<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997.
REGISTRATION NO. 333-39253
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4 TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
ONTRO, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 2820 33-0638356
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
12675 DANIELSON COURT, SUITE 401, POWAY, CALIFORNIA 92064,
(619) 486-7200
(Address and telephone number of principal executive offices and principal place
of business)
CT CORPORATION SYSTEM
818 WEST SEVENTH STREET, LOS ANGELES, CA 90017, (213) 627-8252
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
DAVID A. FISHER, ESQ. THOMAS J. POLETTI, ESQ.
TIMOTHY J. FITZPATRICK, ESQ. SUSAN B. KALMAN, ESQ.
FISHER THURBER LLP FRESHMAN, MARANTZ, ORLANSKI,
4225 Executive Square, Suite 1600 COOPER & KLEIN
La Jolla, California 92037-1483 9100 Wilshire Blvd., 8th Floor East
Tel. (619) 535-9400 Beverly Hills, California 90212-3480
Fax (619) 535-1616 Tel. (310) 273-1870
Fax (310) 274-8357
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) UNIT(2) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Units (each Unit consists of one share
of Common Stock, no par value and
one Common Stock Purchase
Warrant)(3)......................... 4,600,000 $6.00 $27,600,000 $8,362.80
Common Stock, no par value(4)......... 4,600,000 -- -- --
Common Stock Purchase Warrants(5)..... 4,600,000 -- -- --
Common Stock, no par value, underlying
Warrants(6)......................... 4,600,000 $9.00 $41,400,000 $12,544.20
Representative's Option(7)............ 1 $0.001 $400.00 $8.79
Units underlying Representative's
Option (each Unit consists of one
share of Common Stock, no par value,
and one Common Stock Purchase
Warrant)............................ 400,000 $9.60 $3,840,000 $1,163.52
Common Stock, no par value, underlying
Representative's Option............. 400,000 -- -- --
Common Stock Purchase Warrants,
underlying Representative's
Option.............................. 400,000 -- -- --
Common Stock, no par value, underlying
Common Stock Purchase Warrants
underlying Representative's
Option.............................. 400,000 $9.00 $3,600,000 $1,090.80
Common Stock, no par value, owned by
the Selling Security Holders........ 70,587 $6.00 $423,522 $128.34
Common Stock, no par value, underlying
the Selling Security Holder's
Warrants(8)......................... 70,587 $9.00 $635,283 $192.51
Total................................. $23,490.96
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of shares
of Common Stock and Warrants as may be issued by reason of adjustments in
the number of shares of Common Stock and Warrants pursuant to anti-dilution
provisions contained in the Warrants and Representative's Options. Because
such additional shares of Common Stock and Warrants will, if issued, be
issued for no additional consideration, no registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Includes 600,000 Units subject to the Underwriters' over-allotment option
(the "Over-allotment Option). The Common Shares included in these Units will
be offered by L.L. Knickerbocker Company, Inc. and the Warrants included in
these Units will be offered by the Registrant.
(4) Includes 600,000 shares of Common Stock subject to the Over-allotment
Option.
(5) Includes 600,000 Warrants subject to the Over-allotment Option. The Warrants
are exercisable over a three year period commencing on the closing date of
the Offering at 150% of the price of the Units offered herein.
(6) The number of shares of Common Stock specified is the number which may be
acquired upon exercise of the Warrants at the maximum exercise price
thereof.
(7) The Representative's Options entitle the Representative to purchase 400,000
Units at $9.60 per Unit. The Common Stock and Warrants included in the Units
underlying the Representative's Options may only be purchased together. The
Representative's Options are exercisable over a four year period commencing
one year from the effective date of this Registration Statement.
(8) The Selling Security Holders' Warrants are not registered herein. The
Selling Security Holders' Warrants are exercisable over a three year period
commencing on the closing date of the Offering at 150% of the Offering Price
of the Units.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED DECEMBER 16, 1997
PROSPECTUS
4,000,000 UNITS
[LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE THREE YEAR REDEEMABLE COMMON STOCK PURCHASE WARRANT
---------------------
Ontro, Inc. (the "Company") hereby offers units (the "Units"), each Unit
consisting of one share of the Company's Common Stock, no par value (the "Common
Shares"), and one three year redeemable Common Stock purchase warrant (the
"Warrant(s)"). Until the completion of this offering (the "Offering") the Common
Shares and the Warrants may only be purchased together as a Unit. The
anticipated initial public offering price of the Units is between $5.50 and
$6.00 per Unit ("Offering Price"), of which $.10 is the public offering price
allocated to the Warrants. Upon completion of the Offering, the Common Shares
and the Warrants will immediately trade separately, and the Units will not
trade. Each Warrant entitles the holder to purchase one Common Share at an
exercise price of 150% of the Offering Price of a Unit, until the date which is
three years from the date of this Prospectus. The Warrants are redeemable at the
option of the Company at $0.05 per Warrant following at least 30 days prior
notice if the closing price of the Common Stock equals or exceeds 200% of the
Offering Price for 20 consecutive trading days ending within the 30 days prior
to the date the notice of redemption is given, and at such time as there is a
current effective registration statement covering the Common Shares underlying
the Warrants. Upon 30 days written notice to all holders of the affected class
of Warrants, the Company shall have the right to reduce the exercise price
and/or extend the term of the Warrants. The Units, Common Shares and the
Warrants offered hereby are collectively sometimes hereinafter referred to as
the "Securities."
Simultaneously with the Offering made hereby, the Company is registering
70,587 shares of outstanding Common Stock owned by three shareholders (the
"Selling Security Holders") and the 70,587 shares of Common Stock underlying
outstanding warrants held by the same shareholders (the "Security Holders'
Warrants"). These shares may be resold by the Selling Security Holders from time
to time and at any time following the commencement of the offering. The Security
Holders' Warrants are identical to the Warrants
(COVER CONTINUED NEXT PAGE)
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" BEGINNING ON PAGE EIGHT AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1)(2) COMPANY(2)(3)
<S> <C> <C> <C>
Per Unit...............................
Total..................................
</TABLE>
------------------------
(SEE NOTES, PAGE 3)
The Securities are offered by several underwriters ("Underwriters"), subject
to prior sale when, as, and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel, or modify
the Offering and to reject any offer to purchase in whole or in part. It is
expected that delivery of the certificates representing the Securities will be
made against payment therefor at the offices of the Representative, 9701
Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212, or through the
facilities of Depository Trust Company, on or about , 1997.
JOSEPH CHARLES & ASSOCIATES, INC.
The date of this Prospectus is , 1997.
<PAGE>
INSIDE FRONT COVER--PHOTOGRAPHS
1. BACKGROUND: BROWN ALL OVER BUT BOTTOM QUARTER OF PAGE.
2. LEFT SIDE OF PAGE: TEXT "PROPOSED DESIGN OF THE ONTRO SELF-HEATING
CONTAINER" PHOTO OF ONTRO CONTAINER WITH HOT COFFEE LABEL BELOW TEXT.
3. RIGHT SIDE TOP HALF OF PAGE: PHOTO OF COMPANY OFFICES SHOWING FRONT OF
BUILDING, ONTRO SIGN, AND ADDRESS. TEXT BELOW "ONTRO CORPORATE HEADQUARTERS
LOCATED IN POWAY, CALIFORNIA".
4. RIGHT SIDE CENTER OF PAGE: COMPANY LOGO
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR
WARRANTS INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
(CONTINUED FROM COVER PAGE)
included in the Units offered hereby. The Company has covenanted to use its best
efforts to keep the Registration Statement of which this Prospectus is a part
effective in order to permit such resales, and it is expected that such resales
will be made from time to time on the Nasdaq stock market or otherwise. Such
resales are subject to prospectus delivery and other requirements of the
Securities Act of 1933, as amended. The Company will not receive any proceeds
from the market sales of the shares owned by the Selling Security Holders or the
Common Stock underlying the Security Holders' Warrants, although it will receive
the proceeds from the exercise of the Security Holders' Warrants. See
"Concurrent Offering by Selling Security Holders."
Prior to this Offering, there has been no public market for the Company's
Securities, and there can be no assurance that such a market will develop or be
sustained after this Offering. The Offering Price of the Units and the exercise
price and other terms of the Warrants have been determined by negotiation
between the Company and Joseph Charles & Associates, Inc., the representative of
the Underwriters (the "Representative"). The Offering Price does not necessarily
bear any particular relationship to common valuation criteria such as assets,
book value, performance or any other established criteria. For information
regarding the factors considered in determining the Offering Price of the Units
and the terms of the Warrants, see "Underwriting." The Company has applied to
have the Common Shares and Warrants approved for quotation on the Nasdaq
National Market ("Nasdaq") under the symbols ONTR and ONTRW, respectively. The
Units will not be traded on Nasdaq or elsewhere.
NOTES
(1) Does not include additional compensation to be received by the
Representative in the form of: (i) a 2% non-accountable expense allowance
and (ii) the sale to the Representative for $400 of an option (the
"Representative's Option") to purchase 400,000 Units (each Unit consisting
of one Common Share and one Warrant) at a price of 160% of the Offering
Price of the Units, exercisable over a period of four years, commencing one
year from the date of this Prospectus. The Company has also agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
to be $1,200,000, including the Representative's non-accountable expense
allowance.
(3) The Company and L.L. Knickerbocker Company, Inc. ("Knickerbocker") have
granted the Underwriters an option (the "Over-allotment Option"),
exercisable within 45 days from the date of this Prospectus, to purchase up
to 600,000 Units on the same terms as set forth above, solely for the
purpose of covering over-allotments, if any. The Common Shares included in
such additional Units will be offered by Knickerbocker and the Warrants
included in such additional Units will be offered by the Company. If the
Over-allotment Option is exercised in full, the total price to the public,
Underwriting Discounts, and Proceeds to the Company with respect to the
Securities sold by the Company will be $ , $ , and $ ,
respectively and Knickerbocker will receive proceeds of $ ,
after payment of $ of Underwriting Discounts and Commissions. See
"Underwriting."
