<PAGE>
SCHEDULE 14C/A
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 1 )
[X] Preliminary information statement [_] Confidential, for Use of
the Commission Only
(as permitted by
Rule 14c-5(d)(2))
[ ] Definitive information statement
Cooper Development Company
--------------------------------------------
(Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 011(c)(ii), or 14c-5(g)
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.10 Par Value
(2) Aggregate number of securities to which transaction applies:
257,142 shares of Common Stock
<PAGE>
2
(3) Per unit share price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated andstate how it was determined):
$1.50 per share of Common Stock of Cooper Development Company (the
"Company"). The Company proposes to pay $1.50 per share of Common Stock
in lieu of the issuance of fractional shares of Common Stock to persons
who would hold less than one whole share of Common Stock after the
proposed reverse stock split described in the information statement.
The filing fee of $77 represents one-50th of one percent of the maximum
aggregate value (approximately $385,713) of the fractional shares that
may be repurchased by the Company on this basis.
(4) Proposed maximum aggregate value of transaction:
Approximately $385,713 (see the preceding item 3).
(5) Total fee paid:
$77
[_] Fee paid previously with preliminary materials
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$77
(2) Form, Schedule or Registration Statement No.:
Schedule 13E-3
(3) Filing Party:
Cooper Development Company
<PAGE>
3
(4) Date Filed:
October 11, 1996.
Item 1. INFORMATION REQUIRED BY ITEMS OF SCHEDULE 14A.
The following cross-references indicate where the information required by
the Items of Schedule 14A may be found in the information statement:
<TABLE>
<CAPTION>
Schedule 14A Item No. Location in Information Statement
- ------------------------------------------------------------------ -----------------------------------------
<S> <C>
Item 1. Date, Time and Place Information. Not applicable.
Item 2. Revocability of Proxy. Not applicable.
Item 3. Dissenters' Rights of Appraisal. "Special Factors -- Lack of Appraisal
Rights." (Page 20)
Item 4. Persons Making the Solicitation. Cover page of Information Statement.
Item 5. Interest of Certain Persons in Not applicable.
Matters to be Voted Upon.
Item 6. Voting Securities and Principal "Security Ownership of Certain Beneficial
Holders Thereof. Owners and Management." (Page 38)
Item 7. Directors and Executive Officers. Not applicable.
Item 8. Compensation of Directors and Not applicable.
Executive Officers.
Item 9. Independent Public Accountants. Not applicable.
Item 10. Compensation Plans. Not applicable.
Item 11. Authorization or Issuance of Not applicable.
Securities Otherwise Than
for Exchange.
</TABLE>
<PAGE>
4
<TABLE>
<S> <C>
Item 12. Modification or Exchange of Not applicable.
Securities.
Item 13. Financial and Other "Financial Information." (Page 39)
Information.
Item 14. Mergers, Consolidations, Not applicable
Acquisitions and Similar
Matters.
Item 15. Acquisition or Disposition of Not applicable.
Property.
Item 16. Restatement of Accounts. Not applicable.
Item 17. Action With Respect to Not applicable.
Reports.
Item 18. Matters Not Required to be Not applicable.
Submitted.
Item 19. Amendment of Charter, Not applicable.
Bylaws, or Other
Documents.
Item 20. Other Proposed Action. Not applicable.
Item 21. Voting Procedures. "Special Factors--Further Stockholder
Approval Not Required." (Page 20)
Item 22. Information Required in Not applicable.
Investment Company Proxy
Statements.
</TABLE>
ITEM 2. STATEMENT THAT PROXIES ARE NOT SOLICITED.
See cover page of Information Statement.
<PAGE>
5
ITEM 3. INTEREST OF CERTAIN PERSONS IN OR OPPOSITION TO MATTERS TO BE
ACTED UPON.
(a) See "Security Ownership of Certain Beneficial Owners and
Management" on Page 38 of the Information Statement.
(b) Not applicable.
ITEM 4. PROPOSALS FROM SECURITY HOLDERS.
Not applicable.
<PAGE>
Stockholders Should Carefully Read This Information Statement
and the Accompanying Materials in their Entirety.
INFORMATION STATEMENT
REGARDING THE PROPOSED
ONE-FOR-500 REVERSE STOCK SPLIT
AND RELATED TRANSACTIONS
BY
COOPER DEVELOPMENT COMPANY
This Information Statement and the accompanying materials are being
provided by Cooper Development Company (the "Company") and Theodore H.
Kruttschnitt and Parker G. Montgomery (the "Major Stockholders") to the
Company's stockholders in connection with a one-for-500 reverse stock split
approved by the Company's Board of Directors on May 24, 1996. This Information
Statement and such accompanying materials were first sent or given to
stockholders on or about October__, 1996 to stockholders of record as of
October__, 1996. As of June 13, 1996, there were 3,629,376 shares of common
stock issued and outstanding held by approximately 7,560 stockholders of record.
The Company expects that the reverse stock split will be effective on or about
November __, 1996 (the "Effective Date").
The Company will bear all of the costs of the preparation and
dissemination of this Information Statement and the accompanying materials,
which are estimated to be approximately $150,000. No consideration has been or
will be paid to any officer, director, or employee of the Company in connection
with the reverse stock split or the preparation and dissemination of this
Information Statement and the accompanying materials or otherwise in connection
with the reverse stock split.
Correspondence with respect to the reverse stock split should be
addressed to the Secretary of the Company at the Company's principal executive
office at 16160 Caputo Drive, Morgan Hill, CA 95037.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
[PURSUANT TO THE DELAWARE GENERAL CORPORATION LAW, DISSENTING
STOCKHOLDERS WILL NOT HAVE APPRAISAL RIGHTS IF THE REVERSE STOCK SPLIT IS
EFFECTED. See "The Reverse Stock Split - Lack of Appraisal Rights."]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY 3
SPECIAL FACTORS 10
The Company 10
The Reverse Stock Split 13
Reasons for the Reverse Stock Split 14
Conduct of the Company's Business
after the Reverse Stock Split 17
Further Stockholder Approval Not Required 20
Lack of Appraisal Rights 20
Postponement or Abandonment 20
Effective Time 20
Exchange of Stock Certificates;
Cash Payments in Lieu of Fractional Shares 21
Financing of the Reverse Stock Split 21
Fairness of the Reverse Stock Split 23
Certain Federal Income Tax Consequences 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 38
FINANCIAL INFORMATION 39
OTHER INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE 39
</TABLE>
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
2
<PAGE>
SUMMARY
The following summary is intended only to highlight certain
information contained in this Information Statement. This summary is not
complete and is qualified in its entirety by reference to the more detailed
information set forth elsewhere in this Information Statement and its exhibits.
Stockholders are urged to read this Information Statement and its exhibits in
their entirety.
THE COMPANY
Cooper Development Company (the "Company") is primarily engaged in the
development, manufacture and sale of skin care products under the Cabot(R) and
Cabot(R) Vitamin E trademarks through its wholly owned subsidiary, Cabot
Laboratories, Inc. ("Cabot"). Cabot's products are sold directly to drug store
chains and mass volume retailers by its own regional key account managers in the
United States and to exclusive distributors outside the United States.
The Company, through its wholly owned distributor, Difa Cooper, S.p.A.
("DIFA"), an Italian corporation, manufactures and sells an antiviral product
under an exclusive worldwide license to distributors outside the United States
under various trademarks. DIFA also distributes skin care products, including a
line of products developed by a dermatologist, which are sold under the
Cosmetici Magistrali(TM) trademark. The Company also develops skin care products
through its wholly owned subsidiary, Cooper Cosmetics, S.A. ("CCSA"), a Swiss
corporation. CCSA develops skin care products which it licenses to independent
licensees principally in Europe under the Tokalon(R) trademark. The Company,
through its wholly owned subsidiary, Cooper Development S.A. ("CDSA"), a Swiss
corporation, owns undeveloped real estate in Mougins, France. See "Special
Factors - The Company - United States Business Operations" and "European
Operations".
1995-1996 RESTRUCTURING OF CABOT
In 1995 and 1996, the Company implemented plans to reduce its costs
and improve productivity. The Company consolidated all of its United States
offices and manufacturing facilities into one leased facility in Morgan Hill,
California and reduced the number of employees. The Company incurred
$1,670,000 of pre tax charges relating to relocations, separations and related
costs of the restructuring program, including $475,000 paid in fiscal 1995. The
Company expects the balance of such payments to be completed by the end of the
first quarter in 1997. There can be no assurances that the restructuring of
Cabot will result in profitable operations. See "Special Factors - The Company
- - 1995-1996 Restructuring".
DISPOSITIONS AND POSSIBLE DISPOSITIONS OF THE COMPANY'S ASSETS AND/OR BUSINESSES
The Company has historically invested heavily in its operating
subsidiaries to grow their businesses and relied primarily on the sales of such
businesses as they grew to finance their operations. In fiscal 1995 and
through June 30, 1996, the Company incurred over $11,739,000 and $3,307,000,
respectively, in losses . The Company is currently focusing its efforts on
developing its principal subsidiary, Cabot, and considering possible
transactions which may involve the sale or disposition of one or more of its
operating subsidiaries, product lines or assets to finance the continued growth
of Cabot and to increase its focus on developing its core skin care business.
On September 5, 1996, Cabot sold to American International Industries its
cosmetic product line, including Clear Perfection corrective cosmetics and a
limited line of vitamin enriched lipsticks and lipglosses, for $2,500,000.
Although the Company had discussions in June, 1996 to sell some or all
of the capital stock of DIFA to an Italian corporation, there are currently no
discussions regarding such sale. The Company, through its subsidiary, CDSA, is
engaged in efforts to sell four lots of undeveloped land in Mougins, France.
While the Company has discussed possible transactions with third parties, it has
not received any firm offers with respect to any of such possible transactions,
except with respect to two undeveloped lots of real property, and there can be
no assurance that the Company will be able to negotiate any of such possible
transactions on terms favorable to the Company or develop Cabot into a
profitable business. See "Special Factors - The Company - Possible Dispositions
of the Company's Assets and/or Businesses".
3
<PAGE>
THE REVERSE STOCK SPLIT
The Standing Special Committee of the Company's Board of Directors
comprised of James Gilleran and Jackson Schultz, both of whom are non employee
directors and who together constitute a majority of the non-employee directors
(the "Special Committee") and the Company's Board of Directors approved a
proposal on May 24, 1996 and revised it on August 15, 1996 authorizing: (i)
an amendment to the Company's Certificate of Incorporation effecting a one-for-
500 reverse stock split of the Company's existing common stock, $0.10 par value
per share ("Old Common Stock"), reducing the authorized number of shares of
common stock from 10,000,000 shares to 20,000 shares, $50.00 par value ("New
Common Stock"); and (ii) the payment of cash in the amount of $1.50 per share
of Old Common Stock in lieu of the issuance of and the fractional shares of New
Common Stock to persons who otherwise would hold fractions of a share of New
Common Stock after the reverse stock split (collectively, the "Reverse Stock
Split"). Each stockholder will be required to complete and submit a letter of
transmittal in order to receive payments. Stockholders who have not completed
and submitted a letter of transmittal will not receive payments until they have
done so.
REASONS FOR THE REVERSE STOCK SPLIT
The Special Committee and the Board of Directors authorized the
Reverse Stock Split in connection with the Company's ongoing efforts to reduce
costs and improve productivity. Reducing the number of its stockholders of
record to less than 300 would permit the Company to discontinue the registration
of its common stock under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Termination of the Company's status as a public reporting
company under federal securities laws would allow the Company to achieve
additional reductions in costs by reducing the general and administrative costs
incurred in connection with maintaining such status.
The Special Committee and Board of Directors believe that neither the
Company nor its stockholders derive any material benefit from the continued
registration of the Company's common stock under the Exchange Act, since it is
no longer listed on the NASDAQ National Market System or the NASDAQ Small Cap
Market. Furthermore, the Company intends to continue to provide its
stockholders with financial information about the Company. The Company incurs
significant direct and indirect costs, however, as a result of the requirement
that it comply with the filing and reporting requirements applicable to public
companies. The Special Committee and Board of Directors believe that the
expense and burden to the Company of continued registration, including the
requirement to file annual and quarterly reports, proxy statements and other
documents with the Securities and Exchange Commission (the "SEC") significantly
outweigh any benefits to the Company or its stockholders as a result of such
registration because the stockholders will continue to receive the same kind of
financial information that they presently receive and the Company has already
been delisted from the NASDAQ National Market System and the NASDAQ Small Cap
Market. The Company expects to achieve annual cost savings of at least $500,000
as a result of the Reverse Stock Split. The Company's inability to raise
significant amounts of capital from stockholders other than the Major
Stockholders in its 1993 rights offering (the "Rights Offering") and its current
financial condition indicate that the Company is not likely in the near term to
be able to raise capital in a public offering of its securities. The Special
Committee and Board of Directors have determined that the Reverse Stock Split is
the most cost-effective and cash-sparing method of changing the Company's
status from that of a publicly held reporting company to that of a privately
held non-reporting company.
