<PAGE>
SCHEDULE 14C/A2
(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. 3 )
[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
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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:
January 8, 1997.
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 19)
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 42)
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 44)
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 19)
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>
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 January __, 1997, 1996 to stockholders of record as
of January __, 1997. 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 February __, 1997 (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 $170,000. 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 13
Conduct of the Company's Business
after the Reverse Stock Split 16
Further Stockholder Approval Not Required 19
Lack of Appraisal Rights 19
Postponement or Abandonment 19
Effective Time 20
Exchange of Stock Certificates;
Cash Payments in Lieu of Fractional Shares 20
Financing of the Reverse Stock Split 21
Fairness of the Reverse Stock Split 22
Certain Federal Income Tax Consequences 40
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
FINANCIAL INFORMATION 42
OTHER INFORMATION;
DOCUMENTS INCORPORATED BY REFERENCE 45
</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 subsidiary, Difa Cooper, S.p.A.
("DIFA"), an Italian corporation, manufactures and sells an antiviral product
under an exclusive worldwide license in Italy and to distributors outside the
United States under various trademarks. DIFA manufactures and sells 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 September 30,
1996, the Company incurred over $11,739,000 and $5,892,000, 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.
The Company has discussed possible transactions with third parties, and has
received two firm offers with respect to two lots and expects to close the sale
of such
3
<PAGE>
lots by December 31, 1996 for aggregate consideration of approximately $250,000.
See "Special Factors - The Company - Possible Dispositions of the Company's
Assets and/or Businesses".
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. The
Company's stockholders receive the benefit of timely public disclosure of events
and periodic reports as a result of the Company's registration of its Common
Stock under the Exchange Act but the Company intends to continue to provide its
stockholders with at least unaudited annual financial statements 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 at least annual unaudited financial statements 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.
4
<PAGE>
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 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 January __, 1997. 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.
5
<PAGE>
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 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 $170,000 in connection with the Reverse Stock Split. In addition,
the Company estimates that equity will be reduced by aggregate cash payments in
lieu of fractional shares of New Common Stock of approximately $385,000. In the
event that all stockholders other than the Major Stockholder and the members of
the Special Committee decreased their holdings of Old Common Stock prior to the
Reverse Stock Split to holdings of less than 500 shares of old Common Stock, the
Company is not certain whether it would have sufficient cash to finance the
Reverse Stock Split. The Company expects to finance such costs from $500,000
anticipated to be received from its insurers in connection with the settlement
of litigation to obtain reimbursement for environmental cleanup expenses in
connection with property once owned by one of the Company's former subsidiaries.
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
6
<PAGE>
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. After the Reverse Stock Split, the outstanding principal of the
Notes would be convertible into an aggregate of 2,913 shares of new Common Stock
at $1,000 or $1,031.25 per share. After the Reverse Stock Split, the Warrants
would be exercisable into an aggregate of 6,286 shares of New Common Stock.
The Special Committee retained an investment bank, Van Kasper & Company (the
"Advisor"), to analyze 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".
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.
7
<PAGE>
and briefly considered pursuing such an acquisition.
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.
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. 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.
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 of $2,585,000 in the Company's second fiscal quarter of
1996 and a decline in the prevailing market price of the Company's common stock
in the over the
8
<PAGE>
counter market to $1.00 per share. 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.
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 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. 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
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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.
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
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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 in Italy and 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 manufactures and sells 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 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
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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 September 30,
1996, the Company has incurred over $11,739,000 and $5,892,000, 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 of 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"
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 approximately $250,000, in net proceeds
from the sale of these lots. While the Company expects to close such sales
by December 31, 1996, 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.
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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, June 30 and September 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.
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 and the
Company's Common Stock has already been delisted from the NASDAQ National Market
System and the NASDAQ Small Cap Market. The Company's stockholders currently
receive the benefit of timely public disclosure of events and periodic reports
as a result of the Company's registration of its Common Stock under the Exchange
Act but the Company intends to provide stockholders with at least unaudited
annual financial statements. The Company incurs significant direct and
indirect
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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
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
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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
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
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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".