------------------------------
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
------------------------
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, and in accordance
therewith will file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company intends to
furnish its shareholders and the holders of the Securities with annual reports
containing audited financial statements and such other periodic reports as the
Company deems appropriate or as may be required by law. The Company's fiscal
year ends December 31.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
ALL SHARE AND PER SHARE INFORMATION GIVES EFFECT TO A 28.12 FOR ONE STOCK SPLIT
EFFECTED DECEMBER 31, 1996. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF: (i) THE OVER-ALLOTMENT
OPTION; (ii) ISSUANCE AND EXERCISE OF THE WARRANTS; (iii) THE REPRESENTATIVE'S
OPTION; OR (iv) OTHER OUTSTANDING WARRANTS AND OPTIONS.
THE COMPANY
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has the rights to
exploit a unique proprietary technology which it has incorporated into a
proposed product line of fully contained self-heating beverage containers
designed to heat liquid contents such as coffee, tea, hot chocolate, soups, and
baby formula. These proposed containers are similar to typical beverage
containers in size and shape, and are activated by the consumer to heat the
contents within a few minutes. The Company seeks to market its container
technology to develop and expand a consumer market for remote and mobile heating
of beverages and other products.
The Company's products are still in development and are not currently sold
commercially. The Company's first anticipated commercial product is a
self-heating beverage container which will require additional research and
development, including further design improvements, testing, and marketing
studies before it or any of the Company's other potential products under
development will be able to be successfully manufactured and marketed. There can
be no assurance these efforts will be successfully completed.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, significant additional work
testing or verifying different aspects of the containers is required before the
current demonstration models will be ready for commercial production. Additional
development issues which must be completed include, but are not limited to the
areas of seam failure, heat transfer, content related issues, heating control,
pasteurization, timing and temperature ranges, appearance, and packaging. There
can be no assurance these development issues will be successfully concluded.
The Company believes substantial market opportunities exist for the
exploitation of the Company's integrated thermal container technology. The
Company believes as society has become more mobile, demand has risen for remote
heating of goods, and conventional heating sources do not supply truly remote
consumption due primarily to inconvenience and the inability of consumers to
access these sources in a mobile environment. The Company's self-heating
containers are expected to meet the needs of consumers such as mothers requiring
warmed baby formula, commuters, mobile professionals, sports enthusiasts and
others without quick and convenient access to conventional heating sources.
The Company intends to become a leading provider of integrated thermal
containers and related technology to food, beverage and other manufacturers. In
order to do so the Company will have to complete the development of its proposed
products so they may be successfully manufactured and marketed. The Company's
principal strategies include:
SUB-LICENSE AGREEMENTS WITH MAJOR FOOD, BEVERAGE AND CONTAINER COMPANIES
The Company's principal marketing strategy is to target major food, beverage
and container manufacturers for the sub-license of its integrated thermal
container technologies. These manufacturers are expected to manufacture, label,
fill, market and distribute containers under their own brand name or for third
parties in exchange for providing the Company royalties and/or research and
development and marketing assistance. Management believes this approach should
allow the Company to access the manufacturing, marketing, name brand and
distribution capabilities of potential licensees without the high
4
<PAGE>
overhead costs of plant, equipment and labor. The Company believes its
integrated thermal containers could assist manufacturers in offering a
value-added product to complement existing product lines and assist in expanding
market share. To date, the Company has entered into an evaluation agreement with
Nestle USA Inc. ("Nestle") and a distribution agreement with Knickerbocker (see
below). To successfully implement this strategy, the Company will have to
complete its product development and market the proposed products to potential
sublicensees who will have to be independently satisfied with the products and
the market opportunity. There can be no assurance the Company will be able to
complete these objectives.
STRATEGIC MANUFACTURING AND MARKETING
Concurrently with seeking sub-license agreements, the Company plans to
directly produce and market self-heating beverage containers to selected niche
markets. The Company believes such manufacturing and marketing should provide
substantial benefits including: (i) additional revenues to fund marketing
efforts to major food, beverage and container companies as described above; (ii)
demonstration of product feasibility and the manufacturing process; and (iii)
providing evaluation units for use in conducting marketing and product
feasibility studies by the Company and others. The Company plans to selectively
market to customers and distributors whom the Company believes would not
interfere with potential sub-licenses the Company intends to seek with major
food and beverage container manufacturers. The Company intends to use a portion
of the net proceeds of this Offering to complete its development of a full-scale
production facility. In addition to completing its manufacturing facility and
successfully demonstrating its capacity to manufacture commercial quantities of
completed products, the Company will have to identify and obtain distribution
channels in such niche markets. There can be no assurance the Company will be
able to complete these objectives.
DEVELOP INTEGRATED THERMAL TECHNOLOGY FOR OTHER APPLICATIONS
The Company plans to develop additional integrated thermal containers to
further access the beverage market. The Company is designing a proprietary
thermos-Registered Trademark- type container with insertable thermal cartridges,
which would allow consumers to heat and re-heat an integrated thermal container
filled by the consumer with the liquid of their choice. The Company is
developing a disposable self-heating baby bottle, which could be pre-filled with
baby formula and heated on demand. The Company's plans also include additional
research and development into designs and potential uses of integrated thermal
containers for medical, pharmaceutical, health and beauty products, as well as
other potential industrial applications. The Company intends to utilize the
expertise of its management and Advisory Board to identify market opportunities
for its technology. There can be no assurance the Company will be able to
complete the design and development of, or market any such integrated thermal
containers.
The Company has entered into an evaluation agreement (the "Evaluation
Agreement") with Nestle which allows Nestle an exclusive period to review the
Company's designs and technology in order to determine Nestle's interest in
acquiring rights for the commercial use of the Company's self-heating food and
beverage containers. The Evaluation Agreement requires Nestle to cooperate with
the Company in evaluating certain commercial uses and markets for the Company's
technology, and includes an obligation to pay for one-half of the cost of
certain market research studies that are currently underway.
The Company has also entered into a distributorship agreement with
Knickerbocker, a marketer of specialty products. The Company and Knickerbocker
are working to develop certain specialty lines of beverages which would utilize
the Company's integrated thermal containers and be marketed by Knickerbocker.
Ontro was incorporated in the State of California under the name Self
Heating Container Corporation of California on November 8, 1994. The Company
changed its name to Ontro, Inc. on December 31,
5
<PAGE>
1996. The Company's offices are located at 12675 Danielson Court, Suite 401,
Poway, California 92064, and its telephone number is (619) 486-7200.
THE OFFERING
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<S> <C>
Securities Offered by the
Company(1)....................... 4,000,000 Units
Common Stock Outstanding Prior to
this Offering(2)................. 3,089,478 shares
Common Stock Outstanding After
this Offering(3)................. 7,089,478 shares
Use of Proceeds................... The net proceeds of this Offering will be used for the
following: acquiring manufacturing equipment, marketing,
research and development, repayment of indebtedness,
expansion of facilities, prepaid royalties, and working
capital and general corporate purposes. The Company will
not receive the proceeds, if any, from the sale of
Common Shares underlying any Units sold on exercise of
the Over-allotment Option. See "Use of Proceeds."
Proposed Nasdaq Symbols
Common Shares................... ONTR
Warrants........................ ONTRW
</TABLE>
- ------------------------------
(1) Until completion of the Offering, the Units may only be purchased on the
basis of one Common Share and one Warrant per Unit. Upon completion of the
Offering, the Common Shares and the Warrants will be immediately detachable
and separately transferable. Each Warrant entitles the holder to purchase
one Common Share at a price per share equal to 150% of the Offering Price
until that date which is three years from the date of this Prospectus. The
Warrants are redeemable at the option of the Company, at $.05 per Warrant,
at any time upon 30 days prior written notice, if the closing price of the
Common Shares, as reported by the principal exchange on which the Common
Shares are quoted, equals or exceeds 200% of the Offering Price for 20
consecutive trading days within the 30 day period preceding the date of the
notice of redemption and at such time as there is a current effective
registration statement covering the Common Shares underlying the Warrants.
Upon 30 days written notice to all holders of the Warrants, the Company
shall have the right to reduce the exercise price and/or extend the term of
the Warrants. See "Description of Securities."
(2) Excludes shares issuable upon the exercise of options to purchase 1,379,506
shares of Common Stock outstanding as of the date of this Prospectus, and
warrants to purchase 400,587 shares of Common Stock outstanding as of the
date of this Prospectus.
(3) Excludes: (i) 4,000,000 shares reserved for issuance upon exercise of the
Warrants; (ii) 600,000 shares issuable upon exercise of the Warrants
included within the Over-allotment Option; (iii) 400,000 shares issuable
upon exercise of the Representative's Option; (iv) 400,000 shares issuable
upon exercise of the Representative's Warrants included in the
Representative's Option; (v) 545,400 shares reserved for issuance under the
Company's 1996 Omnibus Stock Plan (the "1996 Stock Plan"), of which options
to acquire 113,000 shares of Common Stock have been granted prior to the
date of this Prospectus; (vi) 1,266,506 shares underlying other outstanding
options granted prior to the date of this Prospectus; and (vii) 400,587
shares reserved for issuance upon exercise of outstanding warrants issued
prior to the date of this Prospectus. See "Risk Factors--Dilutive and Other
Adverse Effects of Outstanding Options and Warrants," "Use of Proceeds,"
"Dilution," and "Underwriting."