In making this determination, the Special Committee and Board of
Directors considered other means of achieving this result, such as making
privately or publicly negotiated purchases of outstanding shares of its common
stock, including making a public tender offer for shares, but rejected these
alternatives because they believed that the Reverse Stock Split would be simpler
and more-cost effective, and would allow all existing stockholders an
opportunity to remain stockholders of the Company.
Stockholders who would otherwise hold less than one share of New
Common Stock after the Reverse Stock Split may remain as stockholders of the
Company by purchasing additional shares of Old Common Stock on the open market
prior to the Effective Date to result in their holding at least one whole share
of New
4
<PAGE>
Common Stock following the Reverse Stock Split. See "Special Factors--Exchange
of Stock Certificates; Cash Payments in Lieu of Shares". Because stockholders
may purchase additional shares on the open market prior to the Effective Date,
there can be no assurance that, even if the Reverse Stock Split is effected, the
Company will reduce the number of stockholders following the Reverse Stock Split
to less than 300 stockholders of record. If the Company fails to reduce the
number of stockholders of record to below 300, the Company will still be a
reporting company for purposes of the Exchange Act and will not realize the
anticipated cost-savings that would result from ceasing to be a public reporting
company. See "Special Factors--Reasons for the Reverse Stock Split."
TERMINATION OF REPORTING COMPANY STATUS
If the Reverse Stock Split is effected, the Company expects to cease
to be a reporting company under the Exchange Act and would no longer be required
to file annual and quarterly reports, proxy statements and other documents with
the SEC. In addition, the Company would no longer be required to comply with the
proxy rules of Regulation 14A promulgated under Section 14 of the Exchange Act,
and its officers, directors, and 10% or greater stockholders would no longer be
subject to the reporting requirements and "short-swing" insider trading
restrictions under Section 16 of the Exchange Act. Continuing stockholders would
no longer be entitled to receive annual reports and proxy statements required by
the Exchange Act and most likely would no longer have the benefit of a public
market for their shares of the Company's common stock. See "Special Factors--
Conduct of the Company's Business after the Reverse Stock Split."
FURTHER STOCKHOLDER APPROVAL NOT REQUIRED
The Reverse Stock Split has been approved by the written consent of
the Major Stockholders, the Company's majority stockholders, dated October __,
1996. Such consent from holders of a majority of the Company's issued and
outstanding shares is sufficient to approve the Reverse Stock Split under the
Delaware General Corporation Law, and no other vote or consent of any other
stockholders, including the vote or consent of a majority of the unaffiliated
stockholders, is required or will be sought in connection with the Reverse Stock
Split. Under the Delaware General Corporation Law and the Company's Certificate
of Incorporation, the affirmative vote of a majority of the issued and
outstanding shares voting by written consent constitutes the act of
stockholders. ACCORDINGLY, THE COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND THE COMPANY A PROXY.
LACK OF APPRAISAL RIGHTS
Pursuant to the Delaware General Corporation Law and the Company's
Certificate of Incorporation, dissenting stockholders will not have appraisal
rights if the Reverse Stock Split is effected. Stockholders who believe that
they may be aggrieved by the Reverse Stock Split may have other rights under
federal law or common law, such as rights relating to the fairness of the
Reverse Stock Split and arising from possible breaches of the fiduciary
responsibilities of corporate officers, directors and stockholders. The nature
and extent of such rights, if any, may vary depending upon the facts and
circumstances.
EXCHANGE OF STOCK CERTIFICATES; CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES
If the Reverse Stock Split is effected, the stock certificates
formerly representing shares of Old Common Stock will represent the right to
receive shares of New Common Stock into which they have been converted, and/or
the right to receive a cash payment in lieu of shares, as the case may be, as
described below. Enclosed is a Letter of Transmittal for use in exchanging
stock certificates of Old Common Stock for stock certificates of New Common
Stock and/or a cash payment. Stockholders should not send Letters of
Transmittal to the Company, but to The First National Bank of Boston, the
transfer agent and registrar for Old Common Stock.
Each stockholder of record who holds shares of Old Common Stock should
use the enclosed Letter of Transmittal to surrender his old stock certificate(s)
and the shares of Old Common Stock represented thereby
5
<PAGE>
for a new stock certificate representing one share of New Common Stock for each
500 shares of Old Common Stock, if any, and/or a cash payment in an amount
equivalent to $1.50 per share for such number of shares of Old Common Stock
not divisible by 500 into a whole share of New Common Stock. Each stockholder
will be required to complete and submit a Letter of Transmittal in order to
receive payments. Stockholders who have not completed and submitted a Letter of
Transmittal will not receive payments until they have done so. Stockholders who
wish to purchase additional shares of Old Common Stock may do so on the open
market prior to the Effective Date. See "Special Factors--Exchange of Stock
Certificates; Cash Payments in Lieu of Fractional Shares."
PLEASE NOTE THAT ALL STOCK CERTIFICATES SENT TO THE TRANSFER AGENT SHOULD BE
DULY ENDORSED FOR TRANSFER TO THE COMPANY.
FINANCING OF THE REVERSE STOCK SPLIT
The Company estimates that it will incur transactional expenses of
approximately $150,000 in connection with the Reverse Stock Split. In addition,
equity will be reduced by aggregate cash payments in lieu of fractional shares
of New Common Stock of approximately $385,000. The Company intends to finance
such costs from the sale of assets. If necessary and agreed by the Major
Stockholders, the Company may finance such costs from up to $1,000,000 of
additional borrowings on the same terms as under a $2,000,000 line of credit
provided by the Major Stockholders under a Note and Warrant Purchase Agreement
dated May 22, 1996 (the "May Purchase Agreement") which have been authorized by
the Company's Board of Directors and Special Committee. The Major Stockholders,
however, have not agreed to lend additional funds to be used in connection with
the Reverse Stock Split. See "Special Factors--Financing of the Reverse Stock
Split."
POTENTIAL CONFLICTS OF INTEREST
The directors of the Company are Parker G. Montgomery, the Company's
President and Chairman of the Board of Directors, Theodore H. Kruttschnitt,
James Gilleran and Jackson Schultz. Each of the Major Stockholders owns or
controls approximately 30% of the outstanding shares of common stock. Each
Director, including the Major Stockholders, has advised the Company that he
intends to retain all whole shares of New Common Stock after the Reverse Stock
Split. In addition each of the Major Stockholders has the right to acquire an
additional 728,370 shares of the Company's common stock upon the conversion of
$1,479,049 principal amount of the Company's promissory notes held by each of
them (the "Notes") and the right to acquire 1,571,714 shares of common stock
upon the exercise of warrants issued pursuant to that certain Note and Warrant
Purchase Agreement dated November 10, 1995 between the Company and the Major
Stockholders (the "November Purchase Agreement") and the May Purchase Agreement.
The warrants issued under the November Purchase Agreement and the May Purchase
Agreement are referred to herein as the "Prior Warrants" and the "New Warrants",
respectively, and collectively as the "Warrants". If they were to convert the
Notes and exercise the Warrants, Mr. Kruttschnitt and Mr. Montgomery would then
own 3,389,233 shares (41.18%) and 3,389,232 shares (41.18%), respectively, of
the Company's outstanding common stock. Based on the assumption that the Company
will make cash payments with respect to 257,142 shares of Old Common Stock in
connection with the Reverse Stock Split, the percentage ownership interest in
the issued and outstanding shares of New Common Stock of each of Mr.
Kruttschnitt and Mr. Montgomery will increase by approximately 8% from 30% to
32.3%. On a fully diluted basis, the percentage ownership interest in New Common
Stock of Mr. Kruttschnitt and Montgomery would increase by approximately 3% from
41.18% to 42.51%. If the Major Stockholders agreed to lend, and the Company were
to borrow, the additional $1,000,000 authorized for borrowing from the Major
Stockholders on the same terms as under the May Purchase Agreement and, after
the foregoing conversions and exercises, the Major Stockholders were to exercise
the resulting additional warrants, Mr. Kruttschnitt and Mr. Montgomery would
then own 3,675,090 shares (41.76%) and 3,675,089 shares (41.76%), respectively,
of the Company's outstanding common stock. After the Reverse Stock Split, the
conversion and exercise ratios of the Notes and Warrants, respectively, will be
appropriately adjusted to reflect the Reverse Stock Split.
The Special Committee retained an investment bank, Van Kasper &
Company (the "Advisor"), to analyze
6
<PAGE>
the effect of the May Purchase Agreement on the Company, the Company's
stockholders and the Major Stockholders. At meetings of the Special Committee
and the Board of Directors on May 24, 1996, the Advisor discussed the
transaction contemplated by the May Purchase Agreement and also discussed
certain aspects of the Reverse Stock Split; namely: (i) the Advisor's analysis
and review of the recent trading history of the Company's common stock, (ii)
other reverse stock split transactions, prevailing prices and prices paid for
fractional shares in such transactions, (iii) alternatives to the one-for-500
reverse stock split, (iv) brokerage transaction costs and (v) the relatively
minor incremental investment needed by stockholders of the Company who wish to
remain as stockholders of the Company to purchase additional shares of Old
Common Stock so that they can own at least 500 shares of Old Common Stock prior
to the Reverse Stock Split. The Advisor was not asked to render and did not
render a verbal or written report or opinion as to the fairness of the Reverse
Stock Split from a financial point of view to the stockholders of the Company.
Neither the Special Committee nor the Board of Directors retained an
unaffiliated representative to act solely on the behalf of the unaffiliated
stockholders of the Company for the purposes of negotiating the terms of the
Reverse Stock Split. See "Special Factors--Fairness of the Reverse Stock
Split".
7
<PAGE>
FAIRNESS OF THE REVERSE STOCK SPLIT
BACKGROUND
In March 1996, the Major Stockholders met to discuss the possibility
of a "going private transaction" to reduce the costs associated with the Company
being a public reporting company. At the March 18, 1996 meeting of the Board of
Directors, Mr. Montgomery indicated that he and Mr. Kruttschnitt might be
interested in acquiring the balance of the shares not owned by them. Messrs.
Gilleran and Schultz explored the possibility further with the Major
Stockholders but there was no discussion of any transaction or prices. The Major
Stockholders concluded that they should form a new corporation to acquire the
Company in a cash merger and jointly retained counsel independent of the Company
to advise them with respect to such a transaction. No transaction involving a
cash merger was ever presented to or discussed by the Board of Directors and no
per share cash consideration was determined for such a contemplated transaction.
Thereafter, the cash position of the Company worsened, thereby
increasing the amount of cash that the Major Stockholders would have had to
supply to both finance the Company and to carry out a cash merger. The Major
Stockholders then determined that the most cash-sparing and cost-effective
method of reducing the costs associated with the Company being a public
reporting company would be to effect a reverse stock split which would reduce
the number of stockholders below 300 and so informed the Special Committee prior
to the May 24, 1996 meeting of the Board of Directors. The Major Stockholders
made the proposal to effect the Reverse Stock Split to the Board of Directors
and the Special Committee. As members of the Board of Directors, the Major
Stockholders participated in all deliberations and voting of the Board of
Directors about the proposed Reverse Stock Split and supported the
recommendation of the Special Committee as to its determination of the amount of
the cash payment per share of Old Common Stock in lieu of the issuance of
fractional shares of New Common Stock to persons who would hold fractional
shares of New Common Stock after the Reverse Stock Split.
In May 1996, the Major Stockholders agreed to provide the Company with
an additional $2,000,000 line of credit and the Special Committee retained the
Advisor to assist it with respect to its analysis of the May Purchase Agreement.
The Advisor discussed the terms of the May Purchase Agreement and a reverse
stock split transaction with the Special Committee in telephone calls on May 21
and 22, 1996. All of the directors attended the May 24, 1996 meeting of the
Board of Directors at which the Special Committee presented its recommendation
with respect to the May Purchase Agreement. A representative of the Advisor was
made available by telephone and answered questions with respect to the exercise
price for the New Warrants. At the conclusion of the discussion with respect to
the May Purchase Agreement the Advisor was asked to give his reaction to using a
similar amount as the amount of the cash payment per fractional share in the
Reverse Stock Split. Any connection between the Reverse Stock Split and the May
Purchase Agreement was coincidental. The Special Committee and the Board of
Directors considered, however, that the Advisor's analysis with respect to the
determination of the exercise price of the New Warrants could also be applied to
the amount of the cash payment per share of Old Common Stock in lieu of the
issuance of fractional shares of New Common Stock to persons who would hold
fractional shares of New Common Stock after the Reverse Stock Split. At its May
24, 1996 meetings, the Special Committee and the Board of Directors concluded
that the cash payment per share of Old Common Stock in lieu of the issuance of
fractional shares of New Common Stock to persons who would hold fractional
shares of New Common Stock after the Reverse Stock Split and the exercise price
of the New Warrants should be $1.75 per share.