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, unaffiliated 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. Unaffiliated 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
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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 at least annual unaudited financial statements. Based on
an analysis of its stockholder records, the Company estimates that it had
approximately 7,500 stockholders each holding less than 500 shares of Common
Stock and holding an aggregate of approximately 257,142 shares on June 13, 1996.
Based on the assumption that the Company will make cash payments with respect to
approximately 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 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 ($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 ($942,000) to
approximately ($1,070,000) and by approximately 8%, respectively. In the event
that no stockholder other than the Major Stockholders and the members of the
Special Committee held at least 500 shares of Old Common Stock on the Effective
Date and the Company had sufficient cash to consummate the Reverse Stock Split,
each of the Major Stockholders would hold approximately a 49.9% ownership
interest in the Company. 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
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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 at least unaudited annual financial statements.
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 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
$555,000 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,
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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.
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
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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 February __, 1997,
the Effective Date.
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.
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FINANCING OF THE REVERSE STOCK SPLIT
The Company estimates that it will incur transactional expenses of
approximately $170,000 in connection with the Reverse Stock Split (consisting
primarily of legal and accounting fees of approximately $70,000, 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 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. In the event that all stockholders other
than the Major Stockholder and the members of the Special Committee decreased
their holdings of Old Common Stock to holdings of less than 500 shares of Old
Common Stock prior to the Reverse Stock Split, the Company is not certain
whether it would have sufficient cash to finance the Reverse Stock Split.
The Company intends to finance such costs from the $500,000 anticipated to be
received from its insurers in connection with the settlement of litigation to
obtain reimbursement for environmental cleanup expenses in connection with
property once owned by one of the Company's former subsidiaries. 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 continuing
Stockholders due to an adverse change in the Company's financial condition, or
if the Company would not have sufficient cash to consummate the Reverse Stock
Split.
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
21
<PAGE>
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.
FAIRNESS OF THE REVERSE STOCK SPLIT
BACKGROUND
The Company's Board of Directors has had a standing Special Committee
comprised of non-employee directors who are not significant stockholders since
August 12, 1987. Messrs. Gilleran and Schultz have been members of the Special
Committee since December 14, 1988. The purpose of the Special Committee is to
evaluate the fairness of various transactions to the Company and its
stockholders, particularly those transactions involving employees or significant
stockholders.
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
22
<PAGE>
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. Counsel retained by the Major Stockholders did not
participate in any negotiations with the Board of Directors or the Special
Committee in connection with the Reverse Stock Split.
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 Special Committee's May
21, 1996 telephone conversation with the Advisor. On behalf of the Major
Stockholders, Mr. Montgomery made the proposal to effect a 1 for 500 reverse
stock split and pay $1.75 per share in lieu of fractional shares to the Board of
Directors and the Special Committee on May 24, 1996. 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. At their meetings on
May 24, 1996, The Special Committee and the Board of Directors discussed how the
Reverse Stock Split would serve the Company's objectives of reducing costs, the
fairness of the Reverse Stock Split to the Company and its unaffiliated
stockholders and the price to be paid for fractional shares.
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.
While the Advisor was not retained by the Special Committee to assist it in
connection with the Reverse Stock Split, the Advisor did discuss aspects of the
Reverse Stock Split with members of the Board of Directors and the Special
Committee. The Advisor discussed the terms of the May Purchase Agreement with
the Special Committee and also discussed the possibility that the Company would
effect a reverse stock split to terminate the registration of its Common Stock
under the Exchange Act in telephone calls on May 21 and May 22, 1996. The
Special Committee in its telephone conversations with the Advisor on May 21 and
May 22, 1996 discussed a reverse stock split transaction because of the
Advisor's familiarity with similar, capital market transactions and with the
Company. The Board of Directors discussed the Reverse Stock Split with
23
<PAGE>
The Advisor at its meeting on May 24, 1996 because of the Advisor's familiarity
with similar capital market transactions and its knowledge of the Company. 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, the terms of which were determined by the Special Committee
with the assistance of the Advisor with respect to the exercise price of the New
Warrants. 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 supported the Special Committee's recommendation of $1.75 for the
exercise price of the New Warrants and was asked to give its reaction to using a
similar amount as the amount of the cash payment per share in the Reverse Stock
Split. The Advisor indicated that the Board of Directors should be comfortable
with using $1.75 as the exercise price of the New Warrants and as the price to
be paid for fractional shares 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 their May 24, 1996 separate 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.