6
<PAGE>
<TABLE>
<S> <C>
Risk Factors...................... The Units offered hereby are speculative and involve a
high degree of risk, as well as immediate substantial
dilution. Among others, an investment in the Company is
subject to the risk the Company may not successfully
complete development of its proposed products, or if it
does, that such products may not perform up to market
expectations, or even if they do, that the contemplated
market for the products may not develop or accept the
Company's products to the extent anticipated. Until
substantial licensing activity or commercial sales occur
(if ever) the Company will continue to operate without
significant revenue and with ongoing requirements for
substantial capital investment. Unless the Company can
generate revenue, it will likely need to obtain
additional funds from outside sources. If the Company
cannot obtain such funds, it will not be able to
continue in business. Even upon completion of the
Offering, the Company will likely remain dependent on
business arrangements with third parties in order to
manufacture, market, sell and distribute its proposed
products. In addition, management will be able to
control the operation of the Company as a result of
stock and outstanding options held by management. The
Units should not be purchased by investors who cannot
afford the loss of their entire investment. See "Risk
Factors," "Dilution," and "Related Party Transactions."
Related Party Transactions........ The Company obtained all of the core technology for its
integrated thermal containers pursuant to a license
agreement (the "IHI License") with Insta-Heat, Inc.
("IHI"), an affiliated corporation, pursuant to which
the Company pays royalties to IHI.
The Company has also entered into a distributorship
agreement with Knickerbocker, a marketer of specialty
products. Knickerbocker is a significant shareholder of
both Ontro and IHI. Louis L. Knickerbocker is a director
of the Company and Knickerbocker.
The Company has entered into a consulting agreement with
Manhattan West, Inc., an affiliated corporation, to
assist the Company in locating and arranging
distributorship agreements. Pursuant to the consulting
agreement, Manhattan West, Inc. receives monthly
payments, and received an option to acquire Common
Stock.
See "Risk Factors--Conflicts of Interest," "Risk
Factors--IHI License," "Risk Factors--Offering to
Benefit Existing Stockholders," "Dilution,"
"Business--Distributorship Agreement,"
"Business--License Agreement with Insta-Heat, Inc.,"
"Certain Transactions," and "Related Party
Transactions."
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The Summary Financial Information set forth below should be read in
conjunction with audited and unaudited financial statements included elsewhere
herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
STATEMENT OF OPERATIONS DATA: 1995 1996
--------- ---------- NINE MONTHS NINE MONTHS FROM INCEPTION
ENDED ENDED THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating expenses:
Marketing, general and
administrative.............. $ 94,500 $ 830,400 $ 399,700 $ 1,127,700 $ 2,064,900
Research and
development................. 67,900 235,900 231,200 402,000 705,800
Compensation related to grant
of stock options............ -- 379,300 379,300 26,400 405,700
--------- ---------- ------------------ ------------------ ------------------
Total operating
expenses.................. 162,400 1,445,600 1,010,200 1,556,100 3,176,400
Interest expense.............. 1,700 22,800 11,300 121,100 145,800
--------- ---------- ------------------ ------------------ ------------------
Net loss(1)................... $(164,100) $(1,468,400) $ (1,021,500) $ (1,677,200) $ (3,322,200)
--------- ---------- ------------------ ------------------ ------------------
--------- ---------- ------------------ ------------------ ------------------
Net loss per common
share(1).................... $ (0.07) $ (0.49) $ (0.37) $ (0.43)
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
Weighted average common and
common equivalent shares
outstanding(1).............. 2,423,800 3,024,100 2,733,700 3,864,600
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------
DECEMBER 31, PRO FORMA
1996 ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------------ ---------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)............................ $ (220,800) $(1,504,300) $(1,164,300) $ 17,878,000
Total assets............................................ 328,600 660,100 1,150,100 18,557,900
Notes payable (bridge loans)............................ 110,000 1,245,000 1,395,000 --
Total liabilities....................................... 445,400 1,705,200 1,855,200 186,700
Deficit accumulated during the development stage........ (1,645,000) (3,322,200) (3,439,200) (3,512,900)
Shareholders' equity (deficit).......................... (116,800) (1,045,100) (705,100) 18,371,200
</TABLE>
- ------------------------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net loss per common share and shares used in computing net
loss per common share.
(2) Pro forma reflects the issuance of 83,407 shares of Common Stock and 70,587
warrants to purchase Common Stock during October 1997 for an aggregate
consideration of $340,000 (the "Recent Issuances") the resulting
compensation expense of $117,000, and proceeds from two loans in December
1997 of $150,000 (the "December 1997 Loans").
(3) Adjusted to reflect the Recent Issuances (Note 2 above) and the sale by the
Company of the 4,000,000 Units offered hereby at an assumed Offering Price
of $5.50 per Unit and the application of the estimated net proceeds
therefrom of $19.2 million. The pro forma as adjusted also reflects the
repayment of principal and interest (and related write-off of $73,700 of
deferred financing costs) on certain loans in the original principal amount
of $1,245,000 (the "Bridge Loans"), repayment of the December 1997 Loans
(Note 2 above) in the original principal amount of $150,000, payment of
deferred consulting fees of $57,500 and the repayment of equipment leases of
approximately $145,000. See "Use of Proceeds," "Capitalization" and "Certain
Transactions."
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE MADE BY ANY INVESTOR WHO CANNOT
AFFORD THE LOSS OF HIS/HER ENTIRE INVESTMENT. ACCORDINGLY, PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, IN ADDITION TO ALL OF THE OTHER
INFORMATION PRESENTED IN THIS PROSPECTUS BEFORE PURCHASING THE SECURITIES
OFFERED HEREBY. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
RISK FACTORS RELATING TO THE COMPANY
NO OPERATING REVENUES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has experienced operating losses in each fiscal period since its
inception in 1994. As of September 30, 1997, the Company had a deficit
accumulated in the development stage of approximately $3.3 million and a working
capital deficiency of approximately $1.5 million. The Company expects to incur
additional operating losses through at least 1998 and possibly thereafter. The
Company has generated no revenues from operations. The development of the
Company's integrated thermal containers will require the commitment of
substantial resources in order to make it feasible for such containers to be
sold, or for the underlying technology to be licensed to third parties, and/or
for the Company to sell its proposed containers to distributors or others who
may be responsible for the manufacture and marketing of the proposed containers,
or to establish commercial scale manufacturing processes and facilities for such
manufacturing, and to establish additional quality control, marketing, sales and
administrative capabilities. There can be no assurance the Company will be
successful in any of these endeavors. There can be no assurance the Company will
enter into arrangements with third parties for product development and
commercialization, or will successfully market or license any containers. To
achieve profitable operations, the Company, alone or with others, must
successfully develop, manufacture and market its proprietary containers or
technologies. There can be no assurance the Company will be able to accomplish
these tasks. Significant delays in any of these matters could have a material
adverse impact on the Company's business, financial condition and results of
operations.
GOING CONCERN ASSUMPTION
The Company's independent auditors' report on the Company's financial
statements at December 31, 1996 and for the years ended December 31, 1995 and
1996 contains an explanatory paragraph indicating the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. In addition, the Company had an accumulated deficit of
approximately $3.3 million at September 30, 1997. The Company may require
substantial additional funds in the future, and there can be no assurance that
any independent auditors' report on the Company's future financial statements
will not include a similar explanatory paragraph if the Company is unable to
raise sufficient funds or generate sufficient cash from operations to cover the
cost of its operations. The existence of the explanatory paragraph may
materially adversely affect the Company's relationship with prospective
customers and suppliers, and therefore could have a material adverse effect on
the Company's business, financial condition and results of operations.
FUTURE CAPITAL REQUIREMENTS UNCERTAIN; NO ASSURANCE OF FUTURE FUNDING
The Company will be required to make substantial expenditures to conduct
existing and planned research and development, to manufacture or contract for
the manufacture of, and to market its proposed containers. The net proceeds from
this Offering are expected to be approximately $19.2 million at an assumed
Offering Price of $5.50, assuming no exercise of the Over-allotment Option. In
the absence of
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<PAGE>
receiving the proceeds of this Offering, the Company anticipates its existing
capital resources and cash generated from operations, if any, will be sufficient
to meet the Company's cash requirements only through the end of December 1997 at
its anticipated level of operations. The Company's future capital requirements
will depend upon numerous factors, including the amount of revenues generated
from operations (if any), the cost of the Company's sales and marketing
activities and the progress of the Company's research and development
activities, none of which can be predicted with certainty. The Company
anticipates the proceeds of this Offering, together with existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements for at least the next 24 to 30 months at its
anticipated level of operations. However, the Company may seek additional
funding during the next 30 months and could seek additional funding after such
time. There can be no assurance any additional financing will be available on
acceptable terms, or at all, when required by the Company. Moreover, if
additional financing is not available, the Company could be required to reduce
or suspend its operations, seek an acquisition partner or sell securities on
terms that may be highly dilutive or otherwise disadvantageous to investors
purchasing the Units offered hereby. The Company has experienced in the past,
and may continue to experience, operational difficulties and delays in its
product development due to working capital constraints. Any such difficulties or
delays could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.