In early August 1996, after continued losses from operations and
worsening cash flow and a decline in the prevailing market price for the
Company's common stock on the over the counter market, Mr. Montgomery telephoned
the representative of the Advisor to share views on pricing particularly as it
related to fairness to unaffiliated stockholders who would remain stockholders
of the Company after the Reverse Stock Split. The representative of the Advisor
acknowledged the changed circumstances reflected in the then current bid of
$1.00 and ask of $1.50 per share of the Company's Common Stock in the over the
counter market and suggested that the cash payment per share of Old Common Stock
in lieu of the issuance of fractional shares of New Common Stock to persons who
would hold fractional shares of New Common Stock after the Reverse
8
<PAGE>
Stock Split be reduced to $1.50 per share which reflected the average price at
which trades in the Company's shares had taken place during 1996. Mr.
Montgomery then asked the chairman of the Special Committee, Mr. Gilleran, to
discuss pricing with the Advisor. Mr. Gilleran had a telephone conversation
with the representative of the Advisor and, after a telephone consultation
with Mr. Schultz, recommended to the Board of Directors, on behalf of the
Special Committee, that the cash payment per share of Old Common Stock in lieu
of the issuance of fractional shares of New Common Stock to persons who would
hold fractional shares of New Common Stock after the Reverse Stock Split be
reduced to $1.50 per share.
At its August 15, 1996 meeting, the Board of Directors reconsidered
the amount of the cash payment per share of Old Common Stock in lieu of the
issuance of fractional shares of New Common Stock to persons who would hold
fractional shares of New Common Stock after the Reverse Stock Split in light of
continued losses from operations and declines in the prevailing market prices of
the Company's common Stock in the over the counter market. A representative of
the Advisor was available to answer questions with respect to the amount of the
cash payment per share of Old Common Stock in lieu of the issuance of fractional
shares of New Common Stock to persons who would hold fractional shares of New
Common Stock after the Reverse Stock Split and recent and historical trading
data about the Company's common stock. At its August 15, 1996 meetings, the
Special Committee and the Board of Directors concluded that the cash payment per
share of Old Common Stock in lieu of the issuance of fractional shares of New
Common Stock to persons who would hold fractional shares of New Common Stock
after the Reverse Stock Split should be $1.50 per share. The May 24 and August
15, 1996 meetings of the Board of Directors were attended by all of the
directors and were initiated by Mr. Montgomery.
FAIRNESS DETERMINATIONS
The Special Committee and the Board of Directors have reviewed and
considered the terms and conditions of the Reverse Stock Split and have
unanimously determined that the Reverse Stock Split, taken as a whole, is fair
to, and in the best interests of, the Company and its stockholders. The
Special Committee and the Board of Directors also believe that the Reverse Stock
Split is financially and procedurally fair to (i) the unaffiliated stockholders
who retain their interest in the Company and (ii) unaffiliated stockholders who
do not retain their interest in the Company. Each of the Major Stockholders has
reviewed and considered the terms and conditions of the Reverse Stock Split and
has determined that the Reverse Stock Split, taken as a whole, is fair to, and
in the best interests of, the Company and its stockholders and is financially
and procedurally fair to (i) the unaffiliated stockholders who retain their
interest in the Company and (ii) unaffiliated stockholders who do not retain
their interest in the Company.
The Special Committee, Board of Directors and the Major Stockholders
believe that the payment of cash in the amount of $1.50 per share of Old Common
Stock in lieu of the issuance of fractional shares of New Common Stock to
persons who would hold fractional shares of New Common Stock after the Reverse
Stock Split, will enable such stockholders to liquidate their shares easily and
at a fair price which is at or above recent prevailing market prices of the
Company's common stock. Depending upon a particular stockholder's tax basis in
his shares of common stock, such stockholder may obtain a tax benefit by
recognizing a loss for federal income tax purposes. See "Special Factors--
Certain Federal Income Tax Consequences." In addition, by having shares of Old
Common Stock exchanged for cash by the Company, a stockholder will be able to
liquidate his investment, or fraction thereof, in the Company without incurring
brokerage costs which, in the case of a holder of a small quantity of Old Common
Stock, could materially reduce or eliminate the actual net proceeds of sale to
the stockholder.
The Special Committee, the Board of Directors and the Major
Stockholders also believe that the Reverse Stock Split is fair to the Company
and to (i) the unaffiliated stockholders who retain their interest in the
Company and (ii) unaffiliated stockholders who do not retain their interest in
the Company because, as described above, the Special Committee, the Board of
Directors and the Major Stockholders believe that the price to be paid to
stockholders who receive cash in lieu of fractional shares of New Common Stock,
which is at or above recent prevailing market prices, is fair in light of all
the circumstances and that the Company will realize cost savings if, as a result
of the Reverse Stock Split,
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it ceases to be a reporting company under the Exchange Act.
Stockholders who would otherwise hold less than one full share of New
Common Stock after the Reverse Stock Split may remain as stockholders of the
Company by purchasing additional shares of Old Common Stock on the open market
prior to the Effective Date to hold at least 500 shares of Old Common Stock on
the Effective Date. The Special Committee, the Board of Directors and the
Major Stockholders believe that structuring the Reverse Stock Split to provide
stockholders the opportunity to remain as stockholders of the Company by
purchasing additional shares of Old Common Stock on the open market prior to the
Effective Date is fairer to stockholders than structuring the reverse stock
split as a one-for-10,000 (or higher) split to ensure that the Reverse Stock
Split would achieve the Company's objective of terminating its obligations under
the Exchange Act. See "Special Factors--Fairness of the Reverse Stock Split."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Reverse Stock Split will not have any material federal income
tax consequence to the Company or to stockholders who receive shares of New
Common Stock in exchange for shares of Old Common Stock. In general, for
federal income tax purposes stockholders who receive cash in exchange for their
shares of Old Common Stock will recognize taxable capital gain or loss as a
result of the transaction, provided they hold their Old Common Stock as a
capital asset on the date of exchange. Any such capital gain or loss will be
long-term capital gain or loss if the Old Common Stock had been held for more
than one year and otherwise will be short-term capital gain or loss. THE
COMPANY HAS NOT SOUGHT, AND DOES NOT INTEND TO SEEK, A RULING OF THE INTERNAL
REVENUE SERVICE OR AN OPINION OF COUNSEL AS TO ANY TAX CONSEQUENCES OF THE
REVERSE STOCK SPLIT. EACH STOCKHOLDER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
AS TO THE LIKELY TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT IN THAT
STOCKHOLDER'S PARTICULAR CIRCUMSTANCES. See "Special Factors--Certain Federal
Income Tax Consequences."
POSTPONEMENT OR ABANDONMENT OF THE REVERSE STOCK SPLIT
The Company's Board of Directors may postpone, revise or abandon the
Reverse Stock Split at any time prior to its consummation, for any reason,
including, without limitation, if, in the Directors' sole judgment, consummation
of the Reverse Stock Split would unduly deplete the Company's working capital or
would render the Reverse Stock Split unfair to the Company and its continuing
stockholders due to an adverse change in the Company's financial condition.
SPECIAL FACTORS
THE COMPANY
The Company is primarily engaged in the development, manufacture and
sale of skin care products under the Cabot(R) and Cabot(R) Vitamin E trademarks.
The Company was a wholly owned subsidiary of Cooper Laboratories, Inc.
prior to the consummation of an initial public offering of its common stock in
August 1983. Pursuant to a plan of liquidation, Cooper Laboratories, Inc.
distributed its shares of the Company's common stock to its stockholders in June
1985. The Company is a Delaware corporation and was incorporated in April 1980.
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UNITED STATES OPERATIONS
The Company, through its wholly owned subsidiary, Cabot, develops,
manufactures and sells skin care products. Cabot's products are sold directly to
drug store chains and mass volume retailers by its own regional key account
managers in the United States and to exclusive distributors outside the United
States. Cabot employed 41 full time employees at September 30, 1996, at its
facility in Morgan Hill, California.
Cabot was one of the first companies to incorporate vitamin E in its
skin care product lines. Cabot offers one of the most extensive lines of
vitamin E skin care products in the industry. Use of vitamin E on the skin is
of increasing interest because ongoing medical and academic studies continue to
support fortifying the upper layers of the skin with vitamin E. Vitamin E
continues to be used topically to help neutralize free radicals formed in the
environment by sunlight which may cause premature aging of the skin.
Cabot has introduced Avalon(TM), a new clear oatmeal, into its line of
skin care products. The Avalon line will include anti-itch bath soaks and body
sprays and sensitive skin cleansing bars and body washes. Cabot also markets
Seban(R) Solution which controls the secretion of facial oil.
Cabot is a leader in the sales of single use skin care pacs. The
Cabot Vitamin E Anti-Stress line includes face pacs, bath soaks and foot pacs.
Cabot also markets hair care pacs under the Cabot and Salon Series(R) lines.
Cabot plans to market additional products under the Nature(R) trademark.
EUROPEAN OPERATIONS
The Company, through DIFA, manufactures and sells an antiviral product
under an exclusive worldwide license to distributors outside the United States
under various trademarks. Under the terms of the license, the Company pays a 5%
royalty on sales of its antiviral product for use in the treatment of herpes
zoster and tabes dorsalis and a 1.5% royalty on sales for all other uses. DIFA
also distributes skin care products,
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including a line of products developed by a dermatologist, which are sold under
the Cosmetici Magistrali(TM) trademark.
The Company also develops skin care products through CCSA which
develops skin care products for license to independent licensees principally in
Europe under the "Tokalon" trademark. The Company, through CDSA, owns
undeveloped real estate in Mougins, France.
1995-1996 RESTRUCTURING OF CABOT
In 1995 and 1996, the Company implemented plans to reduce its costs
and improve productivity. The Company consolidated all of its United States
offices and manufacturing facilities into one leased facility in Morgan Hill,
California and reduced the number of employees. The closing of the Company's
Islip, New York facilities was completed by December 31, 1995. The Company has
also sublet its former offices in New York City. The Company incurred $1,670,000
of pre tax charges relating to relocations, separations and related costs of the
restructuring program, including $810,000 for the severance costs of 71
employees working in manufacturing, distribution and administration at the
Company's Islip facilities and $585,000 related to facility leases, close down
costs, and asset retirements. The Company paid $475,000 for its restructuring
program in 1995 and expects such payments to be completed by the end of the
first quarter in 1997. There can be no assurance that the restructuring of Cabot
will result in profitable operations.
DISPOSITIONS AND POSSIBLE DISPOSITIONS OF THE COMPANY'S ASSETS AND/OR BUSINESSES
The Company has historically invested heavily in its operating
subsidiaries to grow their businesses and relied primarily on the sales of such
businesses as they grew to finance their operations. In fiscal 1995 and through
June 30, 1996, the Company has incurred over $11,739,000 and $3,307,000,
respectively, in losses. The Company is currently focusing its efforts on
developing its principal subsidiary, Cabot, and is considering possible
transactions which may involve the sale or disposition of one or more of its
operating subsidiaries, product lines or assets to finance the continued growth
of Cabot and to increase its focus on developing its core skin care business.
On, September 5, 1996, pursuant to an asset purchase agreement, Cabot
sold to American International Industries Cabot's cosmetic product line,
including Clear Perfection corrective cosmetics and a limited line of vitamin
enriched lipsticks and lipglosses, and related inventory, tools and dies and
intangibles for $2,500,000. The Special Committee, the Board of Directors and
the Major Stockholders did not confirm their fairness determinations with
respect to the Reverse Stock Split after the sale since the selling price was
not significantly below the valuation of the minimum price range expected for
the sale of this product line. See "Fairness of the Reverse Stock Split -
Liquidation Value"
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While the Company has discussed other possible transactions with third
parties, it has not received any firm offers with respect to any of such
possible transactions, except with respect to certain real property as described
below, and there can be no assurance that the Company will be able to negotiate
any of such possible transactions on terms favorable to the Company or develop
Cabot into a profitable business.
Although the Company had discussions to sell some or all of the
capital stock of DIFA to an Italian corporation, there are currently no
discussions regarding such sale. The going concern value of DIFA's business is
dependent on DIFA's ability to obtain at least a 30 month extension of the
regulatory approvals required in Italy to continue to market DIFA's anti-viral
product.
The Company, through its subsidiary, CDSA, is engaged in efforts to
sell four lots of undeveloped land in Mougins, France. The Company currently
has two lots under contract and expects to realize $250,000 and $100,000,
respectively, in net proceeds from the sale of these lots. While the Company
expects to close the sales within the next six months, the sale of one lot is
contingent upon the receipt of a building permit and there can be no assurance
that the Company will be able to sell any of the four lots on terms favorable to
the Company.
FURTHER INFORMATION.
For further information with respect to the Company and its business
and operations, see the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and its Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1996, copies of which are enclosed for your reference, and
which are incorporated herein by reference.
THE REVERSE STOCK SPLIT
The Special Committee and the Board of Directors approved the
Reverse Stock Split by authorizing: (i) an amendment to the Company's
Certificate of Incorporation effecting a one-for-500 reverse stock split of the
Company's Old Common Stock, reducing the authorized number of shares of common
stock from 10,000,000 shares to 20,000 shares, $50.00 par value per share; and
(ii) the payment of cash in the amount of $1.50 per share of Old Common Stock
in lieu of the issuance of fractional shares of New Common Stock to persons who
would otherwise hold fractions of a share of New Common Stock after the Reverse
Stock Split.