The Board of Directors believed that setting the price for the cash payment for
fractional shares at the same price as the execise price of the New Warrants
would provide a modest premium over the prevailing market price, since the
exercise price of the New Warrants was set above the prevailing market
price.
In early August 1996, after losses of $2,585,000 in the second fiscal quarter
of 1996 from operations, continued negative cash flow and a decline in the
prevailing market price for the Company's common stock on the over the counter
market to $1.00 per share, Mr. Montgomery telephoned the representative of the
Advisor to discuss 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 since January 1, 1996. No Directors of the Company were parties
to any such trades. Mr. Montgomery
24
<PAGE>
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 regarding pricing relating to fairness to
unaffiliated stockholders and, after a telephone consultation with Mr. Schultz
on the same subject, 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 losses from
operations of $2,585,000 in the Company's second fiscal quarter of 1996 and
decline in the prevailing market price of the Company's common stock in the over
the counter market to $1.00 per share. 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 Board of Directors and Special
Committee concluded that such payment would be fairer to the unaffiliated
stockholders of the Company who would remain as stockholders in light of the
current financial condition of the Company and the prevailing market price for
the Company's common stock. The Board of Directors, the Special Committee and
the Major Stockholders made such fairness determination on August 15, 1996. 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, 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, the Board of Directors and the
Major Stockholders did not confirm their
25
<PAGE>
fairness determinations with respect to the Reverse Stock split after the sale
of Cabot's Clear Perfection product line because the $2,500,000 selling price
was not significantly below the valuation of the minimum price range expected
for the sale of this product line.
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. 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,
26
<PAGE>
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 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:
27
<PAGE>
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; See "Special Factors
- -Assistance of Van Kasper & Company.
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
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, 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 additional
conversations with the Advisor were given greater weight than net book value per
share, going concern value, liquidation value and the analysis of the Advisor
for the May Purchase Agreement. The 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 ultimate 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
28
<PAGE>
great disparity between a valuation based on prevailing market price of $1.50
per share ($1.52 per share average since January 1, 1996) or the discounted
future value valuation presented by the Advisor and net book (($2.11) per
share), liquidation value (estimated at $0.27 per share) or going concern value
(estimated at significantly less than $1.50 per share) 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. In making their
financial fairness determinations, the Board of Directors, the Special Committee
and the Major Stockholders believed that the current prevailing market price of
$1.00 per share supported their fairness determination. 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. Although the
payment by the Company of $1.75 per share for fractional shares would be unfair
to the unaffiliated stockholders who remain as stockholders of the Company after
the Reverse Stock Split, the receipt by the Company of $1.75 per share as the
exercise price of the warrants would be fair to all such stockholders and,
furthermore, the May Purchase Agreement was a completed transaction.
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 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 the common stock
held by the unaffiliated stockholders is required 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 the common stock held
by the 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 because the Major Stockholders
already have effective voting control of the Company and the percentage
ownership interests, on
29
<PAGE>
a fully diluted basis, of each of the Major Stockholders would only increase by
about 3 percentage points as a result of the Reverse Stock Split.