The Company has no established bank financing arrangements, and it is not
anticipated the Company will secure any bank financing in the foreseeable
future. The Company intends to finance the development and marketing of its
proposed containers through license agreements, distribution agreements,
strategic alliances and other arrangements with third parties. There can be no
assurance such license, distribution, marketing, strategic, or other
collaborative arrangements will be obtained, or that additional funds will be
available when needed, or on terms acceptable to the Company. If adequate funds
are not available, the Company may be required to relinquish rights to certain
of its technologies or potential products the Company would not otherwise
relinquish. The Company's future cash requirements will be affected by results
of research and development, collaborative relationships, if any, changes in the
focus and direction of the Company's research and development programs,
competitive and technological advances, and other factors. See "Use of Proceeds"
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
EARLY STAGE OF DEVELOPMENT; ABSENCE OF PRODUCTS
The Company is a development stage company. It has not completed the final
development of any product and, accordingly, has not begun to market or generate
revenues from operations. The Company's first anticipated commercial product is
a self-heating beverage container which will require additional research and
development, including further design improvements, testing, and marketing
studies before it will likely be introduced in the marketplace. There can be no
assurance the Company's research and development efforts will be successful, the
self-heating beverage container or any of the Company's other potential products
under development will be able to be manufactured at acceptable costs and
quality standards. See "Business--Manufacturing and Production." The Company
cannot predict with certainty when, if ever, it will begin to market the
proposed self-heating beverage container or any other integrated thermal
container it is developing, and currently does not expect them to be available
to consumers prior to the end of 1998.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, significant additional work
testing or verifying of different aspects of the containers is required before
the prototypes will be ready for commercial production. Such aspects include,
but are not limited to, the areas of seam failure, heat transfer, type of
content issues, heating control, pasteurization, timing and temperature ranges,
appearance, and packaging. The Company has identified certain unusual
circumstances where the self-heating container could heat to unacceptably high
levels and jeopardize the structural integrity of the container to the extent it
might not withstand the market reliability and quality
10
<PAGE>
control standards generally required of containers for food and beverage
products. The Company is currently researching the use of moderating agents to
inhibit such potential reactions. The Company is also researching different
compositions of the active ingredients to increase the predictability of the
heating reaction and simplify the manufacturing process. There can be no
assurance the Company will be successful in finalizing a commercially viable
design for its proposed products. See "Business."
COMPLETE DEPENDENCE ON MARKET ACCEPTANCE OF INTEGRATED THERMAL CONTAINERS
The Company has not yet commenced sales of its self-heating beverage
container, which is currently the Company's only substantially developed
product. The Company anticipates it will derive substantially all of its
revenues from the sale of licenses of its integrated thermal container
technology. Consequently, the Company is entirely dependent on the successful
introduction and commercial acceptance of this technology. Unless and until such
integrated thermal containers receive market acceptance, the Company will not
likely have any material source of revenue. There can be no assurance that
integrated thermal containers will achieve market acceptance. The Company's
ability to license its technology or sell its containers will be substantially
dependent on the results of certain market studies, and there can be no
assurance the studies currently underway or to be conducted in the future will
demonstrate the level of probable market acceptance sufficient to interest
licensees and distributors to enter into agreements with the Company regarding
its products and technologies. Although the Company has one distributor for its
containers, commercial acceptance of its containers will require the Company to
successfully establish sales through this and other distribution channels, of
which there can be no assurance. Any such failure will likely have a material
adverse effect on the Company's business, financial condition and results of
operations. Failure of the Company's integrated thermal containers to achieve
significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Overview."
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
If the Company's proposed integrated thermal containers are commercially
accepted, such markets are expected to be characterized by rapid technological
advances, evolving industry standards, and frequent new product introductions
and enhancements. The introduction by competitors of containers embodying new
integrated thermal technologies and the emergence of industry standards could
render the Company's containers currently under development obsolete or
unmarketable. The Company's future success may depend upon its ability to keep
pace with technological development and respond to evolving consumer demands.
Failure by the Company to anticipate or respond adequately to technological
developments or changes in consumer tastes, or significant delays in product
development, could damage the Company's potential position in the marketplace
and could result in less revenues and/or lack of profits. The Company may need
to increase the size of its product development staff in the near term to meet
these challenges. There can be no assurance the Company will be successful in
hiring and training adequate product development personnel to meet its needs or
that it will have the resources to do so. There can be no assurance the Company
will be successful in developing and marketing its proposed containers, new
products, or product enhancements, or will not experience significant delays in
such endeavors in the future. Any failure to successfully develop and market its
integrated thermal containers or other products and product enhancements could
have a material adverse effect on the Company's financial condition, business,
and results from operations. See "Business."
IHI LICENSE
The Company has obtained all of the core technology for its integrated
thermal containers through the IHI License. IHI is an affiliated company which
owns three issued patents and patents pending concerning IHI's thermal
technologies. The IHI License grants the Company an exclusive worldwide license
in perpetuity to manufacture, use, sell, and promote IHI's technology, and for
all products developed in connection with the IHI technology. The IHI License
grants the Company the right to
11
<PAGE>
sub-license the technology and to subcontract the manufacture of the licensed
products. The IHI License requires minimum royalty payments of $50,000 per year
and also requires additional royalty payments from the Company on the sale of
products utilizing IHI technology subject to the Company achieving minimum
annual net income after payment of the royalty and of all taxes of no less than
$4 million. Upon achieving the required minimum net income, the IHI License
requires royalty payments equal to the greater of: (i) 2% of the gross sales of
integrated thermal containers and products developed in connection with it; or
(ii) 1.5 cents per unit sold up to the first $30 million in sales by the
Company. For sales in excess of $30 million, the IHI License requires royalty
payments (subject to the same minimum income levels) equal to the greater of:
(i) 3% of gross annual sales in excess of $30 million; or (ii) 1.5 cents per
unit sold. Royalty payments are reduced at such time as IHI does not hold one or
more patents or patent applications on the IHI technology. The Company is
required to prosecute any patent infringements of the IHI technology and to
defend any infringement claims brought in connection with the IHI technology.
Prosecution of patent infringement claims and the defense of infringement claims
could result in substantial costs to the Company. If the Company were unable to
pay such costs, the Company could lose the rights to the IHI technology, which
would likely have a material adverse impact on the business and financial
condition of the Company. The IHI License may be terminated in the event the
Company ceases its business, dissolves, liquidates, or on completion of any
proceeding in bankruptcy or reorganization, or the appointment of a permanent
receiver or trustee or any other proceeding under any law for the relief of
debtors or on any assignment for the benefit of the Company's creditors. If the
IHI License were terminated, the Company would lose all of its rights to the IHI
technology. The IHI License provides an option to the Company to purchase all of
the IHI technology and terminate the IHI License. However this option requires
the Company pay IHI $3 million and is only available through December 31, 2000,
including a one year right to extend upon the payment of $100,000. See
"Business--License Agreement with Insta-Heat, Inc."
CONFLICTS OF INTEREST
IHI has licensed its integrated thermal container technology and related
technology to the Company pursuant to the IHI License. Messrs. Berntsen and
Scudder, co-founders, officers, directors, and significant shareholders of the
Company are also co-founders, officers, directors, and significant shareholders
of IHI. The Board of Directors of IHI is comprised of Messrs. Scudder, Berntsen,
and their spouses. The Company and IHI currently have substantially similar
shareholders. These relationships raise substantial potential conflicts of
interest with regard to the development, licensing, marketing, and sale of the
IHI technology by the Company, as well as conflicts of interest in the
interpretation of the terms and conditions of the IHI License. The interests of
IHI may conflict with the interests of the Company in certain instances
regarding the IHI technology, including if the Company were unable to comply
with the terms of the IHI License. The directors of IHI may have fiduciary
obligations to IHI, which may influence them to take actions which are contrary
to the interests of the Company, and which could result in material adverse
consequences to the business, financial condition, and results of operations of
the Company. In the event of termination of the IHI License, the Company would
lose all of the technology relating to the integrated thermal process it is
currently developing, which would have a material adverse impact on the
financial condition, business, and results of operations of the Company. See
"Business--License Agreement with Insta-Heat, Inc."
IHI and the Company are both California corporations and are subject to
California law. California law requires transactions between corporations with
interested directors either be approved by the shareholders or by an independent
board of directors, and the transaction must also be just and reasonable. If
these conditions are not met, the person asserting the validity of the
transaction must prove the transaction is just and reasonable to the
corporation. The IHI License was approved by the shareholders of both IHI and
the Company. Any future material amendments to the IHI License will require that
the Company and IHI comply with these requirements of California law.
12
<PAGE>
The Company has entered into a Distributorship Agreement with Knickerbocker
(the "LLK Agreement.") Knickerbocker is a significant shareholder in the
Company, and Louis L. Knickerbocker the founder, Chief Executive Officer,
Chairman and President of Knickerbocker is a director of the Company.
Knickerbocker could be expected to exert substantial influence in connection
with the further development (if any) of the scope of the LLK Agreement, and the
products to be included thereunder, as well as other issues between the Company
and Knickerbocker with respect to the LLK Agreement and any related activities.
See "Business--Distributorship Agreement" and "Related Party Transactions."
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc. Pursuant to the consulting agreement, Manhattan West, Inc.
is to assist the Company in locating and arranging distributor agreements.
Manhattan West, Inc. introduced the Company to Knickerbocker. The consulting
agreement is for a term of 30 months, and requires Manhattan West, Inc. be paid
$15,000 per month from July 15, 1996, through April 15, 1997 and $5,000 per
month for the remainder of the term. Manhattan West, Inc. has agreed to defer
collection of a portion of its consulting fees until after completion of the
initial public offering of the Company's securities.
Also, on July 15, 1996, Manhattan West, Inc. purchased 143,102 shares of the
Company's Common Stock for a total consideration of $100,000 or $.70 per share,
and the Company granted an option to Manhattan West, Inc. to purchase 543,841
shares of the Company's Common Stock at an exercise price of $.01 per share
subject to certain conditions. In the event Manhattan West, Inc. exercises its
option, shareholders of the Company will experience significant additional
dilution. See "Related Party Transactions." and "Dilution."