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REASONS FOR THE REVERSE STOCK SPLIT
TRANSACTION TO BECOME A NON-REPORTING COMPANY.
The Board of Directors and the Special Committee authorized the
Reverse Stock Split in connection with the Company's ongoing efforts to reduce
costs and improve productivity. Reducing the number of its stockholders of
record to less than 300 would permit the Company to discontinue the registration
of its common stock under the Exchange Act. Termination of the Company's status
as a public reporting company under federal securities laws would allow the
Company to achieve additional reductions in costs by reducing the general and
administrative costs incurred in connection with maintaining such status.
The Special Committee and the Board of Directors believe that neither
the Company nor its stockholders derive any material benefit from the continued
registration of the Company's common stock under the Exchange Act because the
Company intends to provide stockholders with the same kind of financial
information that they presently receive and the Company has already been
delisted from the NASDAQ National Market System and the NASDAQ Small Cap Market.
The Company incurs significant direct and indirect costs, however, as a result
of the requirement that it comply with the filing and reporting requirements
applicable to public companies. The Company annually incurs direct costs,
including legal and accounting expenses of approximately $70,000 in years in
which the minimum filings with the SEC are required. The Company also incurs
indirect costs as a result of management time required to prepare and review
such filings. The Company expects to achieve annual cost savings of at least
$500,000 as a result of the Reverse Stock Split, resulting from anticipated
reductions in personnel, directors' and officers' liability insurance premiums,
fees paid to outside directors, outside accounting and legal fees, transfer
agent fees, and in printing and mailing costs. The Company expects to continue
to have outside directors after the Reverse Stock Split but expects that reduced
activities and responsibilities will result in a reduction in directors' fees.
The Special Committee and the Board of Directors believe that the
expense and burden to the Company of continued registration, including the
requirement to file annual and quarterly reports, proxy statements and other
documents with the SEC significantly outweigh any benefits to the Company or its
stockholders as a result of such registration since it is no longer listed on
the NASDAQ National Market System or on the NASDAQ Small Cap Market.
Furthermore, the Company intends to continue to provide its stockholders with
periodic financial information about the Company similar to that which it
currently provides. The Company does not presently intend to raise capital in
the public securities markets, to use registered stock to effect acquisitions,
or to avail itself of other advantages of being a public reporting company. The
Company believes that its inability to raise significant amounts of capital
from stockholders other
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than the Major Stockholders in the Rights Offering, and its current financial
condition, indicate that the Company would not likely be able to raise capital
in the near term in the public securities market. The Company believes that its
current financial condition would make it difficult to engage an underwriter to
conduct a public offering of its securities and, based on its experience in the
Rights Offering, believes that few of its existing stockholders, including the
Major Stockholders, would participate in a rights offering of additional
securities. The Company's common stock has been delisted from the NASDAQ
National Market System and from the NASDAQ Small Cap Market and is traded on the
over-the-counter market.
The Company is undertaking the Reverse Stock Split now to allow the
Company to cease to incur public reporting company expenses as quickly as
possible as part of the Company's overall strategy to reduce costs and to allow
stockholders who receive cash in lieu of fractional shares of New Common Stock
to receive, and be able to reinvest or make use of, such cash payments. The
Company had not considered the Reverse Stock Split earlier in the hopes that its
financial condition would improve enough to avoid additional austerity measures.
The Company would not consider a later time in view of the current need to cut
all expenses and conserve cash flow by all possible means. The Company has
considered and adopted other cost-cutting measures in all aspects of its
operations, including reducing salaries, reducing headcount, consolidating
operations, closing facilities, negotiating discounts from vendors and suppliers
of goods and services, selling assets and undertaking the Reverse Stock Split.
See "The Company - 1995-1996 Restructuring - Dispositions and Possible
Dispositions of the Company's Assets and/or Businesses".
FORM OF TRANSACTION.
The Special Committee and the Board of Directors have determined that
the Reverse Stock Split is the most cost-effective method of changing the
Company's status from that of a publicly held reporting company to that of a
privately held non-reporting company. In making this determination, the Special
Committee and the Board of Directors considered other means of achieving this
result, but rejected these alternatives because they believed that the Reverse
Stock Split would be simpler and more-cost effective. In addition, the Reverse
Stock Split would allow existing stockholders who would otherwise hold less than
one share of New Common Stock after the Reverse Stock Split to remain
stockholders of the Company by purchasing additional shares of Old Common Stock
on the open market prior to the Effective Date. The Special Committee and the
Board of Directors considered effecting a reverse stock split that would effect
a greater reduction in the number of stockholders or making privately or
publicly negotiated purchases of outstanding shares of its common stock,
including making a public tender offer for such shares, or effecting a merger in
which the Company's public stockholders would receive cash instead of stock in
the surviving corporation. The Special Committee and the Board of Directors
rejected these alternatives as impracticable in light of the Company's current
financial
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condition and Cabot's capital requirements, and because the Board of Directors
believed that the Reverse Stock Split would be simpler and less expensive to
effect and because the Reverse Stock Split would allow existing stockholders to
remain stockholders after the Reverse Stock Split by purchasing additional
shares of Old Common Stock. In addition, the Special Committee and the Board of
Directors considered that, in the case of a merger, the Delaware General
Corporation Law would afford dissenting stockholders appraisal rights that they
would not be entitled to in the case of the Reverse Stock Split. The Special
Committee and the Board of Directors believe that the availability of appraisal
rights could unduly increase the complexity and potential cost of becoming a
non-reporting company without materially benefiting any dissenting stockholders.
POTENTIAL BENEFITS OF TRANSACTION TO BECOME A NON-REPORTING COMPANY MAY NOT BE
REALIZED
Stockholders who would otherwise hold less than one share of New
Common Stock after the Reverse Stock Split may remain as stockholders of the
Company by purchasing additional shares of Old Common Stock on the open market
to hold at least 500 shares of Old Common Stock on the Effective Date. See
"Special Factors--Exchange of Stock Certificates; Cash Payments in Lieu of
Fractional Shares". Because stockholders may purchase additional shares on the
open market prior to the Effective Date, there can be no assurance that, even if
the Reverse Stock Split is effected, the Company will reduce the number of
record stockholders following the Reverse Stock Split to less than 300
stockholders of record. If the Company fails to reduce the number of
stockholders of record to below 300, the Company will still be a reporting
company for purposes of the Exchange Act and will not realize the anticipated
cost savings that would result from ceasing to be a public reporting company.
Based on the assumption that the number of stockholders who reduce
the number of shares they hold prior to the Effective Date from holdings of more
than 500 shares to holdings of less than 500 shares will offset the number of
stockholders who increase the number of shares they hold prior to the Effective
Date from holdings of less than 500 shares to holdings of greater than 500
shares or multiples of 500 shares, the Company expects that approximately 100
stockholders will remain after the Reverse Stock Split.
RULE 13e-3 TRANSACTION STATEMENT.
In connection with the Reverse Stock Split, the Company has filed with
the SEC a Rule 13e-3 Transaction Statement on Schedule 13e-3. See "Other
information; Documents Incorporated by Reference".
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CONDUCT OF THE COMPANY'S BUSINESS AFTER THE REVERSE STOCK SPLIT
NO EFFECT ON CONTINUING BUSINESS AND OPERATIONS.
The Company believes that the Reverse Stock Split will not have any
effect on its business and operations and expects to continue to conduct such
business and operations as they are currently being conducted. The Company
expects to achieve annual cost savings of at least $500,000 as a result of the
Reverse Stock Split, resulting from anticipated reductions in personnel,
directors' and officers' liability insurance premiums, fees paid to outside
directors, outside accounting and legal fees, transfer agent fees, and in
printing and mailing costs. The Company's ability to raise capital on the public
securities market may be reduced or curtailed but the Company believes that its
current financial condition make it unlikely that the Company would be able to
raise capital in the public securities market. The Company will continue to
explore ways of raising working capital through the sale of assets and/or
businesses, including, but not limited to, (i) the possible sale of the
Company's French real estate and (ii) the possible sale or disposition of DIFA.
If the Reverse Stock Split is effected, stockholders holding less than
500 shares of Old Common Stock on the Effective Date will receive cash payments
in lieu of fractional shares of New Common Stock and will not remain as
stockholders of the Company and therefore will not participate in any future
earnings or growth of the Company or in the sale or disposition of any of its
businesses or assets. Stockholders holding at least 500 shares of Old Common
Stock on the Effective Date will remain as stockholders and will retain all of
the rights and benefits possessed by stockholders prior to the Reverse Stock
Split except those resulting from the Company's status as a publicly held
reporting company under the Exchange Act. In addition, such stockholders may no
longer have the benefit of a public market for the Company's New Common Stock.
The Company intends to continue to provide such stockholders with the same type
of financial information that they currently receive. Based on the assumption
that the Company will make cash payments with respect to 257,142 shares of Old
Common Stock in connection with the Reverse Stock Split, the percentage
ownership interest of each stockholder who will remain a stockholder of the
Company and who does not purchase any additional shares of Old Common Stock
prior to the Reverse Stock Split will increase by approximately 8%.
The Major Stockholders will remain as stockholders of the Company and
will retain all of the rights and benefits possessed by stockholders prior to
the Reverse Stock Split except those resulting from the Company's status as a
publicly held reporting company under the Exchange Act. In addition, the Major
Stockholders may no longer have the benefit of a public market for the Company's
New Common Stock. After the Reverse Stock Split, the Major Stockholders would no
longer be subject to the reporting requirements and "short swing" insider
trading regulations under Section 16 of the Exchange Act. Based on the
assumption that the Company will make cash payments
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with respect to 257,142 shares of Old Common Stock in connection with the
Reverse Stock Split, the percentage ownership interest in the issued and
outstanding shares of New Common Stock of each of the Major Stockholders will
increase by approximately 8% from 30% to 32.3%. On a fully diluted basis, the
percentage ownership interest in New Common Stock of each of the Major
Stockholders would increase by approximately 3% from 41.18% to 42.51%. At June
30, 1996, the interest in the net book value of the Company in absolute and
percentage terms would increase from approximately ($2,300,000) to approximately
($2,500,000) and by approximately 8%, respectively, and the interest in the net
earnings of the Company in absolute and percentage terms would increase from
approximately ($992,000) to approximately ($1,070,000) and by approximately 8%,
respectively. See "Fairness of the Reverse Stock Split - Potential Conflicts of
Interest".
TERMINATION OF REPORTING COMPANY STATUS.
If the Reverse Stock Split is effected, the Company expects to cease
to be a reporting company under the Exchange Act. As a result, the Company would
no longer file annual and quarterly reports, proxy statements, and other
documents with the SEC. In addition, the Company would no longer be required to
comply with the proxy rules of Regulation 14A promulgated under Section 14 of
the Exchange Act, and its officers, directors and 10%-or-greater stockholders
would no longer be subject to the reporting requirements and "short-swing"
insider trading restrictions under Section 16 of the Exchange Act. Continuing
stockholders would no longer be entitled to receive annual reports and proxy
statements required by the Exchange Act and would most likely no longer have the
benefit of a public market for their shares of the Company's common stock. In
light of the listing requirements of stock exchanges, including the NASDAQ
National Market System and the NASDAQ Small Cap Market, that a class of listed
security must be registered pursuant to Section 12 of the Exchange Act, it is
unlikely that a public market will develop for the Company's New Common Stock.
The Company intends to continue to provide such stockholders with the same type
of financial information that they currently receive.
EFFECTS OF REVERSE STOCK SPLIT ON THE COMPANY,
CHANGES TO AUTHORIZED CAPITAL STOCK; TERMS OF STOCK UNCHANGED.
If the Reverse Stock Split is effected, the number of authorized
shares of the Company's common stock will be reduced from 10,000,000 shares,
$0.10 par value, to 20,000 shares, $50.00 par value. Apart from such changes,
the terms of the New Common Stock will remain the same as those of the Old
Common Stock.
CHANGES IN PROPORTIONATE STOCK OWNERSHIP AND SHARE VALUES.
Stockholders who remain stockholders of the Company after the Reverse
Stock Split are likely to experience a slight increase in their percentage stock
ownership in the Company as a result of the exchange of shares of Old Common
Stock for a cash payment of $1.50 per share of Old Common Stock in lieu of the
issuance of fractional
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shares of New Common Stock. The extent of such increase will depend on the
number of such shares exchanged and the number of such shares, if any, that are
purchased by other stockholders on the open market prior to the Effective Date.
The use of Company funds to pay for fractional shares of New Common Stock and to
pay the transactional costs of the Reverse Stock Split will cause a decrease in
the Company's assets of approximately $535,000 if no stockholders purchase
additional shares of Old Common Stock on the open market prior to the Effective
Date.