In making their procedural and financial fairness determinations, the Board
of Directors, the Special Committee and the Major Stockholders 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 December 11, 1996 for the
quarters ended March 31, June 30, September 30 and December 31:
30
<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 $ 2 $ 1 1/4
Low $ 1 1/2 $ 1 1/2 $ 7/8 $ 1
- ----------------------------------------------------------------------------------
1995
Common Stock price range:
High $ 3 1/8 $ 3 1/2 $ 3 1/2 $ 3 5/8
Low $ 2 1/8 $ 2 1/8 $ 2 1/2 $ 1 1/2
- ----------------------------------------------------------------------------------
1994
Common Stock price range:
High $ 3 1/4 $ 3 1/4 $ 4 1/4 $ 4
Low $ 2 1/2 $ 2 1/2 $ 2 1/4 $ 2 1/8
- ----------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Net Book Value. As of June 30, 1996, the Company had a negative net value book
per share of common stock of $(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
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
September 30, 1996, the Company suffered losses of $11,739,000 and $5,892,000,
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
32
<PAGE>
approximately .5 times annual sales plus related inventory), the Company would
realize gross proceeds of approximately $17,500,000. Using approximately
$7,500,000 of such proceeds to discharge liabilities in excess of assets and
repaying $8,948,098 of indebtedness to the Major Stockholders 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 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 received certain net present value analyses from the Advisor in
connection with the May Purchase Agreement. 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 was 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. While the Company did not retain the Advisor in
connection with the Reverse Stock Split, the Advisor did discuss the Reverse
Stock Split with members of the Special Committee and Board of Directors. The
Board of Directors and Special Committee consulted the advisor regarding the
Reverse Stock Split because of its familiarity with the Company, the
negotiations leading to the November Purchase Agreement and the May Purchase
Agreement and with similar capital market transactions.
In preparing its analysis for the May Purchase Agreement, the Advisor
presented the Special Committee with a summary of the trading history of the
Company's common stock since october 1994 and sales prices of the Company's
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<PAGE>
common stock since November, 1995. The Advisor also provided the Special
Committee with two analyses of projected internal rates of return of 30% and
35% over three years based on a warrant exercise price of $1.50, two analyses
showing projected internal rates of return of 28% and 33% over three years
based on a warrant exercise price of $1.75 and one analysis showing a
projected internal rate of return of 25% over a three year period based on a
warrant exercise price of $2.00. The two analyses showing the 33% and 35%
internal rates of return were based on the subjective assumption that Cabot
would attain a $30,000,000 valuation in three years and the three other
analyses were based on the subjective assumption that Cabot would attain a
$25,000,000 valuation in three years. Based on its experience with other high
risk financing transactions, the Advisor believed that a 25%-28% internal rate
of return would be a reasonable rate of return for investors in a transaction
like the one proposed in the May Purchase Agreement. In telephone
conversations with the Special Committee on May 21 and 22, 1996, the Advisor
discussed the possibility that the Company would effect a reverse stock split
to terminate the registration of the Company's common stock under the exchange
act. Finally, the Advisor provided the Special Committee with an analysis of
warrant prices needed to achieve a 25% or 28% internal rate of return based on
Cabot attaining either a $25,000,000 or $30,000,000 valuation in three years
and factoring in the assumption that it would cost either $1,000,000,
$2,000,000, $3,000,000 or $4,000,000 for the Company to "go private". Based on
the subjective assumption that Cabot would attain a $25,000,000 valuation in
three years and that the Company would spend $1,000,000 to "go private", such
analysis showed warrant exercise prices of $1.65 and $1.50 to attain 25% and
28% internal rates of return, respectively. The Advisor indicated to the
Special Committee that it should be comfortable with $1.75 as the exercise
price for the warrants. The foregoing materials were received by the Special
Committee on May 22.
At the meetings of the Special Committee and the Board of Directors on May
24, 1996, the Advisor 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 proposed 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 proposed 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 the Reverse Stock Split from
a financial point of view 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 written report, opinion or appraisal from the Advisor directly
34
<PAGE>
related 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 at the May 24, 1996
meetings of the Special Committee and the Board of Directors, the Advisor
subjectively 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. Although it had prepared analyses also showing cabot attaining a
$30,000,000 valuation in three years, the Advisor believed that attaining a
$25,000,000 valuation was the more likely scenario. The Company, The Special
Committee, the Board of Directors and the Major Stockholders did not request,
nor did they receive, information about how the Advisor formed its subjective
assumptions that the Company would attain an estimated gross fair value of
$25,000,000 in three years and liquidate all of its assets which were not
related to the Company's Cabot and skin care businesses, what was the discounted
present value or how it arrived at such discounted present value. The Advisor
did not disclose the basis of such subjective 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 based on analysis based on a "best case" scenario in
which Cabot would attain a $25,000,000 valuation in three years without
factoring in such risks. The Advisor noted that the $1.75 payment for fractional
shares matched this negotiated warrant price and also represented approximately
a 17% premium over the then prevailing closing price of $1.50 per share for the
common stock since February 1996.