OFFERING TO BENEFIT EXISTING STOCKHOLDERS AND RELATED PARTIES
Completion of this Offering will provide substantial benefits to existing
shareholders of the Company and other related parties. The assumed Offering
Price of $5.50 per Unit (of which $5.40 is attributed to one Common Share and
$0.10 is attributed to one Warrant) is substantially higher than the negative
$.35 per share book value of the shares held by existing shareholders. The
dollar figures in this risk factor reflect market values of Common Stock held
after the Offering and assumes an Offering Price of $5.50 per Unit. Purchasers
of the Units offered hereby will invest $22 million or 91.5% of the total
consideration paid for 56.4% of the Common Stock to be outstanding after the
Offering. The shares of Common Stock owned by existing shareholders would be
valued at approximately $17.0 million upon completion of the Offering; such
shares had a negative book value of $1,045,100 at September 30, 1997. In the
event the underwriters exercise the Over-allotment Option, Knickerbocker will
sell the 600,000 Common Shares included in such additional Units. If the
Over-allotment Option is exercised in full at a price of $5.50 per Unit,
Knickerbocker will receive from the proceeds of the Offering approximately
$3,240,000 or $5.40 per share (before commissions and other expenses); for
shares it purchased in September 1996 for $420,000 or $.70 per share. In
addition, the remaining 258,673 shares owned by Knickerbocker, for which it paid
$180,000, would have a market value of approximately $1,397,000 upon completion
of the Offering. The 1,015,197 shares beneficially owned by the two founders,
senior executive officers, and directors (James A. Scudder and James L.
Berntsen) purchased for approximately $.90 per share, would have a market value
of approximately $5,482,063 upon completion of the Offering. The 143,103 common
shares owned by Manhattan West, Inc. for which it paid $100,000 in July 1996 or
approximately $.70 per share will have a market value of approximately $772,756
upon completion of the Offering. In the event Manhattan West exercises the one
option and one warrant it holds and purchases an additional 553,841 common
shares, Manhattan West will pay additional consideration of approximately
$15,438.41 or $.03 per share for Common Stock with an approximate market value
upon completion of the Offering of $3,046,126. Manhattan West, Inc. will also
receive deferred consulting fees of approximately $77,000 upon completion of the
Offering. See "Bridge Loans" and "Related Party Transactions."
13
<PAGE>
Certain of the members of the Company's Advisory Board and other consultants
and professionals also have options to purchase a significant number of Common
Shares for exercise prices ranging from $.001 to $3.00 per share. See "Certain
Transactions."
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in large part, on IHI's or the Company's
ability to obtain patent protection for the proposed containers, both in the
United States and in foreign countries. IHI currently has three patents issued,
and one additional patent application pending in the United States. There have
been foreign counterparts to certain of these applications filed in other
countries on behalf of IHI. The Company intends to support IHI in filing
additional applications as appropriate for patents covering one or more proposed
containers and related processes. There can be no assurance patents will issue
from any of the pending applications, or for patents that have been issued or
may be issued, that the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance any patents issued
to IHI or to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide adequate proprietary protection
to IHI or to the Company. In addition, any patents obtained by IHI or by the
Company will be of limited duration. All United States patents issuing from
patent applications filed June 8, 1995 or thereafter will have a term of 20
years from the date of filing. All United States patents in force before June 8,
1995 will have a term of the longer of: (i) 17 years from the date of issuance;
or (ii) 20 years from the date of filing. All United States patents issuing from
patent applications applied for before June 8, 1995 will have a term equal to
the longer of: (i) 17 years from the date of issuance; or (ii) 20 years from the
date of filing. All United States design patents have a 14 year life from the
date of issuance.
The commercial success of the Company may also depend upon avoiding
infringing on patents issued to competitors, and upon maintaining the IHI
License. If competitors prepare and file patent applications in the United
States that claim technology also claimed by IHI, the Company, in accordance
with the requirements of the IHI License, may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office
("PTO") to determine the priority of invention, which could result in
substantial cost, even if the outcome is favorable to the Company. An adverse
outcome could subject the Company to significant liabilities to third parties,
and could require the Company to license disputed rights from third parties or
cease using all or part of the licensed technology. The Company is aware of U.S.
and foreign patents issued to third parties that broadly claim self-heating
technology similar to the IHI's. Although the Company believes its current
activities do not infringe on these patents, there can be no assurance the
Company's belief would be affirmed in any infringement litigation over the
patents, or that the Company's future technological developments would be
outside the scope of these patents. A U.S. patent application is maintained
under conditions of confidentiality while the application is pending in the PTO,
so the Company cannot determine the inventions being claimed in pending patent
applications filed by its competitors in the PTO. Further, U.S. patents do not
provide any remedies for infringement that occurred before the patent is
granted.
The Company also attempts to protect its proprietary and its licensed
technology and processes by seeking to obtain confidentiality agreements with
its contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements will
adequately protect the Company, will not be breached, the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors. This
approach could increase the risk to the Company which may not be able to protect
its proprietary and licensed technology.
There can be no assurance others will not independently develop similar or
more advanced technologies or designs around aspects of IHI's technology which
may be patented, or duplicate IHI's or the Company's trade secrets. In some
cases, the Company may rely on trade secrets to protect IHI's or its inventions.
There can be no assurance trade secrets will be established, secrecy obligations
will be honored,
14
<PAGE>
or that others will not independently develop similar or superior technology. To
the extent consultants, key employees, or other third parties apply
technological information independently developed by them or by others to
Company projects, disputes may arise as to the proprietary rights to such
information, which may not be resolved in favor of the Company. See
"Business--Patents and Proprietary Technology" and "Management."
LIMITED MANUFACTURING FACILITIES; PROBABLE SIGNIFICANT DEPENDENCE ON
SUB-LICENSEES FOR MANUFACTURE, MARKETING, AND SALE OF PROPOSED PRODUCTS
The Company's strategy is to sub-license its integrated thermal technologies
to major food, beverage, and container companies. The Company anticipates
requiring such companies to be responsible for the manufacture, marketing, and
sale of the overwhelming majority of the Company's proposed containers. With the
proceeds of this Offering, the Company intends to purchase equipment which will
enable it to manufacture self-heating beverage containers for testing and
marketing studies, and to sell limited quantities of certain self-heating
containers to distributors or other customers. The Company intends to require
most of its distributors and other customers to manufacture and market the
containers they purchase or sub-license, or to contract for the manufacture,
marketing, and distribution of the containers. There can be no assurance the
Company will enter into satisfactory license agreements with any parties for the
manufacture, marketing, or sale of its integrated thermal containers; such
licenses, if any, will result in revenues to the Company; the Company will enter
into any agreements with distributors or others for the manufacture, marketing,
or sale of its proposed containers, or that parties who do enter into such
agreements will perform adequately. In the event the Company is unable to
license its technology to third parties or is unable to require third parties to
manufacture, market, and sell substantial quantities of its proposed containers,
the Company could be required to develop adequate manufacturing facilities to
fulfill any demand for its containers. The development of such facilities could
require additional capital, personnel, and other resources beyond any available
from the proceeds of this Offering. There can be no assurance the Company will
be able to successfully establish such manufacturing operations or obtain any
additional capital.
PROBABLE DEPENDENCE ON OUTSIDE PARTIES FOR MARKETING AND DISTRIBUTION
If the Company is successful in completing the development of its proposed
integrated thermal containers the Company intends to primarily market its
proposed products through contractual arrangements with others such as
sub-licensing, distribution or similar collaborative agreements. This may result
in a lack of control by the Company over some or all of the material marketing
and distribution aspects of its potential products. There can be no assurance
the Company will be able to maintain the quality of its products when they are
manufactured by unrelated parties. Any significant quality control problems
could result in excessive recalls, increased product liability exposure, and
reduced market acceptance.
There can be no assurance the Company will enter into any marketing and
related arrangements on terms acceptable to the Company, or that any marketing
efforts undertaken on behalf of the Company by third parties will be successful.
The inability of the Company to license its products to others for their
distribution, or inadequacy of such licensees' distribution, or the inability of
the Company to enter into distributorship or similar agreements to market
products produced by the Company would likely have a material adverse impact on
the ability of the Company to market its products.
The Company may, in the future, determine to directly market certain of its
proposed containers. The Company has a limited marketing budget and resources.
Additional capital expenditures and management resources would be required to
develop more complete marketing and distribution capabilities. In the event the
Company elects to engage in broader or more direct marketing activities, there
can be no assurance the Company will be able to obtain the requisite funds, or
attract and retain the human and other resources necessary to successfully
expand its marketing plans for any of its potential products. See
"Business--Marketing."
15
<PAGE>
The Company's future growth and profitability is expected to depend, in
large part, on the success of its licensees, sub-licensees and distributors, if
any, and others who may participate in marketing efforts on behalf of the
Company. Success in marketing the Company's containers will be substantially
dependent on educating the targeted markets as to the distinctive
characteristics and perceived benefits of the Company's proposed containers.
COMPETITION
The Company believes competition among marketers of self-heating beverage
containers will be based primarily on price, product safety, ease of use,
quality, product recognition, access to distribution channels, product
innovation, and packaging. The competitive position of the Company will in part
depend on the ability of the Company to remain current in plastics manufacturing
technology and to anticipate innovations in integrated thermal container
technology, as well as changes in consumer preferences. If the Company's
integrated thermal containers are successfully received in the market, increased
competition is probable. Increased competition is likely to result in price
reductions, reduced operating margins, and loss of market share, any of which
could materially and adversely affect the Company's business, operating results,
and financial condition. There can be no assurance the Company will be able to
compete successfully, keep pace with technological developments, or have
sufficient funds to invest in new technologies, products, or processes.
There also can be no assurance companies in the food and beverage or
container industry, or other companies, will not enter the market for integrated
thermal containers with products that are superior to, less expensive, or which
achieve greater market acceptance than the Company's proposed containers. The
majority of food and beverage and container manufacturers are substantially
larger and more diversified than the Company; have substantially greater
financial and marketing resources than the Company; have greater name
recognition and distribution channels than the Company; and may have the ability
to develop competitively priced integrated thermal containers.
