depreciation and amortization..................... 212,831 246,672
---------- -------------
Net equipment.................................................. $ 251,503 231,753
---------- -------------
---------- -------------
</TABLE>
(7) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 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.................................... 138,942 157,999
------------ -------------
Net intangible assets........................................ $ 238,146 219,089
------------ -------------
------------ -------------
</TABLE>
(8) RELATED PARTIES
At March 31, 1997 and September 30, 1997, accounts payable include $68,849
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 a
related party. During the six month period ended September 30, 1997, the Company
paid approximately $30,500 in consulting fees to a related party.
F-13
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(9) LINE OF CREDIT
At March 31, 1997, the Company had a $2,500,000 line of credit with a bank
expiring August 1997. Borrowings under the line of credit bore interest at a
fixed rate of 6.91%. The line of credit was secured by a $2,500,000 certificate
of deposit.
At September 30, 1997, the Company has a line of credit with a bank, which
expires in May 1998, in the amount of Cdn. $3,500,000. Borrowings under the line
of credit at September 30, 1997, net of deemed interest of $88,612, were
$1,171,345 and are due on demand. Borrowings bear interest at the Canadian prime
rate plus .25% (5% at September 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 31,667 warrants, each for one share of the Company's common
stock. The warrants are exercisable at $7.44 per share through May 8, 1998 and
at $8.64 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.
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>
Notes payable to related parties at September 30, 1997 consisted of a note
payable in the amount of $1,250,000. Interest on the note payable is payable
monthly at the Canadian prime rate plus 3% (7.75% at September 30, 1997).
Principal is payable in full in May 1998. The note is secured by substantially
all of the Company's assets and by a pledge of all of the Company's common stock
owned by certain executive officers and directors. In September 1997, the
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 aforementioned
loan.
In October 1997, Paulson Investment Company, Inc. (Paulson), an underwriter
of the Offering, loaned the Company $200,000. In November 1997, Paulson loaned
the Company an additional $350,000. The
F-14
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
loans are non-interest bearing and will be repaid by the Company out of the net
proceeds of the Offering; provided, however, if the Offering has not occurred on
or before January 30, 1998, the Company must repay the loans within 30 days
following Paulson's demand.
(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 September 30, 1997), including interest at the Canadian
prime rate plus 1% (5.75% at March 31, 1997 and September 30, 1997).
Scheduled principal maturities of long-term debt at March 31, 1997 and
September 30, 1997 are as follows for each of the following fiscal years ending
March 31:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
FISCAL YEAR-END 1997 1997
- ------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
1998............................................................... $ 12,126 10,862
1999............................................................... 5,485 --
----------- ------
$ 17,611 10,862
----------- ------
----------- ------
</TABLE>
The loan is secured by the Company's equipment and accounts receivable.
(12) CAPITAL LEASES
The Company leases equipment under capital lease agreements that expire in
January 2002 at March 31, 1997 and in November 2001 at September 30, 1997.
Aggregate minimum payments to be made under these agreements are as follows for
each of the following twelve month periods:
<TABLE>
<CAPTION>
MARCH 31 SEPTEMBER 30
----------- -------------
<S> <C> <C>
1998................................................................ $ 14,058 9,269
1999................................................................ 8,076 9,269
2000................................................................ 8,076 9,269
2001................................................................ 8,076 1,545
2002................................................................ 7,598 --
----------- ------
45,884 29,352
Less amounts representing interest at rates ranging from 9% to 11%
at March 31, 1997 and at 9% at September 30, 1997................. 7,970 7,071
----------- ------
$ 37,914 22,281
----------- ------
----------- ------
</TABLE>
F-15
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(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
September 30, 1997. Aggregate minimum rental payments on operating leases are as
follows for each of the following twelve month periods:
<TABLE>
<CAPTION>
MARCH 31 SEPTEMBER 30
---------- ------------
<S> <C> <C>
1998............................................................... $ 90,530 94,187
1999............................................................... 92,484 92,242
2000............................................................... 92,790 82,588
2001............................................................... 33,557 1,368
---------- ------------
$ 309,361 270,385
---------- ------------
---------- ------------
</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 $54,563 and
$57,628 for the six-month periods ended September 30, 1996 and 1997,
respectively.