POSSIBLE EXTRAORDINARY TRANSACTIONS.
Other than as described in this Information Statement with respect to
(i) the possible sale of the Company's French real estate, (ii) the possible
sale or disposition of DIFA and (iii) the possible borrowing of $1,000,000
from the Major Stockholders, the Company has no current plan to effect any
extraordinary corporate transaction, such as a merger, reorganization,
liquidation, sale or transfer of a material amount of assets, change in its
present Board of Directors or management, or change in dividend rate or policy,
indebtedness, or capitalization, or otherwise to effect any material change in
its corporate structure or business. The Company also has no current plans to
engage in any public offering of shares of common stock or other securities.
There is no assurance, however, that the Company will not form an intention to
engage in any of the foregoing transactions in the future or that it will be
able to negotiate any or all of the contemplated transactions on terms favorable
to the Company. Stockholders holding less than 500 shares of Old Common Stock on
the Effective Date will not continue as stockholders of the Company and will not
participate in the benefits of any such transactions or in any future growth of
the Company.
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FURTHER STOCKHOLDER APPROVAL NOT REQUIRED
The Reverse Stock Split has been approved by the written consent of
the Major Stockholders. Such consent is sufficient to approve the Reverse Stock
Split under the Delaware General Corporation Law and the Company's Certificate
of Incorporation, and no other vote or consent of stockholders is required or
will be sought in connection with the Reverse Stock Split. Under the Delaware
General Corporation Law and the Company's Certificate of Incorporation, the
affirmative vote of a majority of the issued and outstanding shares voting by
written consent constitute the act of stockholders. ACCORDINGLY, THE COMPANY IS
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A
PROXY.
LACK OF APPRAISAL RIGHTS
Pursuant to the Delaware General Corporation Law and the Company's
Certificate of Incorporation, dissenting stockholders are not entitled to
appraisal rights if the Reverse Stock Split is effected and no appraisal rights
will be voluntarily accorded by the Company to its stockholders in connection
with the Reverse Stock Split. Stockholders who believe that they may be
aggrieved by the Reverse Stock Split may have other rights under federal law or
common law, such as rights relating to the fairness of the Reverse Stock Split
and arising from possible breaches of the fiduciary responsibilities of
corporate officers, directors, and stockholders. The nature and extent of such
rights, if any, may vary depending upon the facts and circumstances.
POSTPONEMENT OR ABANDONMENT
The Company's Board of Directors may postpone, revise or abandon the
Reverse Stock Split at any time prior to its consummation, for any reason,
including, without limitation, if, in the Directors' sole judgment,
consummation of the Reverse Stock Split would unduly deplete the Company's
working capital or would render the Reverse Stock Split unfair to the Company
and its continuing stockholders due to an adverse change in the Company's
financial condition.
EFFECTIVE TIME
Subject to the rights of the Board of Directors to postpone or abandon
the Reverse Stock Split, the Reverse Stock Split will be effected by filing an
amendment to the Company's Certificate of Incorporation with the Delaware
Secretary of State and will be effective upon such filing. The form of the
proposed amendment to the Company's Certificate of Incorporation is set forth as
Exhibit A to this Information Statement. The Company intends to file the
amendment to its Certificate of Incorporation on or about November __, 1996,
the Effective Date.
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EXCHANGE OF STOCK CERTIFICATES; CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES
LETTER OF TRANSMITTAL.
If the Reverse Stock Split is effected, the stock certificates
formerly representing shares of Old Common Stock will represent the right to
receive the shares of New Common Stock into which they have been converted,
and/or the right to receive a cash payment in lieu of fractional shares of New
Common Stock, as the case may be, as described below. Enclosed is a Letter of
Transmittal for use in exchanging stock certificates of Old Common Stock for
stock certificates of New Common Stock and/or a cash payment. Stockholders
should not send Letters of Transmittal to the Company, but to The First National
Bank of Boston, the transfer agent and registrar for Old Common Stock.
Each stockholder of record who holds shares of Old Common Stock should
use the enclosed Letter of Transmittal to surrender his old stock certificate(s)
and the shares of Old Common Stock represented thereby for a new stock
certificate representing one share of New Common Stock for each 500 shares of
Old Common Stock, if any, and/or a cash payment in an amount equivalent to $1.50
per share for such number of shares of Old Common Stock not divisible by 500
into a whole share of New Common Stock. Each stockholder will be required to
complete and submit a Letter of Transmittal in order to receive payments.
Stockholders who have not completed and submitted a Letter of Transmittal will
not receive payments until they have done so. Stockholders who wish to purchase
additional shares of Old Common Stock may do so on the open market prior to the
Effective Date.
PLEASE NOTE THAT ALL STOCK CERTIFICATES SENT TO THE TRANSFER AGENT SHOULD BE
DULY ENDORSED FOR TRANSFER TO THE COMPANY.
FINANCING OF THE REVERSE STOCK SPLIT
The Company estimates that it will incur transactional expenses of
approximately $150,000 in connection with the Reverse Stock Split (consisting
primarily of legal and accounting fees of approximately $50,000, investment
banking fees of $10,000, printing and mailing expenses of approximately $20,000,
transfer agent fees of approximately $60,000 and miscellaneous expenses of
approximately $10,000, including SEC filing fees of approximately $77). In
addition, equity will be reduced by aggregate cash payments in lieu of
fractional shares of New Common Stock of approximately $385,000. Such cash
payments in lieu of fractional shares of New Common Stock have been estimated
based on the assumption that all stockholders holding less than 500 shares of
Old Common Stock will elect to receive cash rather than purchase prior to the
Effective Date additional shares of Old Common Stock on the open market to
remain stockholders after the Reverse Stock Split. The
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<PAGE>
Major Stockholders and the other Directors have advised the Company that they
intend to retain all shares of New Common Stock to be owned or controlled by
them. To the extent that stockholders increase their holdings of Old Common
Stock to become holders of New Common Stock after the Reverse Stock Split, the
reduction in the Company's equity would be reduced. The Company intends to
finance such costs from the sale of assets. If necessary and agreed by the Major
Stockholders, the Company may finance such costs from up to $1,000,000 of
additional borrowings on the same terms as under a $2,000,000 line of credit
provided by the Major Stockholders under the May Purchase Agreement which have
been authorized by the Company's Board of Directors and Special Committee. The
Major Stockholders, however, have not agreed to lend additional funds to be used
in connection with the Reverse Stock Split. The Company's Board of Directors
may, however, postpone, revise or abandon the Reverse Stock Split at any time
prior to its consummation, for any reason, including, without limitation, if, in
the Directors' sole judgment, consummation of the Reverse Stock Split would
unduly deplete the Company's working capital or would render the Reverse Stock
Split unfair to the Company and its stockholders due to an adverse change in the
Company's financial condition.
Since 1993, the Company has been dependent on the sale of assets and
borrowings from the Major Stockholders for working capital. On May 22, 1996,
the Company entered the May Purchase Agreement with the Major Stockholders,
which provides for the establishment of a $2,000,000 line of credit in favor of
the Company. Of the line of credit, $1,000,000 can be drawn down by the Company
from each Major Stockholder in $500,000 increments. Amounts drawn down are due
on December 31, 2000 and bear interest at the rate of 12% per annum. As
consideration for the establishment of the line of credit, the Company issued
warrants to each of the Major Stockholders to purchase 285,714 shares of common
stock of the Company. In addition, for each $1,000 borrowed by the Company from
a Major Stockholder under the line of credit, the Company agreed to issue to
such lender warrants to purchase an additional 286 shares of common stock. The
exercise price of the warrants is $1.75 per share. The line of credit is
secured by a pledge of all of the issued and outstanding capital stock of Cabot.
The transactions covered by the May Purchase Agreement were negotiated
and approved by the Special Committee, with the assistance of the Advisor. The
Company has used amounts drawn under the lines of credit to repay existing
accounts payable and for working capital. As of September 5, 1996, the Company
had drawn $2,000,000 under the line of credit and had issued warrants to
purchase 286,000 shares of its common stock to each of the Major Stockholders.
In addition, the Special Committee has authorized up to an additional $1,000,000
of borrowings from the Major Stockholders on the same terms and conditions as
the borrowings under the May Purchase Agreement. Again, the Major Stockholders,
however, have not agreed to lend additional funds to be used in connection with
the Reverse Stock Split. The Company has no present plans to repay the line of
credit provided under the May Purchase Agreement other than as provided by its
terms.
22
<PAGE>
FAIRNESS OF THE REVERSE STOCK SPLIT
BACKGROUND
In March 1996, the Major Stockholders met to discuss the possibility
of a "going private transaction" to reduce the costs associated with the Company
being a public reporting company. At the March 18, 1996 meeting of the Board of
Directors, Mr. Montgomery indicated that he and Mr. Kruttschnitt might be
interested in acquiring the balance of the shares not owned by them. Messrs.
Gilleran and Schultz explored the possibility further with the Major
Stockholders but there was no discussion of any transaction or prices. The Major
Stockholders concluded that they should form a new corporation to acquire the
Company in a cash merger and jointly retained counsel independent of the Company
to advise them with respect to such a transaction. No transaction involving a
cash merger was ever presented to or discussed by the Board of Directors and no
per share cash consideration was determined for such a contemplated transaction.
Thereafter, the cash position of the Company worsened, thereby
increasing the amount of cash that the Major Stockholders would have had to
supply to both finance the Company and to carry out a cash merger. The Major
Stockholders then determined that the most cash-sparing and cost-effective
method of reducing the costs associated with the Company being a public
reporting company would be to effect a reverse stock split which would reduce
the number of stockholders below 300 and so informed the Special Committee prior
to the May 24, 1996 meeting of the Board of Directors. The Major Stockholders
made the proposal to effect the Reverse Stock Split to the Board of Directors
and the Special Committee. As members of the Board of Directors, the Major
Stockholders participated in all deliberations and voting of the Board of
Directors about the proposed Reverse Stock Split and supported the
recommendation of the Special Committee as to its determination of the amount of
the cash payment per share of Old Common Stock in lieu of the issuance of
fractional shares of New Common Stock to persons who would hold fractional
shares of New Common Stock after the Reverse Stock Split.
In May 1996, the Major Stockholders agreed to provide the Company with
an additional $2,000,000 line of credit and the Special Committee retained the
Advisor to assist it with respect to its analysis of the May Purchase Agreement.
The Advisor discussed the terms of the May Purchase Agreement and a reverse
stock split transaction with the Special Committee in telephone calls on May 21
and 22, 1996. All of the directors attended the May 24, 1996 meeting of the
Board of Directors at which the Special Committee presented its recommendation
with respect to the May Purchase Agreement. A representative of the Advisor was
made available by telephone and answered questions with respect to the exercise
price for the New Warrants. At the conclusion of the discussion with respect to
the May Purchase Agreement the Advisor was asked to give his reaction to using a
similar amount as the amount of the cash payment per share in the Reverse Stock
Split. Any connection between the
23
<PAGE>
Reverse Stock Split and the May Purchase Agreement was coincidental. The Special
Committee and the Board of Directors considered, however, that the Advisor's
analysis with respect to the determination of the exercise price of the New
Warrants could also be applied to the amount of the cash payment per share of
Old Common Stock in lieu of the issuance of fractional shares of New Common
Stock to persons who would hold fractional shares of New Common Stock after the
Reverse Stock Split. At its May 24, 1996 meetings, the Special Committee and
the Board of Directors concluded that cash payment per share of Old Common Stock
in lieu of the issuance of fractional shares of New Common Stock to persons who
would hold fractional shares of New Common Stock after the Reverse Stock Split
and the exercise price of the warrants to be issued in connection with the May
Purchase Agreement should be $1.75 per share.
In early August 1996, after continued losses from operations and
worsening cash flow and a decline in the prevailing market price for the
Company's common stock on the over the counter market, Mr. Montgomery telephoned
the representative of the Advisor to share views on pricing particularly as it
related to fairness to unaffiliated stockholders who would remain stockholders
of the Company after the Reverse Stock Split. The representative of the Advisor
acknowledged the changed circumstances reflected in the then current bid of
$1.00 and ask of $1.50 per share of the Company's Common Stock in the over the
counter market and suggested that the cash payment per share of Old Common Stock
in lieu of the issuance of fractional shares of New Common Stock to persons who
would hold fractional shares of New Common Stock after the Reverse Stock Split
be reduced to $1.50 per share which reflected the average price at which trades
in the Company's shares had taken place during 1996. Mr. Montgomery then asked
the chairman of the Special Committee, Mr. Gilleran, to discuss pricing with the
Advisor. Mr. Gilleran had a telephone conversation with the representative of
the Advisor and, after a telephone consultation with Mr. Schultz, recommended to
the Board of Directors, on behalf of the Special Committee that the cash payment
per share of Old Common Stock in lieu of the issuance of fractional shares of
New Common Stock to persons who would hold fractional shares of New Common Stock
after the Reverse Stock Split be reduced to $1.50 per share.