DEPENDENCE UPON KEY PERSONNEL
The Company's success in developing marketable containers and achieving a
competitive position will depend, in large part, on its ability to attract and
retain qualified management personnel, and in particular to retain Mr. Scudder
and Mr. Berntsen. The proprietary technology which has been licensed to the
Company by IHI was primarily developed by Mr. Scudder and Mr. Berntsen. Messrs.
Scudder and Berntsen have entered into employment agreements obligating them to
provide services to the Company through August 1999. The loss of either of these
individuals could have a material adverse impact on the business and operations
of the Company. The Company maintains life insurance policies on Messrs. Scudder
and Berntsen, but no assurance can be given that the proceeds from any such
policy will be adequate to offset the loss of their services. The Company will
need to hire additional management, administrative and engineering personnel in
the next year to meet its plans. Competition for such personnel is intense and
no assurance can be given that the Company will be able to hire and/or retain
adequate personnel. The Company's potential growth and any expansion into areas
and activities requiring additional expertise, such as expanded programs for
manufacturing and marketing, would be expected to place increased demands on the
Company's human resources. These demands are expected to require the addition of
new management personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Company's prospects for
success. In addition, the Company relies on consultants and advisors to assist
the Company from time to time in reviewing its marketing, management, research
and development strategies. Most if not all of the Company's consultants and
advisors are self-employed or are employees of other companies, and may have
commitments to, or consulting or advisory contracts with, more than one other
entity that may affect their ability to contribute to the Company. See
"Management."
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<PAGE>
EXPOSURE TO FLUCTUATIONS IN RESIN PRICES AND SUPPLY
Upon receipt of the proceeds from this Offering, the Company intends to
manufacture certain parts of the proposed integrated thermal containers using
plastic resins. The Company does not currently have agreements with any raw
material suppliers, including suppliers of resins. After this Offering, the
Company intends to enter into agreements with resin and other raw material
suppliers. There can be no assurance the Company will obtain supply agreements
on acceptable terms and conditions. Since plastic resin is anticipated to be a
principal component in the Company's proposed containers, the Company's
financial performance could become materially dependent on its ability, and the
ability of its licensees and/or distributors, if any, to acquire resin in
acceptable amounts and at acceptable costs, and to pass resin price increases on
to its future customers through contractual agreements or otherwise. The
capacity, supply, and demand for plastic resins and the petrochemical
intermediates from which they are produced are subject to cyclical price
fluctuations, including those arising from supply shortages. There can be no
assurance a significant increase in resin prices or a shortage of supply would
not have a material adverse impact on the business, financial condition, and
results from operations of the Company. See "Business-- Raw Materials and
Suppliers."
SUPPLY OF RAW MATERIALS; DEPENDENCE ON SINGLE SOURCE SUPPLIERS
The Company does not have agreements with the suppliers of any of its raw
materials. The Company currently obtains certain self-heating beverage container
components from single source suppliers. Specifically, the outside container and
the activating device (button) for the beverage container are supplied by
Johnson Controls, Inc. and Complex Tool & Mold, respectively. The Company
intends to purchase equipment with the proceeds of this Offering to manufacture
the outside container to provide an alternative supply source to Johnson
Controls, Inc. Although the Company is also currently dependent on Complex Tool
& Mold as the sole source of supply for one of its proprietary components, the
Company believes this component can be obtained from numerous suppliers and as a
result thereof the Company believes it is not materially dependent upon any
single source for any of its raw materials. Until such time as the Company
manufactures the outside container, locates a second source of supply for the
container and the activating device (button), there can be no assurance the
Company will be able to procure or substitute such components without a
significant interruption in its supply of component parts. The failure or delay
by any supplier to furnish the Company with these component parts could have a
material adverse effect on the Company's business, financial condition, and
results from operations.
ENVIRONMENTAL MATTERS
Federal, state, and local governments or regulatory agencies could enact
laws or regulations concerning environmental matters that may increase the cost
of producing, or otherwise adversely affect the demand for plastic products such
as those proposed by the Company. A decline in consumer preference for plastic
products due to environmental considerations could have a material adverse
effect upon the Company's business, financial condition, and results of
operations. In addition, certain of the Company's operations are subject to
federal, state, and local environmental laws and regulations that impose
limitations on the discharge of pollutants into the air and water, and establish
standards for the treatment, storage, and disposal of solid and hazardous
wastes. While the Company has not been required, in its limited history of
assembling integrated thermal containers, to make significant capital
expenditures in order to comply with applicable environmental laws and
regulations, the Company may have to make substantial future capital
expenditures due to changing compliance standards and environmental technology.
Furthermore, unknown contamination of sites currently or formerly owned or
operated by the Company (including contamination caused by prior owners and
operators of such sites) and off-site disposal of hazardous substances may give
rise to additional compliance costs.
In addition the principal components of the Company's products are made from
plastic. Although the Company's products use all recyclable plastics they cannot
generally be recycled into the same component
17
<PAGE>
parts, and there are likely fewer potential uses for the recycled plastic used
in the Company's products than there were for the original raw materials.
Therefore the Company would be expected to be contributing to an increasing
supply of plastic needing to be recycled into fewer uses or simply an increasing
amount of plastic, which although recyclable, may not be recycled. Similar
factors have been the source of increasing environmental concern by some and
increasing legislative and regulatory activity. The Company cannot predict the
nature of future legislation, regulation or liability exposure which may evolve
from these environmental concerns or the adverse impact it may have on the
Company. The Company does not have insurance coverage for environmental
liabilities and does not anticipate obtaining such coverage in the future. See
"Business--Environmental Matters and Government Regulation."
LIABILITY INSURANCE
The Company's proposed containers expose it to possible product liability
claims if, among other things, the use of its proposed containers results in
personal injury, death or property damage. There can be no assurance the Company
will have sufficient resources to satisfy any liability resulting from such
claims or will be able to cause its customers to indemnify or insure the Company
against such claims. The Company intends to obtain product liability insurance
prior to the commencement of commercial shipment of its products. There can be
no assurance such insurance coverage will be adequate in terms and scope to
protect the Company against material adverse effects in the event of a
successful claim, or that such insurance will be renewed, or the Company will be
able to acquire additional coverage when it deems it desirable to do so.
RISK FACTORS RELATING TO THIS OFFERING
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this Offering will experience immediate and substantial
dilution of approximately $2.91, or 53%, per share between the adjusted pro
forma net tangible book value per share after the Offering and an assumed
Offering Price of $5.50 per Unit. To the extent that any Warrants, options or
other securities convertible into shares of Common Stock currently outstanding
or subsequently granted to purchase shares of Common Stock are exercisable at a
price less than the net tangible book value per share following the Offering,
there will be further dilution upon the exercise of such securities. See
"Dilution" and "Description of Securities."
CONTROL BY PRESENT SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
SECURITIES
Without consideration of the Warrants, the Representative's Option, the
Over-allotment Option, or other outstanding options and warrants; the Company's
present shareholders will own 3,089,478 shares of Common Stock upon the
completion of this Offering, representing approximately 43.6% of the Company's
outstanding shares of Common Stock. The Company's officers and directors
currently own 1,893,870 of the 3,089,478 outstanding shares representing 61.3%
of the currently outstanding Common Stock. The Company's officers and directors
also have the right to acquire an additional 138,000 shares of Common Stock,
which are reserved for issuance upon the exercise of existing options.
Accordingly, without consideration of the Warrants, the Representative's Option,
the Over-allotment Option, or other outstanding options and warrants; if the
Company's officers and directors exercised all of the options they currently
hold, they could own up to 63.0% of the Company's outstanding Common Stock
before this Offering, and 28.1% of the Company's outstanding Common Stock after
this Offering. The price range for the officers' and directors' options is $1.00
to $5.00 per share. Even after this Offering, the Company's present shareholders
may be able to elect a majority of the Company's directors and otherwise control
the Company's operations. Also, the concentration of ownership by the Company's
officers and directors may discourage potential acquirors from seeking control
of the Company through the purchase of Common Stock, and this possibility could
have a depressive effect on the price of the Company's Securities. See
"Principal Shareholders" and "Description of Securities."
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<PAGE>
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
Purchasers of Units will only be able to exercise the Warrants if a current
prospectus under the Securities Act relating to the shares underlying the
Warrants is then in effect, and such securities are qualified for sale or exempt
from qualification under the applicable securities laws of the states in which
the various holders of Warrants reside. Although the Company has undertaken to
use its best efforts to maintain the effectiveness of a current prospectus
covering the shares underlying the Warrants, there can be no assurance the
Company will be able to do so. The Warrants may have a lower value if such
securities are not qualified, or exempt from qualification in the states in
which the holders of Warrants reside, and may have no value if a current
prospectus, covering the shares issuable upon the exercise of the Warrants, is
not kept effective. See "Description of Securities--Warrants."
DILUTIVE AND OTHER ADVERSE EFFECTS OF OUTSTANDING OPTIONS AND WARRANTS
Under the terms of the Warrants, the Representative's Option, options issued
under the Company's 1996 Stock Plan, the Over-allotment Option, and other
outstanding options and warrants, the holders thereof are given an opportunity
to profit from a rise in the market price of the Common Stock with a resulting
dilution in the interests of the other shareholders. The terms on which the
Company may obtain additional financing may be adversely affected by the
existence of such options and warrants. For example, the holders of the Warrants
could exercise them at a time when the Company was attempting to obtain
additional capital through a new offering of securities on terms more favorable
than those provided by the Warrants. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations," "Underwriting," "Description
of Securities," and "Shares Eligible for Future Sale."
ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE
The Offering Price of the Units and the exercise price and other terms of
the Warrants have been determined by negotiation between the Company and the
Representative and do not bear any relationship to any established valuation
criteria such as assets, book value, or prospective earnings. The market prices
for securities of emerging and development stage companies have historically
been volatile. Future announcements concerning the Company or its competitors,
including the results of testing, technological innovations or new commercial
products, government regulations, developments concerning proprietary rights,
litigation or public concern as to safety of potential containers developed by
the Company or others, may have a significant impact on the market price of the
Company's Securities. See "Underwriting."