Additionally, at the May 24, 1996 meeting of the Board of Directors, 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 Advisor also noted that the proposed Reverse
Stock Split would allow stockholders holding less than 500 shares of Old Common
Stock to increase their holdings for a relatively modest investment to remain
stockholders of the Company following the Reverse Stock Split whereas
structuring the transaction as a Reverse Stock Split with a higher ratio such as
5,000 to one would make it more expensive for such stockholders to remain as
stockholders of the Company. The Advisor also noted that stockholders in other
Reverse Stock Split transactions often received a premium for fractional shares.
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 suggested and determined the $1.75
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 continuing
negative cash flow and a decline in the prevailing market price to $1.00
per
35
<PAGE>
share 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 of (i) a
reduction in the prevailing market price of the Company's common stock to $1.00
per share and (ii) continued losses from operations of $2,585,000 in the second
fiscal quarter of 1996 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 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 of $2,585,000 in the second fiscal quarter of 1996 and a
decline in the prevailing market price of the Company's common stock in the over
the counter market from $1.50 per share to $1.00 per share. 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 between January 1
and August 14, 1996, the weighted average (weighted by weekly trading volume) of
the weekly closing price for the Company's common stock was $1.52 per share. The
payment for fractional shares approximated this weighted average and represented
a significant 50% premium over the prevailing closing price per share 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. Mr.
Montgomery initially suggested the revised $1.50 per share price for fractional
shares in the Reverse Stock Split.
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
36
<PAGE>
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 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
37
<PAGE>
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 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, Suite 850, 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
38
<PAGE>
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. After the Reverse Stock Split, the outstanding principal of
the notes would be convertible into an aggregate of 2,913 shares oF New Common
Stock at $1,000 or $1,031.25 per share. After the Reverse Stock Split, the
warrants would be exercisable into an aggregate of 6,286 shares of New Common
Stock.
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 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.
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<PAGE>
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 should qualify as a recapitalization and will not be
taxable to the Company under Code section 368(a)(1)(E). Amounts paid by the
Company for fractional shares will not be deductible by the Company but will be
treated as dividend distributions or as amounts paid in redemption of
shares.
TAX CONSEQUENCES TO THE STOCKHOLDERS
---
The Reverse Stock Split should be viewed by the IRS as a nontaxable exchange of
Old Common Stock for New Common Stock. Under Code Section 354(a), no gain or
loss will be recognized by a stockholder if Old Common Stock is exchanged solely
for New Common Stock. However, a stockholder will realize gain equal to the
difference, if any, between (i) the fair market value of the New Common Stock
and the amount of cash received, and (ii) such stockholder's basis in his or her
Old Common Stock immediately before
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<PAGE>
the Reverse Stock Split. Gain realized by a stockholder would be recognized
only to the extent of the amount of cash received by the Stockholder.
The character of any gain recognized by a stockholder in the Reverse Stock Split
will depend on whether the exchange of shares by the stockholder has the effect
of a dividend distribution or is treated as a sale or exchange as to such
shareholder. if the exchange is treated as a sale or exchange as to a
stockholder, any gain recognized by such stockholder will be long term capital
gain if the shares have been held as a capital asset for more than one year at
the Effective Time, and will be short term capital gain if the shares have been
so held for one year or less at that time.
If the exchange of shares has the effect of a dividend distribution as to a
stockholder, the gain recognized by such stockholder will be taxed as ordinary
dividend income to the extent of that stockholder's ratable share of the
Company's accumulated earnings and profits and the remainder, if any, will be
treated as gain from the exchange of stock. Whether the Reverse Stock Split will
have the effect of a dividend distribution as to a stockholder or is treated as
a sale or exchange will be determined by applying the principles of Code section
302.
Under section 302 of the Code, minority interest holders who receive only cash
in the Reverse Stock Split will treat the cash payments as payments in
redemption of their stock and not as dividends because the payments result in a
complete termination of their stock interest in the Company.