(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 292 common
shares of the Company at $1.20 until April 28, 1996 and thereafter at
$2.40 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 11,716 common shares of the Company at a price of
Cdn. $28.80 per share until October 1, 1997. The proceeds of
F-16
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
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 416,667 Units at a price of Cdn. $21.06
(approximately U.S. $15.60) 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. $19.44 at any
time until October 5, 1996, or at anytime thereafter until October 5,
1997 at the price of Cdn. $22.68. As consideration for services
rendered, the transaction agent was paid $562,500 in addition to 33,333
whole Share Purchase Warrants which have the same terms as the warrants
discussed above.
(C) WARRANTS
The Company had warrants outstanding to purchase common shares as
follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 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.
$22.68 until October 5, 1997..................................... 132,146 132,146
Warrants issued pursuant to the second short-term loan whereby one
warrant entitles the holder to purchase one share at Cdn. $28.80
until October 1, 1997............................................ 11,716 11,716
Warrants issued pursuant to the guarantee of the bank line of
credit whereby one warrant entitles the holder to purchase one
share at $7.44 through May 8, 1998 and thereafter at $8.64
through May 8, 1999.............................................. -- 31,667
----------- -------------
Total warrants outstanding..................................... 143,862 175,529
----------- -------------
----------- -------------
</TABLE>
In October 1997, the expiration date of the warrants issued in
conjunction with the Private Placement was extended through October 5,
1998 at an exercise price of Cdn. $22.68.
In October 1997, the Company issued two-year warrants to purchase 8,000
shares of common stock of the Company at an exercise price of Cdn. $5.04
through October 21, 1999.
F-17
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(D) REVERSE STOCK SPLITS
In June 1997, the Company completed a one for six reverse stock split of
its issued and outstanding common stock. In October 1997, the Company
completed an additional one-for-four reverse stock split of its issued
and outstanding common stock. These consolidated financial statements
have been restated to reflect the reverse stock splits.
(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 six-month period ended September
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 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...................................................... $ 7.35 2.94
Pro forma........................................................ 8.33 3.27
</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, 87,167 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
F-18
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
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 September 30, 1997, 89,733 stock options
remain outstanding under the 1993 Incentive Program.
- 1996 INCENTIVE PROGRAM: Under the 1996 Incentive Program, 208,333 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.
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 208,333 to
625,000. The amendment was approved by the Company's stockholders in
October 1997 and is subject to the completion of a public offering of the
Company's Common Stock.
At March 31, 1997 and September 30, 1997, 53,000 and 50,917 stock
options, respectively, are outstanding and 65,600 and 67,683,
respectively, are available for future grant under the 1996 Incentive
Program, prior to consideration of the aforementioned increase in shares
available for grant and 306,250 stock options granted in August 1997.
F-19
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
A summary of the Company's stock option plans' activity is presented below
(not including the 306,250 stock options granted in August 1997 discussed
below):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-----------------------------------------------
SIX-MONTH PERIOD ENDED
1996 1997 SEPTEMBER 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.... 28,500 $ 30.00 86,067 $ 19.68 142,733 $ 16.08
Granted............................... 102,567 19.68 70,083 12.00 5,000 12.00
Canceled.............................. (28,500) 30.00 -- -- -- --
Forfeited............................. (16,500) 19.68 (13,417) 18.48 (7,083) 12.00
---------- --------- ---------
Outstanding at end of period.......... 86,067 19.68 142,733 16.08 140,650 16.08
---------- --------- ---------
---------- --------- ---------
Options exercisable at period-end..... 66,900 19.68 119,067 16.80 125,317 16.80
---------- --------- ---------
---------- --------- ---------
Weighted-average fair value of options
granted during the period........... $ 8.64 $ 5.04 $ 4.88
</TABLE>
In March 1996, the Company modified the exercise price on 28,500 stock
options granted in February 1994 from $30.00 to $19.68.
In August 1997, the Company granted 306,250 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.
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>
$19.68...................................... 74,942 3.50 74,192
12.00...................................... 67,791 4.69 44,875
</TABLE>
The following is a summary of stock options outstanding at September 30,
1997 (not including the 306,250 stock options granted in August 1997):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER OF OPTIONS
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------------------------------------- ----------- ------------------- -----------------
<S> <C> <C> <C>
$24.00...................................... 1,042 1.33 1,042
19.68...................................... 74,942 2.50 77,317
12.00...................................... 64,666 4.01 46,958
</TABLE>
F-20
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(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 six-month periods ended September 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.
(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.