POSSIBLE DEPRESSIVE EFFECT ON PRICE OF SECURITIES OF FUTURE SALES OF COMMON
STOCK
The sale or other disposition of much of the currently outstanding shares of
Common Stock is restricted by the Securities Act. Unless such sale is
registered, these shares may only be sold in compliance with Rule 144
promulgated under the Securities Act or some other exemption from registration
thereunder. For a description of the conditions under which shares may be sold
pursuant to Rule 144, see "Shares Eligible for Future Sale." Actual sales or the
prospect of sales of Common Stock under Rule 144 or otherwise in the future may
depress the prices of the Securities or any market that may develop, and may
also make it difficult for investors herein to sell the Securities. All officers
and directors and substantially all shareholders have agreed not to offer, sell,
assign, transfer, pledge or otherwise hypothecate without the Representative's
prior written consent, any of his/her securities of the Company for a period of
12 months from the date of this Prospectus. The sale or availability for sale of
substantial amounts of Common Stock in the public market after this Offering
could adversely affect the prevailing market price of the Securities and could
impair the Company's ability to raise additional capital through the sale of its
equity securities. See "Description of Securities," "Shares Eligible for Future
Sale," and "Underwriting."
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<PAGE>
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of preferred stock. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms, and all other rights, preferences and privileges with respect
to any series of preferred stock. The issuance of any series of preferred stock
having rights superior to those of the Common Stock may result in a decrease in
the value or market price of the Common Stock and could be used by the Board of
Directors as a means to prevent a change in control of the Company. Future
issuances of preferred stock may provide for dividends, certain preferences in
liquidation, as well as conversion rights. Such preferred stock issuances could
make the possible takeover of the Company, or the removal of management of the
Company, more difficult. The issuance of such preferred stock could discourage
hostile bids for control of the Company in which shareholders could receive
premiums for their Common Stock or Warrants, could adversely affect the voting
and other rights of the holders of the Common Stock, or could depress the market
price of the Common Stock or Warrants.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
Each Warrant will entitle the holder to purchase one Common Share at an
exercise price equal to 150% of the Offering Price commencing from the effective
date of the Registration Statement ("Effective Date"). The Warrants are
redeemable by the Company for $.05 per Warrant at any time after the Common
Shares and Warrants become separately tradable. To redeem the Warrants the
Company must provide at least 30 days prior written notice, and may only provide
such notice after the closing price of the Common Stock has for 20 consecutive
trading days within the 30 day period preceding the date of the notice of
redemption equaled or exceeded 200% of the Offering Price. In the event the
Company exercises its right to redeem the Warrants, a holder would be forced:
(i) to exercise the Warrant within the period of the notice of redemption, which
could occur at a time when it may be disadvantageous for them to do so; (ii) to
sell the Warrants at the then current market price, which could be at a time the
holder might otherwise wish to hold them; or (iii) to accept the redemption
price which will likely be substantially less than the market value of the
Warrants at the time of redemption. The Company may elect to call all of the
Warrants for redemption as soon as the trading price of its Common Stock meets
the minimum amount for the specified number of days, provided it is one year
from the Effective Date, or such earlier date as may be determined by the
Representative, and a current Prospectus relating to the Common Shares
underlying such Warrants is then in effect. See "Description of
Securities--Warrants."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
Although the Company has tentatively allocated the net proceeds from this
Offering for various uses, the projected expenditures are estimates and
approximations only and do not represent firm commitments of the Company.
Accordingly, the Company's management will retain broad discretion in the use of
these funds. In the event the Company's plans change, or if the proceeds of this
Offering or cash flow otherwise prove to be insufficient to fund operations, the
Company may find it necessary or advisable to reallocate some or all of the
proceeds from the Offering or may be required to seek additional financing or
curtail its product development activities. There can be no assurance any
additional financing will be available to the Company or that any available
financing will be on commercially reasonable terms. See "Use of Proceeds."
ANTI-TAKEOVER PROVISIONS; LIMITATION ON VOTING RIGHTS
The Company's Amended and Restated Articles of Incorporation ("Articles")
and its Bylaws contain provisions that may make it more difficult to acquire
control of the Company by means of tender offer, over-the-counter purchases, a
proxy fight, or otherwise. The Articles also include provisions restricting
shareholder voting rights. The Company's Articles include a provision
prohibiting action by written consent of the shareholders. The Company's
Articles provide that certain provisions of the Articles may only be amended by
a vote of 66 2/3% of the shareholders. The Company's Articles also require that
20
<PAGE>
shareholders give advance notice to the Company of any nomination for election
to the Board of Directors, or other business to be brought at any shareholders'
meeting. This provision makes it more difficult for shareholders to nominate
candidates to the Board of Directors who are not supported by management. In
addition, the Articles require advance notice for shareholder proposals to be
brought before a meeting of shareholders and requires the notice to specify
certain information regarding the shareholder and the proposal. This provision
makes it more difficult to implement shareholder proposals even if a majority of
shareholders are in support thereof. Each of these provisions may also have the
effect of deterring hostile take-overs or delaying changes in control or
management of the Company. In addition, the indemnification provisions of the
Company's Articles and Bylaws may represent a conflict of interest between
management and the shareholders since officers and directors may be indemnified
prior to any judicial determinations as to their conduct. The Articles provide
that the shareholders' right to cumulative voting will terminate automatically
when the Company's shares are listed on Nasdaq, the New York Stock Exchange
("NYSE") or the American Stock Exchange ("AMEX"), and the Company has at least
800 shareholders as of the record date for the most recent meeting of
shareholders. Upon consummation of this Offering, the Common Shares are
anticipated to be listed on Nasdaq. Therefore, cumulative voting will likely
terminate following consummation of this Offering. When and if the Company so
qualifies, the absence of cumulative voting may have the effect of limiting the
ability of minority shareholders to effect changes in the Board of Directors
and, as a result, may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of the Company.
The Company's Articles also include a provision ("Fair Price Provision")
requiring the approval of the holders of 66 2/3% of the Company's voting stock
as a condition to a merger or certain other business transactions with, or
proposed by, a holder of 15% or more of the Company's voting stock (an
"Interested Shareholder"), except in cases where the continuing directors
approve the transaction or certain minimum price criteria and other procedural
requirements are met. A "Continuing Director" is a director who is not
affiliated with an Interested Shareholder and was elected prior to the time such
Interested Shareholder became an Interested Shareholder, or any successor chosen
by a majority of the Continuing Directors. The minimum price criteria generally
require that, in a transaction in which shareholders are to receive payments,
holders of Common Stock must receive a value equal to the highest price of: (i)
the price paid by the Interested Shareholder for Common Stock during the prior
two years; (ii) the Fair Market Value (as defined) at the time; or (iii) the
amount paid in the transaction in which such person became an Interested
Shareholder. In addition, such payment must be made in cash or in the type of
consideration paid by the Interested Shareholder for the greatest portion of the
Interested Shareholder's shares. The Company's Board of Directors believes the
Fair Price Provision will help assure similar treatment for all of the Company's
shareholders if certain kinds of business combinations are effected. However,
the Fair Price Provision may make it more difficult to accomplish certain
transactions potentially beneficial to shareholders, but opposed by the
incumbent Board of Directors.
The Company's Articles provide for a classified Board of Directors to
automatically become effective when the Company's shares are listed on Nasdaq,
NYSE or AMEX, and the Company has at least 800 shareholders as of the record
date for the most recent meeting of shareholders. The classified Board of
Directors provisions, when and if effective, divide the Board of Directors into
two or more classes of directors serving staggered two-year terms, with one
director to be elected at each annual meeting of shareholders. The
classification of directors extends the time required to change the composition
of the Board of Directors. Upon consummation of this Offering, the Common Shares
and Warrants are anticipated to be listed on Nasdaq which will result in a
classified Board of Directors. See "Description of Securities--Possible
Anti-Takeover Effect of Certain Provisions of the Company's Articles of
Incorporation."
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<PAGE>
NO ASSURANCE OF PUBLIC MARKET
Prior to this Offering, there has been no public trading market of the
securities of the Company. There can be no assurance a regular trading market
for the Common Shares and Warrants will develop after this Offering or, if
developed, it will be sustained.
NO DIVIDENDS
The Company has never paid cash or other dividends on its Common Stock. It
is the Company's intention to retain earnings, if any, to finance the operation
and expansion of its business, and therefore, it does not expect to pay any cash
dividends in the foreseeable future. See "Dividend Policy."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ AND POSSIBLE MARKET ILLIQUIDITY
While the Company expects the Common Shares and Warrants will be included
for initial listing on Nasdaq there can be no assurance the Company will meet
the criteria for continued listing of the Securities on Nasdaq. Based on
existing listing criteria, a Nasdaq listing will generally require the Company
to have a minimum public distribution of 1,100,000 shares of Common Stock with a
minimum of 400 public holders of 100 shares or more, a minimum bid price of
$5.00 per share, and aggregate market value of publicly held shares of
$18,000,000. Nasdaq has adopted a number of alternative and additional criteria
for listing and there is no assurance the Company will be successful in
obtaining a listing or in maintaining its listing, if granted. In the event the
Company is either unsuccessful in obtaining an initial listing or is thereafter
delisted for any reason, investors would likely find it more difficult to
dispose of the Securities, or to obtain accurate quotations as to their value.