Cash payments in lieu of fractional share interests received by a stockholder
who receives both cash and New Common Stock may be treated as sale or exchange
payments (rather than dividends) if the stockholder's interest in the number of
New Common Stock immediately after the Reverse Stock Split is less than 80% of
his or her percentage ownership immediately before the reverse stock split. For
this purpose, a stockholder will be treated as owning not only the New Common
Stock that the stockholder actually owns, but also shares which are treated as
owned by the stockholder under the constructive ownership rules of Code section
318. Under section 318, a stockholder is considered to own shares of stock that
are actually and sometimes constructively owned by certain related individuals
and entities.
A cash payment will also be treated as a distribution in redemption of stock
(rather than a dividend) if it results in a meaningful reduction of the
stockholder's proportionate interest in the Company. The determination of
whether a stockholder's percentage interest has been meaningfully reduced
ordinarily is based on an evaluation of the reduction in the stockholder's right
to vote, participate in earnings, and participate in liquidation proceeds.
Both the safe harbor test and the meaningful reduction test are applied after
taking into account transactions that are part of an integrated plan. It is
possible that the reverse
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<PAGE>
Stock Split may be considered part of an integrated plan.
Because of the factual nature of the determination of whether cash payments will
be treated as dividend or redemption payments, the stockholders are strongly
urged to consult their own tax advisors with respect to their particular facts
and circumstances.
Each stockholder will have a tax basis in his or her shares of New Common Stock
equal to his or her basis in the shares of Old Common Stock immediately prior to
the Reverse Stock Split, increased by the amount of income recognized and
decreased by the amount of cash received. The holding period of the New Common
Stock will include the holding period of the Old Common Stock provided those
shares of Old Common Stock were held as capital assets.
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 September 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.
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<PAGE>
<TABLE>
<CAPTION>
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
Morgan Hill, California 95037
Michael J. Braden 0 0
16160 Caputo Drive
Morgan Hill, California 95037
James E. Gilleran 5,000 (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>
- ---------------
(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.
(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.
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<PAGE>
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 and September 30, 1996, copies of which are enclosed herewith.
Certain proforma financial information showing the effect of the Reverse Stock
Split is set forth below.
COOPER DEVELOPMENT COMPANY AND SUBSIDIARIES
Proforma Consolidated Condensed Balance Sheets
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Actual as Proforma as of
ASSETS of September 30 Proforma adjustment September 30,
- ------ 1996 1 2 1996
--------- -------- --------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,601 $555 ($555) $ 2,601
Restricted cash
Accounted receivable, net 3,800 3,800
Other receivables 541 541
Inventories 3,833 3,833
Prepaid expenses 216 216
-------- -------- -------- --------
Net assets of discontinued ops
Total current assets 10,991 10,991
Property, plant and equipment at cost, net 2,974 2,974
Intangible assets, net:
Trademarks, tradenames and licenses 148 148
Excess cost over net assets acquired 2,841 2,841
Other assets 367 367
-------- --------
Net non-curent assets of discontinued ops
17,321 17,321
======== ========= ========= ========
</TABLE>
44
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current liabilities:
Short-term borrowings
Notes payable to related parties
Accounts payable 4,107 4,107
Accrued expenses 6,149 6,149
Tax liabilities 6,494 6,494
------- -------
Total current liabilities 16,750 16,750
Notes and advances payable to related parties 8,948 8,948
Other long-term liabilities 1,903 1,903
------- -------
Total current liabilities 27,601 27,601
------- -------
Stockholders' equity
Preferred stock, $.10 par value, per share
Common stock, $.10 par value, per share 447 447
Additional paid-in capital 68,580 68,580
Foreign currency translation adjustments 654 654
Accumulated deficit (75,299) 555 (170) 310
Cost of shares held in treasury (4,662) (385) 390
Unrealized loss on marketable securities
Total stockholders' equity (10,280) (10,280)
------- -------
$17,321 $17,321
======= =======
</TABLE>
Pro forma adjustments
1) to show effect of cash generated from operations
2) to show effect of going private transaction
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.
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