At its August 15, 1996 meeting, the Board of Directors reconsidered
the amount of the cash payment per share of Old Common Stock in lieu of the
issuance of fractional shares of New Common Stock to persons who would hold
fractional shares of New Common Stock after the Reverse Stock Split in light of
continued losses from operations and declines in the prevailing market prices of
the Company's Common Stock in the over the counter market. A representative of
the Advisor was available to answer questions with respect to the amount of the
cash payment per share of Old Common Stock in lieu of the issuance of fractional
shares of New Common Stock to persons who would hold fractional shares of New
Common Stock after the Reverse Stock Split and recent and historical trading
data about the Company's common stock. At its August 15, 1996 meetings, the
Special Committee and the Board of Directors concluded that the cash payment per
share of Old Common Stock in lieu of the issuance of fractional shares of New
Common Stock to persons who would hold fractional shares of New Common Stock
24
<PAGE>
after the Reverse Stock Split should be $1.50 per share. The May 24 and August
15, 1996 meetings of the Board of Directors were attended by all of the
directors and were initiated by Mr. Montgomery.
FAIRNESS DETERMINATIONS
The Special Committee and the Board of Directors have reviewed and
considered the terms and conditions of the Reverse Stock Split and have
unanimously determined that the Reverse Stock Split, taken as a whole, is fair
to, and in the best interests of, the Company and its stockholders. The Special
Committee and the Board of Directors also believe that the Reverse Stock Split
is financially and procedurally fair to (i) the unaffiliated stockholders who
retain their interest in the Company and (ii) unaffiliated stockholders who do
not retain their interest in the Company. Each of the Major Stockholders has
reviewed and considered the terms and conditions of the Reverse Stock Split and
has determined that the Reverse Stock Split, taken as a whole, is fair to, and
in the best interests of, the Company and its stockholders and is financially
and procedurally fair to (i) the unaffiliated stockholders who retain their
interest in the Company and (ii) unaffiliated stockholders who do not retain
their interest in the Company.
The Special Committee, Board of Directors and the Major Stockholders
believe that the payment of cash in the amount of $1.50 per share of Old Common
Stock in lieu of the issuance of fractional shares of New Common Stock to
persons who would hold fractional shares of New Common Stock after the Reverse
Stock Split, will enable such stockholders to liquidate their shares easily and
at a fair price which is at or above recent prevailing market prices of the
Company's common stock. Depending upon a particular stockholder's tax basis in
his shares of common stock, such stockholder may obtain a tax benefit by
recognizing a loss for federal income tax purposes. See "Special Factors--
Certain Federal Income Tax Consequences." In addition, by having shares of Old
Common Stock exchanged for cash by the Company, a stockholder will be able to
liquidate his investment, or fraction thereof, in the Company without incurring
brokerage costs which, in the case of a holder of a small quantity of Old Common
Stock, could materially reduce or eliminate the actual net proceeds of sale to
the stockholder.
The Special Committee, the Board of Directors and the Major
Stockholders also believe that the Reverse Stock Split is fair to the Company
and to (i) the unaffiliated stockholders who retain their interest in the
Company and (ii) unaffiliated stockholders who do not retain their interest in
the Company because, as described above, the Special Committee, the Board of
Directors and the Major Stockholders believe that the price to be paid to
stockholders who receive cash in lieu of fractional shares of New Common Stock,
which is at or above recent prevailing market prices, is fair in light of all
the circumstances and that the Company will realize cost savings if, as a result
of the Reverse Stock Split, it ceases to be a reporting company under the
Exchange Act.
Stockholders who would otherwise hold less than one full share of New
Common Stock after the Reverse Stock Split may remain as stockholders of the
Company by purchasing additional shares of Old Common Stock on the open market
prior to the Effective Date to hold at least 500 shares of Old Common Stock on
the Effective Date.
25
<PAGE>
The Special Committee, the Board of Directors and both the Major Stockholders
believe that structuring the Reverse Stock Split to provide stockholders the
opportunity to remain as stockholders of the Company by purchasing additional
shares of Old Common Stock on the open market prior to the Effective Date is
fairer to stockholders than structuring the reverse stock split as a one-for-
10,000 (or higher) split to ensure that the Reverse Stock Split would achieve
the Company's objective of terminating its obligations under the Exchange Act.
See "Special Factors--Fairness of the Reverse Stock Split."
FAIRNESS OF CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES.
The Special Committee, the Board of Directors and the Major
Stockholders believe that the payment of cash in the amount of $1.50 per share
of Old Common Stock in lieu of the issuance of fractional shares of New Common
Stock to unaffiliated stockholders who do not hold a whole number of shares of
New Common Stock after the Reverse Stock Split, is financially and procedurally
fair to such persons because such persons will be able to liquidate such shares
easily and at a fair price which is at or above recent prevailing market prices
of the Company's common stock. Depending upon a particular stockholder's tax
basis in his shares of common stock, such stockholder may obtain a tax benefit
by recognizing a loss for federal income tax purposes. See "Special Factors--
Certain Federal Income Tax Consequences." In addition, by having shares of Old
Common Stock exchanged for cash by the Company, an unaffiliated stockholder will
be able to liquidate his investment, or fraction thereof, in the Company without
incurring brokerage costs which, in the case of a holder of a small quantity of
Old Common Stock, could materially reduce or eliminate the actual net proceeds
of sale to the stockholder.
FAIRNESS TO THE COMPANY AND CONTINUING STOCKHOLDERS.
The Special Committee, the Board of Directors and the Major
Stockholders also believe that the Reverse Stock Split is financially and
procedurally fair to the Company and to unaffiliated stockholders who remain as
stockholders of the Company following the consummation of the Reverse Stock
Split because, as described above, they believed that the price to be paid to
stockholders who receive cash in lieu of shares of New Common Stock is fair in
light of all the circumstances and that the Company will realize cost savings
if, as a result of the Reverse Stock Split, it ceases to be a reporting company
under the Exchange Act.
STOCKHOLDERS' OPTION.
Stockholders who would otherwise hold less than one full share of New
Common Stock after the Reverse Stock Split may remain as stockholders of the
Company by purchasing additional shares of Old Common Stock on the open market
prior to the Effective Date to hold at least 500 shares of Old Common Stock on
the Effective Date. The Board of Directors believes that structuring the
Reverse Stock Split to provide stockholders the option to remain as stockholders
of the Company is fairer to
26
<PAGE>
stockholders than structuring the reverse stock split as a one-for-10,000 (or
higher) split to ensure that the reverse stock split would achieve the Company's
objective of terminating its obligations under the Exchange Act.
FACTORS CONSIDERED IN FAIRNESS DETERMINATION.
The Board of Directors, the Special Committee and the Major
Stockholders considered many factors in reaching their determinations that the
Reverse Stock Split is fair to the Company and (i) unaffiliated stockholders who
retain their interest in the Company and (ii) unaffiliated stockholders who do
not retain their interest in the Company. The Board of Directors, the Special
Committee and the Major Stockholders considered each director's knowledge of,
and familiarity with, the Company's businesses and assets, its financial
condition, operating results, cash flows, liabilities and prospects, as well as
general economic, industry, and market conditions. The Special Committee, the
Board of Directors and the Major Stockholders also considered the following
factors:
The recent and historical trading ranges of the Company's common stock on the
over-the-counter market;
Net book value per share;
The going concern value of the Company;
The liquidation value of the Company;
The analysis of the Advisor for the May Purchase Agreement;
The affiliation of the Major Stockholders to the Company;
The opportunity that the Reverse Stock Split would afford stockholders of less
than 500 shares of Old Common Stock to liquidate their investments in the
Company while avoiding brokerage costs and possibly realizing a tax loss
benefit from the transaction;
The opportunity that the Reverse Stock Split would afford stockholders of less
than 500 shares of Old Common Stock wishing to remain as stockholders of the
Company to remain as stockholders of the Company by purchasing additional shares
of Common Stock for a relatively small investment;
The future cost-savings that the Company and its continuing stockholders will
enjoy if, as a result of the Reverse Stock Split, the Company ceases to be a
reporting company under the Exchange Act; and
27
<PAGE>
Each director's familiarity with the process and issues involved in pricing the
common stock in connection with other corporate transactions, including
determining the offering price in the Rights Offering and determining the
conversion price per share of convertible debt and exercise price of warrants
issued to the Major Stockholders in financing transactions.
Given the wide variety of factors considered in reaching their
conclusion as to fairness (including those described below), the Board of
Directors, the Special Committee and the Major Stockholders did not deem it
practicable to assign precise relative weights to the factors considered, and
all factors were considered as a totality except that, with respect to
determining financial fairness, information regarding the current and
historical market prices for the common stock and the analysis of the Advisor
for the May Purchase Agreement and additional conversations with the Advisor
were given greater weight than net book value per share, going concern value
and liquidation value. The analysis of the Advisor for the May Purchase
Agreement, additional conversations with the Advisor and such information
regarding the current and historical prices for the common stock were given
equal weight by the Board of Directors, the Special Committee and the Major
Stockholders in making their financial fairness determination particularly in
view of the lower valuations derived from the other methods of valuation
considered. The Board of Directors, the Special Committee and the Major
Stockholders believed that the great disparity between a valuation based on
prevailing market prices or the discounted future value valuation presented by
the Advisor and net book, liquidation or going concern value would have
rendered the payment of a premium unfair to unaffiliated stockholders who
would remain as stockholders of the Company after the Reverse Stock Split. The
Board of Directors, the Special Committee and the Major Stockholders also
believed that the Advisor's discounted present value of the Company
based on its assumption that the Company would attain an estimated gross fair
value of $25,000,000 in three years supported their determinations. In making
their financial fairness determinations, the Board of Directors, the Special
Committee and the Major Stockholders believed that recent prevailing market
prices of a share of the Company's Common Stock in light of lower or
substantially lower negative net book, liquidation and going concern values
per share, supported the determination of the financial fairness of the
payment of cash in the amount of $1.50 per share of Old Common Stock in lieu
of the issuance of fractional shares of New Common Stock to unaffiliated
stockholders who do not hold a whole number of shares of New Common Stock
after the Reverse Stock Split. The financial and procedural fairness
determinations of the Board of Directors, the Special Committee and the Major
Stockholders were not affected by the fact that the exercise price of the New
Warrants remained at $1.75 per share.
In making their procedural fairness determinations, the Board of
Directors, the Special Committee and the Major Stockholders believed that
structuring the Reverse Stock Split to allow the stockholders of less than 500
shares of Old Common Stock wishing to remain as stockholders of the Company to
remain as stockholders of the Company by purchasing additional shares of Common
Stock for a relatively small
28
<PAGE>
investment supported their determination of the procedural fairness of the
Reverse Stock Split. The fact that the Reverse Stock Split is not structured so
that approval of at least a majority of unaffiliated holders of common stock did
not affect their procedural fairness determinations because the Board of
Directors, the Special Committee and the Major Stockholders believed that
structuring the Reverse Stock Split to allow the stockholders of less than 500
shares of Old Common Stock wishing to remain as stockholders of the Company to
remain as stockholders of the Company by purchasing additional shares of Common
Stock for a relatively small investment was a procedurally fair alternative. The
Reverse Stock Split is not structured so that approval of at least a majority of
unaffiliated stockholders is required. The fact that the Major Stockholders
would retain their interests in the Company did not affect the financial or
procedural fairness determinations of the Board of Directors, the Special
Committee or the Major Stockholders.
In making their procedural and financial fairness determinations, the
Board of Directors, the Special Committee and the Board of Directors considered
their familiarity with the process and the issues involved in establishing (i)
the conversion prices per share of common stock issuable upon conversion of the
Notes issued to the Major Stockholders in 1992 and 1993, (ii) the exercise price
of the Prior Warrants issued to the Major Stockholders in November, 1995 in
connection with the provision of a $4,000,000 line of credit and (iii) the
exercise price of the New Warrants issued to the Major Stockholders in May,
1996, all at conversion or exercise prices at or above the then current market
prices of the Company's common stock. In connection with establishing the
conversion price of the Notes and the exercise price of the Prior Warrants, the
Special Committee retained independent counsel to advise it with respect to
legal and fiduciary issues. In addition, the Special Committee retained the
Advisor to advise it with respect to the exercise price of the Prior Warrants
and the New Warrants. This familiarity with similar pricing events made the
Special Committee, the Board of Directors and the Major Stockholders feel
comfortable in making their procedural and financial fairness determinations
without the additional expenses to the Company of (i) hiring independent counsel
to the Special Committee and an unaffiliated representative to represent the
interests of the unaffiliated stockholders and (ii) retaining the Advisor to
render a formal fairness opinion.