(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>
YEAR ENDED MARCH 31
---------------------
1996 1997
---------- ---------
<S> <C> <C>
Revenues:
U.S................................... $ 914,311 1,916,263
Canada................................ 204,175 371,234
---------- ---------
Total revenues...................... $1,118,486 2,287,497
---------- ---------
---------- ---------
</TABLE>
F-21
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------
1996 1997
---------- ---------
<S> <C> <C>
Net loss:
U.S................................... $2,954,312 2,082,450
Canada................................ 1,005,628 822,436
---------- ---------
Total net losses.................... $3,959,940 2,904,886
---------- ---------
---------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
----------
<S> <C>
Assets:
U.S................................... $4,939,873
Canada................................ 1,448,664
----------
Total assets........................ $6,388,537
----------
----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
----------
<S> <C>
Net assets of Canadian subsidiary....... $1,340,171
----------
----------
</TABLE>
F-22
<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....................................... 26
Management..................................... 35
Advisory Board................................. 42
Certain Transactions........................... 43
Principal Stockholders......................... 44
Description of Securities...................... 46
Underwriting................................... 50
Legal Matters.................................. 52
Experts........................................ 52
Additional Information......................... 53
Financial Statements........................... F-1
</TABLE>
1,750,000 UNITS
CONSISTING OF 1,750,000 SHARES OF COMMON STOCK AND 1,750,000 WARRANTS
[LOGO]
CARING PRODUCTS
INTERNATIONAL, INC.
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT COMPANY, INC.
COHIG & ASSOCIATES, INC.
DECEMBER , 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.............................................. $ 11,438
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................................................... 4,274
Nasdaq listing application fee.................................... 10,000
Miscellaneous expenses............................................ 51,288
---------
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 Splits 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 to sophisticated investors
in reliance upon the exemption provided by Section 4(2) of the Act. Each
investor was furnished with information regarding 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, 1996 and at Cdn. $1.38 until October
1, 1997, on which date the warrants expired unexercised. 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.
As of February 27, 1996, the Special Warrants were deemed converted, for no
additional consideration, into 416,667 shares (post reverse splits) and warrants
to purchase up to 208,334 additional shares (post reverse splits) of Common
Stock, exercisable at Cdn. $19.44 per share through October 5, 1996 and Cdn.
$22.68 per share until October 5, 1997 and, as extended, until October 5, 1998.
The Special Warrants were issued to the following non-U.S. investors:
<TABLE>
<CAPTION>
NUMBER OF SPECIAL
NAME OF INVESTOR WARRANTS PURCHASED AMOUNT INVESTED (CDN.$)
- ------------------------------------------------ ------------------ -----------------------
<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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SPECIAL
NAME OF INVESTOR WARRANTS PURCHASED AMOUNT INVESTED (CDN.$)
- ------------------------------------------------ ------------------ -----------------------
<S> <C> <C>
James R. Tuer................................... 225,000 197,437.50
Royal Canadian Small Cap Fund................... 1,300,000 1,140,750.00
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 33,333 shares (post reverse splits) of Common Stock, at
Cdn. $19.44 per share through October 5, 1996 and Cdn. $22.68 per share from
October 6, 1996 to October 5, 1997 and, as extended, to October 5, 1998. 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 31,667 shares (post reverse splits)
of Common Stock at $7.44 per share at any time until May 8, 1998 and thereafter
at $8.64 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.
The grants of options have been made at exercise prices ranging from $12.00 to
$24.00 per share and the grants of warrants have been made at exercise prices
ranging from $7.44 to Cdn. $28.80 per share. An aggregate of 537,676 shares of
Common Stock have been issued upon exercise of warrants since March 31, 1995 and
no options have been exercised. To the extent options or warrants have been
issued by the Company to U.S. persons, they have been issued to sophisticated
investors pursuant to the exemption for transactions not involving a public
offering provided in Section 4(2) of the Act, and the securities have been
appropriately legended.
6. In connection with the settlement of certain litigation, on October 22,
1997, the Company issued to three plaintiffs two-year warrants to purchase an
aggregate of 8,000 shares of Common Stock at an exercise price of Cdn. $5.04 per
share. These warrants were issued to sophisticated investors pursuant to the
exemption for transactions not involving 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 Restated Certificate of Incorporation
3.1.2(1) Certificate of Amendment of Restated Certificate of Incorporation
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
3.1.3(4) Certificate of Amendment of Restated Certificate of Incorporation
3.2(2) By-laws, as currently in effect
4.1(2) Specimen Common Stock Certificate
4.1.1(4) 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(5)
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
4.7(4) Form of Warrant Certificate
4.8(4) Form of Lockup Agreement
4.9(6) Form of Unit Certificate
5.1(4) Opinion of Bryan Cave LLP as to the legality of the securities being
registered
10.1(7) Restated and Amended Employment Agreement between the Registrant and
William H.W. Atkinson dated as of March 13, 1996
10.2(7) 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(8)
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(9)
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(10) 1996 Incentive Program (8)
10.13(1) Amendment No. 1 to the Registrant's 1996 Incentive Program (8)
10.14(1) Stock Option Agreement between the Registrant and William H.W.