The Board of Directors, the Special Committee and the Major
Stockholders considered the following information regarding the current and
historical market prices for the common stock, net book value per share, going
concern value and liquidation value in making their financial fairness
determinations:
Current and Historical Market Prices for the Common Stock. The Company's common
- ---------------------------------------------------------
stock is not currently listed on any stock exchange or quoted in the National
Association of Securities Dealers Automated Quotation (NASDAQ) system and is
traded on the over-the-counter market. The Company has never paid any dividends
on its common stock and is precluded from doing so until it has repaid all of
its indebtedness to the Major Stockholders under the May Purchase Agreement, the
November Purchase Agreement and the Notes. The following table sets forth
information about the range of prices of the Company's common stock on the
NASDAQ National Market System, the NASDAQ Small Cap Market and the over-the-
counter market for the last two calendar years through August 16, 1996 for the
quarters ended March 31, June 30, September 30 and December 31:
29
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1996
Common Stock price range:
High $ 3 1/4 $ 2 1/4 $ 1 1/2
Low $ 1 1/2 $ 1 1/2 $ 1
1995
Common Stock price range:
High $ 3 1/8 $ 3 1/2 $ 3 1/2 $ 3 1/4
Low $ 2 1/4 $ 2 1/2 $ 2 1/2 $ 1 31/32
1994
Common Stock price range:
High $ 3 1/2 $ 3 1/4 $ 2 3/4 $ 4 1/4
Low $ 1 11/16 $ 2 1/2 $ 2 1/2 $ 2 1/4
</TABLE>
Net Book Value. As of June 30, 1996, the Company had a negative net value
- --------------
book per share of common stock was approximately $(2.11). The audit report
of the Company's independent public accountants, KPMG Peat Marwick LLP, with
respect to the Company's financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 1995 contained an unqualified opinion
with an explanatory paragraph addressing the uncertainty about the Company's
ability to
30
<PAGE>
continue as a going concern for a reasonable period of time. The Company's
financial statements have been prepared on the assumption that the Company will
continue as a going concern; that it will realize its assets and liquidate its
liabilities in the normal course of business. In fiscal 1995 and through June
30, 1996, the Company suffered losses of $11,739,000 and $3,307,000,
respectively, and expects to require additional cash to fund its operations, the
Company's independent public accountants have stated that there is substantial
doubt as to the Company's ability to continue as a going concern.
Given this substantial doubt and the negative book value of the
Company, the Board of Directors, the Special Committee and the Major
Stockholders do not believe that book value, which is computed on the assumption
that the Company will continue as a going concern, provides a reliable measure
of the fair value of the common stock. Accordingly, the Board of Directors, the
Special Committee and the Major Stockholders did not assign any material weight
to this factor in determining the financial fairness of the Reverse Stock Split.
Going-Concern Value. The Board of Directors, the Special Committee and the Major
- -------------------
Stockholders do not believe that going concern value provides a reliable measure
of the fair value of the common stock. The Board of Directors, the Special
Committee and the Major Stockholders believe that it is impossible to quantify
a "going concern value" under circumstances where negative net worth and limited
cash availability raise questions as to the Company's ability to continue as a
"going concern". The Board of Directors, the Special Committee and the Major
Stockholders believe that if such a value could be determined, it would be
substantially less than $1.50 per share. Accordingly, the Board of Directors,
the Special Committee and the Major Stockholders did not assign any material
weight to this factor in determining the financial fairness of the Reverse Stock
Split.
Liquidation Value. The Company has no current plans to effect any liquidation
- -----------------
of the Company or its assets other than (i) the possible sale of the Company's
French real estate and (ii) the possible sale or disposition of DIFA. See
"Special Factors--Conduct of the Company's Business after the Reverse Stock
Split--Possible Extraordinary Transactions." The Company's primary asset
consists of the business of Cabot. The Board of Directors, the Special Committee
and the Major Stockholders believe that it is impossible to quantify the
liquidation value of the Company since the expenses of continuing the Company
during its liquidation would significantly diminish the amounts that would be
realized through liquidation. Nonetheless, on the assumption that the remaining
assets are sold at a valuation equal to one times sales (Cabot's cosmetics
business was recently sold for approximately .5 times annual sales plus related
inventory), the Company would realize gross proceeds of approximately
$17,500,000 less approximately $7,500,000 of negative net worth. The repayment
to the Major Stockholders of $8,948,098 of indebtedness would leave an estimated
liquidation value of approximately $1,000,000 or approximately $0.27 per share.
The Board of Directors, the Special Committee and the Major Stockholders believe
that the Company would not be able to realize the full value of all of its
assets through liquidation, because it is unlikely
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<PAGE>
that any buyer would purchase Cabot except at a substantial discount, and that
to realize the full value of Cabot it would be necessary to continue to grow the
business. In Mr. Montgomery's experience, buyers approaching companies in
Cabot's financial condition expect, and generally receive, prices significantly
under what they would receive with a strong balance sheet and income statement.
Cabot's cosmetics business is a good example of this tendency; with
approximately $3,750,000 of annual sales, the Company received $2,500,000 for
the business and related inventory. Accordingly, the Board of Directors, the
Special Committee and the Major Stockholders did not assign any material weight
to this factor in determining the financial fairness of the Reverse Stock Split.
ASSISTANCE OF VAN KASPER & COMPANY.
The Company did not receive any written report, opinion, or appraisal
from any outside party that is materially related to the Reverse Stock Split.
The Special Committee retained the Advisor to analyze the effect of the May
Purchase Agreement on the Company, the Company's unaffiliated stockholders and
the Major Stockholders and provide an analysis with respect to the determination
of the exercise price of the New Warrants. The Advisor is a full service West
Coast regional investment banking firm, which provides a full range of
investment banking services, including public and private financings and other
corporate financial services, which include merger and acquisition advisory
services and fairness opinions. The Advisor's research department covers a
variety of industries, including health care. The Advisor has experience in
providing financial structuring analysis and advice on corporate transactions of
this nature. The Advisor had previously provided analysis to the Special
Committee with respect to other transactions between the Company and the Major
Stockholders and was selected on the basis of its familiarity with, and
knowledge of, the Company and its businesses. The Advisor will be paid a fee of
$10,000 in connection with its analysis of the May Purchase Agreement. The
amount of such fee was determined by the Advisor. In connection with its prior
engagements with the Company in the past two years, the Advisor received
$10,000.
In telephone conversations with the Special Committee on May 21 and
22, 1996 and at the meetings of the Special Committee and the Board of Directors
on May 24, 1996, the Advisor discussed certain aspects of a reverse stock split
transaction; namely: (i) the Advisor's analysis and review of the recent trading
history of the Company's common stock, (ii) other reverse stock split
transactions, prevailing prices and prices paid for fractional shares in such
transactions, (iii) alternatives to the one-for-500 reverse stock split, (iv)
brokerage transaction costs and (v) the relatively minor incremental investment
needed by stockholders of the Company who wish to remain as stockholders of the
Company to purchase additional shares of Old Common Stock so that they can own
at least 500 shares of Old Common Stock prior to the Reverse Stock Split. The
Advisor was not asked to render and did not render a verbal or written report or
opinion as to the fairness of the Reverse Stock Split from a financial point of
view
32
<PAGE>
to the stockholders of the Company and did not provide the Board of Directors or
the Special Committee with any formal oral or written presentation with respect
to the Reverse Stock Split. The Advisor did not present the Board of Directors
or the Special Committee with specific information with respect to companies
involved in other reverse stock split transactions or the premiums, if any, paid
in such transactions. The Company received no report, opinion or appraisal from
the Advisor with respect to the Reverse Stock Split and none is available for
inspection by the Company's stockholders or their representatives.
In preparing its analysis for the May Purchase Agreement, the Advisor
assumed that the Company would liquidate all of its assets which are not related
to its Cabot and skin care business and that the resultant business would attain
an estimated gross fair value of $25,000,000 in three years. The Advisor did
not disclose the basis of such assumptions but the Company believes that the
Advisor assumed that the Company would work to maximize its future value by
focusing on its core Cabot business and by liquidating unrelated assets to build
such business. The Advisor believed that the discounted present value of such a
valuation and the uncertainties inherent in the Company's ability to develop its
Cabot skin care business, supported the $1.75 exercise price of the New
Warrants. The Advisor noted that the $1.75 payment for fractional shares matched
this negotiated warrant price and also represented a 17% premium over the then
prevailing closing prices for the common stock since February 1996.
Additionally, the Advisor determined that the transactional costs associated
with selling less than 500 shares of the common stock through a typical
brokerage transaction would be significant as measured against the net proceeds,
while the Reverse Stock Split would provide holders of less than 500 shares of
common stock with a sale free of transaction costs. The Board of Directors and
the Special Committee had considered $1.75 as the payment for fractional shares
and the exercise price for the New Warrants and finally determined such price
after receiving the Advisor's analysis for the May Purchase Agreement. The
Special Committee determined the exercise price for the New Warrants which price
was approved by the Board of Directors at the May 24, 1996 meeting.
In early August 1996, after continued losses from operations and
worsening cash flow and a decline in the prevailing market price for the
Company's common stock on the over the counter market, Mr. Montgomery telephoned
the representative of the Advisor to share views on pricing particularly as it
related to fairness to unaffiliated stockholders who would remain stockholders
of the Company after the Reverse Stock Split. The representative of the Advisor
acknowledged the changed circumstances reflected in the then current bid and ask
prices of $1.00 and $1.50 per share, respectively, of the Company's Common Stock
in the over the counter market and suggested that the cash payment per share of
Old Common Stock in lieu of the issuance of fractional shares of New Common
Stock to persons who would hold fractional shares of New Common Stock after the
Reverse Stock Split could be reduced to $1.50 per share thus approximating the
average price at which trades in the Company's shares had taken place during
1996. Mr. Montgomery then asked the chairman of the Special Committee, Mr.
Gilleran, to discuss pricing with the Advisor. Mr. Gilleran had a telephone
conversation with the representative of the Advisor and recommended to the Board
of Directors, on behalf of the Special Committee that the cash payment per
share of Old Common Stock in lieu of the issuance of fractional shares of New
Common Stock to persons who would hold
33
<PAGE>
fractional shares of New Common Stock after the Reverse Stock Split be reduced
to $1.50 per share.
At its August 15, 1996 meeting, the Board of Directors reconsidered
the amount of the cash payment per share of Old Common Stock in lieu of the
issuance of fractional shares of New Common Stock to persons who would hold
fractional shares of New Common Stock after the Reverse Stock Split in light of
continued losses from operations and declines in the prevailing market prices of
the Company's common Stock in the over the counter market. A representative of
the Advisor was available to answer questions with respect to the amount of the
cash payment per share of Old Common Stock in lieu of the issuance of fractional
shares of New Common Stock to persons who would hold fractional shares of New
Common Stock after the Reverse Stock Split and recent and historical trading
data about the Company's common stock. The Advisor noted that during 1996
through August 14, the weighted average (weighted by weekly trading volume) of
the weekly closing prices for the Company's common stock was $1.52. The payment
for fractional shares approximates this weighted average and represented a
significant 50% premium over the prevailing closing prices for the Common Stock
since mid-July 1996. Additionally, the Advisor determined that the transactional
costs associated with selling less than 500 shares of the Common Stock through a
typical brokerage transaction would be significant as measured against the net
proceeds, while the Reverse Stock Split would provide holders of less than 500
shares of Common Stock with a sale free of transaction costs.
The Special Committee did not consider it necessary to retain an
unaffiliated representative to act solely on behalf of the unaffiliated
stockholders of the Company for the purposes of negotiating the terms of the
Reverse Stock Split or to retain the Advisor to render a report or opinion
concerning the fairness of the Reverse Stock Split. The primary factors
considered by the Special Committee in determining not to retain the services of
such an unaffiliated representative or the Advisor to render a report or opinion
were (i) its belief that the cost of such services would be excessive relative
to the size of the transaction and the potential benefits to the Company and its
stockholders and was not justified in light of its discussions with the Advisor
and (ii) its experience with prior transactions involving a valuation of the
Company's securities. Although the Special Committee retained independent
counsel to advise it with respect to determining (i) the conversion prices per
share of common stock issuable upon conversion of convertible notes issued to
the Major Stockholders in 1992 and 1993 and (ii) the exercise price of the Prior
Warrants issued to the Major Stockholders pursuant to the November Purchase
Agreement, all at conversion or exercise prices at or above the then current
prevailing market prices of the Company's common stock, the Special Committee
believed that its familiarity with the legal and other considerations in
determining the conversion price in these prior transactions coupled with the
expense of hiring special counsel did not warrant the hiring of special counsel
to advise it with respect to the Reverse Stock Split.
ABSENCE OF FIRM OFFERS FOR ALTERNATIVE TRANSACTIONS.
Since January 1, 1994, the Company has not received any firm offers
made by any unaffiliated persons for the merger or consolidation of the Company
with or into such person or of such person with the Company or for the sale or
other transfer of all or any substantial portion of the Company's assets.
Each of the Major Stockholders has held approximately 30% of the
Company's outstanding common stock since 1993, giving them the ability to
exercise voting control of the Company. In addition, each of the Major
Stockholders has held $1,474,049 principal amount of Notes convertible into
728,370 shares of common stock since 1993. The Company entered into the November
Purchase
<PAGE>
Agreement and the May Purchase Agreement with the Major Stockholders pursuant to
which the Company received lines of credit of $4,000,000 and $2,000,000. In
consideration for the provision of each of the lines of credit and for advances
made by the Major Stockholders under such lines of credit, the Company has
issued warrants to purchase 1,571,714 shares of common stock to each of the
Major Stockholders. Amounts drawn down under the November Purchase Agreement
and May Purchase Agreement are due on December 31, 2000 and bear interest at the
rate of 12% per annum. The Company entered into the November Purchase Agreement
and May Purchase Agreement to acquire capital to repay existing accounts payable
and for working capital purposes.
If the Major Stockholders agree to lend, and the Company borrows, the
additional $1,000,000 authorized for borrowing from the Major Stockholders on
the same terms as the May Purchase Agreement, the Company would issue additional
warrants to purchase 285,857 shares of common stock to each of the Major
Stockholders. The outstanding principal of the Notes held by the Major
Stockholders is convertible into shares of the Company's common stock at $2.00
and $2 1/16 per share. The Prior Warrants and the New Warrants are exercisable
at $1.75 per share. If the Major Stockholders were to convert such Notes and
exercise the Warrants, each would own more than 41% of the outstanding capital
stock of the Company. Because the Major Stockholders already own a majority of
the Company's outstanding common stock and can already effect the approval of
most corporate transactions under the Delaware General Corporation Law and the
Company's Certificate of Incorporation by written consent, the acquisition of
any of such securities would not enable the Major Stockholders to exercise more
control of the Company than they may currently exercise.
The Company is aware that during the spring of 1996, the Major
Stockholders discussed the possibility of effecting a merger of the Company with
and into a corporation to be created and controlled by the Major Stockholders as
a possible means of effecting a transaction to become a non-reporting company
and eliminating the costs related to the Company's status as a public reporting
company. Under the scenario discussed by the Major Stockholders, all of the
Company's other stockholders would have received a cash payment in exchange for
their shares of the Company's common stock. Following the March 18, 1996
meeting of the Board of Directors, the Major Stockholders discussed with the
other directors the possibility that they might consider effecting such a
transaction and were encouraged by the other directors to explore this
possibility further. The Major Stockholders retained independent counsel to
assist in such explorations but concluded that such a transaction was too costly
and not the most efficient means of eliminating the costs related to the
Company's status as a public reporting company. The Company did not receive any
firm proposal from the Major Stockholders.
POTENTIAL CONFLICTS OF INTEREST.
This Information Statement and the accompanying materials have been
filed with the SEC by the Company and Theodore H. Kruttschnitt and Parker G.
Montgomery, both of whom are citizens of the United States. During the past
five years, neither Mr. Kruttschnitt nor Mr. Montgomery was convicted in a
criminal proceeding or was or is
35
<PAGE>
subject to a judgment, decree or final order enjoining further violations of, or
prohibiting activities subject to, federal or state securities laws or finding
any violation of such laws.
Mr. Kruttschnitt founded California Innkeepers (an owner/operator of
hotels) in 1970 and serves as its Chairman of the Board. He also serves as a
director of Hanover Direct, Inc. (a merchandiser of specialty products through
catalog sales) and various private companies. Mr. Kruttschnitt has a business
address at 1350 Bayshore Highway, Burlingame, California 94010.
Mr. Montgomery has been Chairman of the Board and President of the
Company since 1988. Mr. Montgomery has a business address at 16160 Caputo
Drive, Morgan Hill, California 95037.
The directors of the Company are Parker G. Montgomery, the Company's
President and Chairman of the Board of Directors, Theodore H. Kruttschnitt,
James Gilleran and Jackson Schultz. The Reverse Stock Split has been approved by
all of the non-employee directors. None of the Directors has made an individual
recommendation with respect to the Reverse Stock Split. Each of the Major
Stockholders owns or controls approximately 30% of the outstanding shares of
common stock, giving them effective voting control of the Company. Each
Director, including the Major Stockholders, has advised the Company that he
intends to retain all such whole shares of New Common Stock after the Reverse
Stock Split. In addition each of the Major Stockholders has the right to acquire
an additional 2,300,084 shares of the Company's common stock upon the conversion
of the Notes and upon the exercise of the Warrants. If they were to convert the
Notes and exercise the Warrants, Mr. Kruttschnitt and Mr. Montgomery would then
own 3,389,233 shares (41.18%) and 3,389,232 shares (41.18%), respectively, of
the Company's outstanding common stock. Based on the assumption that the Company
will make cash payments with respect to 257,142 shares of Old Common Stock in
connection with the Reverse Stock Split, the percentage ownership interest in
the issued and outstanding shares of New Common Stock of each of the Major
Stockholders will increase by approximately 8% from 30% to 32.3%. On a fully
diluted basis, the percentage ownership interest in New Common Stock of each of
the Major Stockholders would increase by approximately 3% from 41.18% to 42.51%.
If the Major Stockholders were to agree to lend, and the the Company were to
borrow, the additional $1,000,000 authorized for borrowing from the Major
Stockholders on the same terms as under the May Purchase Agreement and, after
the foregoing conversions and exercises, the Major Stockholders were to exercise
the resulting additional warrants, Mr. Kruttschnitt and Mr. Montgomery would
then own 3,675,090 shares (41.76%) and 3,675,089 shares (41.76%), respectively,
of the Company's outstanding common stock. After the Reverse Stock Split the
conversion and exercise ratios of the Notes and Warrants, respectively, will be
appropriately adjusted to reflect the Reverse Stock Split.
The Major Stockholders have loaned the Company an aggregate of
$8,948,098 pursuant to the May Purchase Agreement, the November Purchase
Agreement and the Notes, which indebtedness is secured by a pledge of all of the
issued and outstanding capital stock of Cabot.
As discussed above, the Major Stockholders considered the possibility
of effecting a
36
<PAGE>
merger of the Company with and into a corporation to be created and controlled
by the Major Stockholders as a possible means of effecting a transaction to
become a non-reporting company and eliminating the costs related to the
Company's status as a public reporting company. Under the scenario discussed by
the Major Stockholders, all of the Company's other stockholders would have
received a cash payment in exchange for their shares of the Company's common
stock. While the Major Stockholders have indicated that they are no longer
contemplating such a transaction, the Major Stockholders have voting control of
the Company and, therefore, could effect such a transaction in the future. If
the Major Stockholders were to effect such a merger transaction, dissenting
stockholders would have dissenter's rights under the current Delaware General
Corporation Law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE COMPANY HAS NOT SOUGHT, AND DOES NOT INTEND TO SEEK A RULING FROM
THE INTERNAL REVENUE SERVICE OR AN OPINION OF COUNSEL AS TO ANY TAX CONSEQUENCES
OF THE REVERSE STOCK SPLIT. THE FOLLOWING DISCUSSION SUMMARIZES CERTAIN FEDERAL
INCOME TAX CONSEQUENCES THAT THE COMPANY BELIEVES WOULD RESULT TO STOCKHOLDERS
WHO ARE RESIDENTS OF THE UNITED STATES AS A CONSEQUENCE OF THE REVERSE STOCK
SPLIT. THIS DISCUSSION IS BASED ON CURRENT LAW AS OF THE DATE OF THIS
INFORMATION STATEMENT AND DOES NOT TAKE INTO ACCOUNT ANY SPECIAL RULES THAT MAY
AFFECT THE TREATMENT OF PARTICULAR STOCKHOLDERS, SUCH AS DEALERS IN SECURITIES,
TAX-EXEMPT ENTITIES, NON-RESIDENT ALIENS OR FOREIGN CORPORATIONS. THIS
DISCUSSION IS INCLUDED WITHOUT REFERENCE TO THE PARTICULAR FACTS AND
CIRCUMSTANCES OF ANY SPECIFIC STOCKHOLDER. EACH STOCKHOLDER SHOULD CONSULT HIS
OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES IN HIS OWN
CIRCUMSTANCES, AND WITH RESPECT TO THE EFFECTS OF APPLICABLE STATE, LOCAL AND
FOREIGN TAX LAWS AS TO WHICH NO INFORMATION IS PROVIDED HERE.
TAX CONSEQUENCES TO THE COMPANY.
The Reverse Stock Split qualifies for federal income tax purposes as a
tax-free reorganization of the Company pursuant to Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code") and the Company will not
experience any material tax consequences as a result of the Reverse Stock Split.
TAX CONSEQUENCES TO STOCKHOLDERS.
The following discussion assumes each stockholder holds his shares of
Old Common Stock as a capital asset.
Exchange of Old Common Stock for New Common Stock. A stockholder who exchanges
- -------------------------------------------------
all of his Old Common Stock solely for New Common Stock will not recognize any
gain or loss on the exchange. The aggregate tax basis of the New Common Stock
received
37
<PAGE>
will be equal to the aggregate tax basis of the Old Common Stock exchanged, and
the holding period of the New Common Stock received will include the holding
period of the Old Common Stock exchanged.
Exchange of Old Common Stock for Cash. A stockholder who exchanges all of his
- -------------------------------------
Old Common Stock (or shares of Old Common Stock exchanged in lieu of fractional
shares of New Common Stock as a result of the Reverse Stock Split) for cash
will, assuming he is not treated as owning any other New Common Stock
immediately after the Reverse Stock Split, recognize capital gain or loss equal
to the difference between the basis of the Old Common Stock surrendered and the
cash received. Such capital gain or loss will be long-term capital gain or loss
if the stockholder's holding period for his Old Common Stock exceeds one year,
and otherwise will be short-term capital gain or loss.
Backup Withholding. Each stockholder who receives cash in lieu of fractional
- ------------------
shares of New Common Stock will be required to provide the Company with a
correct Taxpayer Identification Number on the Form W-9 or substitute Form W-9
included with the Letter of Transmittal and to certify that he is not subject to
backup withholding. FAILURE TO PROVIDE THE INFORMATION AND CERTIFICATION ON THE
FORM W-9 (OR SUBSTITUTE FORM W-9) MAY SUBJECT THE STOCKHOLDER TO 31% FEDERAL
INCOME TAX BACKUP WITHHOLDING WITH RESPECT TO ANY CASH PAYMENT FOR THE
STOCKHOLDER'S SHARES OF NEW COMMON STOCK.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of shares of Old Common Stock as of June 30, 1996 by (i)
each person or group who is known by the Company to own beneficially more than
5% of the issued and outstanding shares of common stock as of that date, (ii)
each director and each executive officer of the Company, and (iii) all directors
and executive officers of the Company, as a group. Except as otherwise
indicated below, to the best of the Company's knowledge each person listed below
has sole voting and investment power with respect to his shares of common stock,
except to the extent that such power may be with his or her spouse under
applicable law.
<TABLE>
Shares Beneficially Owned
-------------------------
Name Number Percent of Class
- ----------------------------------- --------- -------------------------
<S> <C> <C>
Theodore H. Kruttschnitt 3,389,233 41.18%/1/
1350 Bayshore Highway, Suite 850
Burlingame, California 94010
Parker G. Montgomery 3,389,232 41.18%/(1)/
16160 Caputo Drive
</TABLE>
_______________________
/1/Includes 728,370 shares of the Company's common stock issuable upon the
conversion of an aggregate of $1,474,049 principal amount of Notes, 1,000,000
shares of common stock issuable upon the exercise of the Prior Warrants and
571,714 shares of common stock issuable upon exercise of the New Warrants.
38
<PAGE>
<TABLE>
<S> <C> <C>
Morgan Hill, California 95037
Michael J. Braden - 0 - - 0 -
16160 Caputo Drive
Morgan Hill, California 95037
James E. Gilleran 5,000/1/ /(2)/
16160 Caputo Drive
Morgan Hill, California 95037
Jackson L. Schultz 5,000 /(2)/
16160 Caputo Drive
Morgan Hill, California 95037
--------- --------
All directors and executive 6,788,405 82.4%/3/
officers, as a group (5 persons)
========= ========
</TABLE>
FINANCIAL INFORMATION
The financial information required herein is hereby incorporated by reference
from the Company's Annual Report on Form 10-K for the year ended December 31,
1995, and its Quarterly Reports on Form 10-Q for the quarters ended March 31 and
June 30, 1996, copies of which are enclosed herewith.
OTHER INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to the Exchange Act, the Company files with the SEC periodic reports
and other documents relating to its business, financial condition, and other
matters. In connection with the Reverse Stock Split, the Company has filed with
the SEC a Rule 13e-3 Transaction Statement on Schedule 13e-3. The Schedule 13e-
3, including exhibits, and other filings made by the Company as described above,
may be inspected without charge, and copies may be obtained at prescribed rates
at the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Schedule 13e-3 is
also available for inspection and copying during normal business hours at the
principal executive offices of the Company at 16160 Caputo Drive, Morgan Hill,
California 95037.
______________________
/2/ Less than 1%.
/3/ Includes 1,456,740 shares of the Company's common stock issuable upon
the conversion of an aggregate of $2,948,098 principal amount of Notes,
2,000,000 shares of common stock issuable upon the exercise of the Prior
Warrants and 1,143,428 shares of common stock issuable upon exercise of the New
Warrants.
39