Atkinson (8)
10.15(1) Stock Option Agreement between the Registrant and Susan A. Schreter
(8)
</TABLE>
II-4
<PAGE>
<TABLE>
<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(4) Letter Agreement among The Toronto-Dominion Bank, Bradstone Equity
Partners, Inc. and the Registrant dated September 5, 1997
10.19(1) Agreement between the Registrant and Bradstone Equity Partners, Inc.
dated September 2, 1997
10.20(4) Promissory Note dated October 23, 1997 between the Registrant and
Paulson Investment Company, Inc.
10.21(11) Business Credit Service Agreement between The Toronto-Dominion Bank
and the Registrant dated April 14, 1997.
10.22(11) Business Credit Service Agreement between The Toronto-Dominion Bank
and the Registrant dated September 8, 1997.
10.23(12) Promissory Note dated November 17, 1997 between the Registrant and
Paulson Investment Company, Inc.
21.1(1) List of Subsidiaries
23.1(13) Consent of KPMG Peat Marwick LLP (see page II-8 of the Registration
Statement)
23.2(13) Consent of KPMG, Chartered Accountants (see page II-9 of the
Registration Statement)
23.3(4) Consent of Bryan Cave LLP (contained in their opinion; see Exhibit
5.1)
24.1(1) Power of Attorney
99.1(4) United States Patent, Patent Number 5,360,422, issued to the
Registrant on November 1, 1994
</TABLE>
- ------------------------
(1) Filed as an exhibit to the Registration Statement on Form SB-2, File No.
333-35239 (the "Current Registration Statement"), filed with the Commission
on September 9, 1997.
(2) Filed as an exhibit to the Registration Statement on Form SB-2, File No.
33-96882-LA (the "Prior Registration Statement"), filed with the Commission
on September 12, 1995.
(3) Filed as an exhibit to Amendment No. 1 to the Prior Registration Statement,
filed with the Commission on March 20, 1996.
(4) Filed as an exhibit to Amendment No. 1 to the Current Registration
Statement, filed with the Commission on October 29, 1997.
(5) A schedule of the specific investors who received these Warrants is
attached as an appendix to this exhibit.
(6) Filed as an exhibit to Amendment No. 2 to the Current Registration
Statement, filed with the Commission on November 7, 1997.
(7) Filed as an exhibit to Amendment No. 3 to the Prior Registration Statement,
filed with the Commission on November 12, 1996.
(8) Managerial contract or compensatory plan or arrangement in which the
Company's directors and officers participate.
II-5
<PAGE>
(9) 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.
(10) 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.
(11) Filed as an exhibit to Amendment No. 3 to the Current Registration
Statement, filed with the Commission on November 12, 1997.
(12) Filed as an exhibit to Amendment No. 4 to the Current Registration
Statement, filed with the Commission on November 21, 1997.
(13) Filed herewith.
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.
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 Amendment
No. 5 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Burnaby, British
Columbia, Canada, on December 5, 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>
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 5 to the 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 (Principal Executive
- ------------------------------ Officer and Principal December 5, 1997
William H.W. Atkinson Financial and Accounting
Officer)
*
- ------------------------------ President, Chief Operating December 5, 1997
Susan A. Schreter Officer and Director
/s/ SANDRA L. STERNOFF
- ------------------------------ Chief Financial Officer December 5, 1997
Sandra L. Sternoff
*
- ------------------------------ Director December 5, 1997
Anthony A. Cetrone
*
- ------------------------------ Director December 5, 1997
Michael M. Fleming
*
- ------------------------------ Director December 5, 1997
Paul Stanton
*
- ------------------------------ Director December 5, 1997
Herbert Sohn
*By: /s/ WILLIAM H.W.
ATKINSON
-------------------------
WILLIAM H.W. ATKINSON, AS
ATTORNEY-IN-FACT
- ------------------------
* The power of attorney authorizing William H.W. Atkinson and Susan A.
Schreter, and each of them singly, to sign this Amendment No. 4 to the
Registration Statement, on behalf of the above named directors and officers,
has previously been filed with the Securities and Exchange Commission as
part of the Registration Statement.
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
December 5, 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
December 5, 1997
II-9