DISCLOSURES RELATING TO LOW PRICED STOCKS; POSSIBLE RESTRICTIONS ON RESALE OF
LOW PRICED STOCKS AND ON BROKER-DEALER SALES; POSSIBLE ADVERSE EFFECT OF
"PENNY STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S SECURITIES
If the Securities were delisted from Nasdaq (see "Possible Delisting of
Securities from Nasdaq and Possible Market Illiquidity" above) at a time when
the Company had net tangible assets of $2,000,000 or less, further transactions
in the Securities would become subject to Rule 15g-9 under the Securities
Exchange Act of 1934 (the "Exchange Act"). Rule 15g-9 imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 individually, or $300,000 together with their spouses). For
transactions covered by this Rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. Consequently, this Rule
could affect the ability of broker-dealers to sell the Securities, and may
affect the ability of purchasers in this Offering to sell any of the Securities
acquired hereby in the secondary market.
The Commission has adopted regulations which generally define a "penny
stock" to be any security of a company that has a market price (as therein
defined) less than $5.00 per share, or with an exercise price of less than $5.00
per share subject to certain exceptions, and which is not traded on any exchange
or quoted on Nasdaq. For any transaction by broker-dealers involving a penny
stock, unless exempt, the rules require delivery of a risk disclosure document
relating to the penny stock market prior to a transaction in a penny stock.
Disclosure is also required to be made about compensation payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in an account and information
on the limited market in penny stocks.
The foregoing restrictions will not apply to the Securities if the
Securities are listed on Nasdaq or another exchange, and have certain price and
volume information provided on a current and continuing basis, or if the Company
meets certain minimum net tangible asset requirements, or certain average annual
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revenue criteria over specific periods. There can be no assurance the Securities
will continue to qualify for exemption from these restrictions. If the
Securities were subject to these restrictions, the market liquidity for the
Securities could be materially and adversely affected.
CONTRACTUAL OBLIGATIONS TO REPRESENTATIVE
The Underwriting Agreement with the Representative provides for the
Company's continuing involvement with the Representative after the Offering,
including: (i) the Company's agreement to retain the Representative as a
consultant for two years from the date of this Prospectus for a fee of $3,000
per month; (ii) the Company's agreement to allow the Representative to nominate
one director or to designate a consultant to the Board of Directors for a period
of four years from the date of this Prospectus; (iii) the Company's agreement to
appoint the Representative as Warrant solicitation agent and to pay a fee for
such services equal to two percent of the exercise price of Warrant exercises
solicited by the Representative; and (iv) the grant to the Representative of an
option to purchase 400,000 Units at an exercise price of 160% of the Offering
Price. The ongoing fees to be paid to the Representative will reduce the amount
of working capital available for other purposes. See "Underwriting." In
addition, pursuant to a warrant agreement between the Company and the
Representative, the holders of the Representative's Option have the right, for a
period of five years, to require the registration under the Securities Act, at
the Company's expense, of the Common Shares and Warrants issuable upon exercise
of the Representative's Option and of the Common Shares issuable upon exercise
of the Warrants included therein, as well as certain "piggyback" registration
rights. The cost to the Company of effecting a demand registration may be
substantial. See "Description of Securities--Representative's Option."
To the extent the Representative elects to effect transactions in the
Company's Common Shares and Warrants, the Representative may exert a dominating
influence on the market for such Common Shares and Warrants. Such market making
activity may be discontinued at any time. In the event the Representative elects
or is forced to discontinue such activity following the completion of the
Offering, the price and liquidity of the Common Shares and Warrants may be
materially adversely affected. Further, as a result of the Representative's role
as a Warrant solicitation agent, unless granted an exemption by the Commission
from its rules, the Representative may be prohibited from engaging in any market
making activities with regard to the Company's Securities for the period from
one to five business days prior to any solicitation by the Representative of the
exercise of the Warrants until the later of: (i) termination of such
solicitation activity; or (ii) the termination, by waiver or otherwise, of any
right that the Representative may have to receive a fee for the exercise of the
Warrants following the solicitation. As a result, the Representative may be
unable to continue to provide a market for the Company's Securities under
certain periods while the Warrants are exercisable. See "Underwriting."
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<PAGE>
USE OF PROCEEDS
The Company estimates the net proceeds from the sale of the 4,000,000 Units
offered hereby will be approximately $19.2 million, assuming an Offering Price
of $5.50 per Unit, and after deducting underwriting discounts and commissions of
$1,650,000 and other expenses of this Offering estimated to be approximately
$1,200,000 (which includes the Representative's non-accountable expense
allowance). The Company intends to use the proceeds substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF NET
APPLICATION OF PROCEEDS DOLLAR AMOUNT PROCEEDS
- -------------------------------------------------------------- -------------- -------------------
<S> <C> <C>
Acquisition of manufacturing equipment........................ $ 4,450,000 23%
Marketing..................................................... 2,500,000 13
Research and development...................................... 1,900,000 10
Repayment of certain loans and deferred consulting fees(1).... 1,716,000 9
Expansion of facilities(2).................................... 750,000 4
Prepaid royalties(3).......................................... 250,000 1
Working capital and general corporate purposes................ 7,584,000 40
-------------- ---
$ 19,150,000 100%
-------------- ---
-------------- ---
</TABLE>
- ------------------------
(1) Includes repayment of principal and accrued interest on the Bridge Loans,
repayment of the December 1997 Loans and payment of deferred consulting
fees to Manhattan West, Inc. in the amount of $77,000 as of December 1,
1997, increasing at the rate of $5,000 per month thereafter. The Bridge
Loans all provide for accruing interest at 10% per annum, with all interest
and principal due upon the earlier to occur of five business days after
completion of the Offering, or 25 months. The December 1997 Loans provide
for accruing interest at 12% per annum, with all interest and principal due
upon the earlier to occur of five business days after completion of the
Offering, or 120 days. The Bridge Loans were issued between December 1996
and May 1997. One Bridge Loan contains a provision which allows the Company
to convert the amount owed to Common Stock based on a purchase price of one
half of the Offering Price. All of the proceeds from the Bridge Loans and
the December 1997 Loans were expended on research and development, working
capital and general corporate purposes. The amount shown above also
includes repayment of equipment leases guaranteed by certain officers and
directors of the Company in the approximate amount of $145,000. See
"Certain Transactions." "Bridge Loans" and "Related Party Transactions."
(2) The Company has entered into a lease in order to relocate its facilities to
an approximately 28,400 square foot single user building presently under
construction. Includes the Company's estimate of costs to conform the
building to its requirements.
(3) Five year prepayment of minimum royalty due pursuant to IHI License.
The estimates shown above exclude any proceeds from exercise of any of the
Warrants, the Representative's Option, the Over-allotment Option, and other
outstanding options and warrants to acquire the Common Stock of the Company. The
Common Shares included in all Units purchased pursuant to exercise of the
Over-allotment Option will be sold by Knickerbocker and the Company will not
receive any of the proceeds from the sale of such Common Shares. The Company
will receive the proceeds from the sale of the Warrants included in all Units
purchased pursuant to exercise of the Over-allotment Option. The net proceeds,
if any, from the exercise of the Warrants, the Representative's Option or other
outstanding options and warrants will be added to working capital.
The Company may use a portion of the net proceeds of this Offering to
acquire businesses, products, or technologies anticipated by management to be
complementary to those of the Company. The Company has no present plans,
agreements, or commitments and is not currently engaged in any negotiations with
respect to any such transaction.
The Board of Directors has broad discretion in determining how the net
proceeds of this Offering will be applied. The foregoing represents the
Company's best estimate of the allocation and use of proceeds based upon its
present plans and certain assumptions including industry conditions and the
Company's anticipated expenditures. The projected expenditures described above
are estimates and approximations only and do not represent firm commitments of
the Company. Actual expenditures may vary substantially from these estimates
depending upon many factors, including the costs and results of research and
product
24
<PAGE>
development activities, marketing studies, product testing, product
availability, costs of third party manufacturing facilities, market acceptance
of the Company's proposed containers, changes in current regulations or
competitive conditions, and the availability of other financing arrangements.
The Company's future capital requirements will depend upon numerous factors,
including the amount of revenues generated from operations (if any), the cost of
the Company's sales and marketing activities and the progress of the Company's
research and development activities, none of which can be predicted with
certainty. The Company anticipates the proceeds of this Offering, together with
existing capital resources and cash generated from operations, if any, will be
sufficient to meet the Company's cash requirements for at least the next 24 to
30 months at its anticipated level of operations. However, the Company may seek
additional funding during the next 30 months and could seek additional funding
after such time. There can be no assurance any additional financing will be
available on acceptable terms, or at all, when required by the Company.
Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors purchasing the Units offered hereby. The Company
has experienced in the past, and may continue to experience, operational
difficulties and delays in its product development due to working capital
constraints. Any such difficulties or delays could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes to Financial Statements.
Pending use of the proceeds from this Offering as set forth above, the
Company will invest all or a portion of such proceeds in short-term bank
certificates of deposit, U.S. Government obligations, money market investments,
and short-term investment grade securities.
DIVIDEND POLICY
No dividends have ever been paid on the Company's Common Stock and the
Company does not currently anticipate paying any cash or other dividends on the
Common Stock, but instead intends to retain future earnings, if any, for
reinvestment in the Company. Future dividend policy will be determined by the
Board of Directors of the Company in light of prevailing financial need,
earnings, if any, as well as other relevant factors. In addition, any financing
which the Company may obtain in the future may contain provisions restricting
the Company's ability to pay dividends.
25
<PAGE>
DILUTION
Dilution represents the difference between the Offering Price per share paid
by purchasers in this Offering, and the pro forma net tangible book value per
share immediately after completion of this Offering. "Net tangible book value
per share" represents the amount of the Company's total assets less the amount
of its intangible assets and its liabilities, divided by the number of shares of
Common Stock outstanding. As of September 30, 1997, as adjusted for the Recent
Issuances, the negative net tangible book value of the Company was $(714,300),
or $(0.23) per share of Common Stock, based on 3,089,478 shares of Common Stock
outstanding as of the date of this Prospectus. After giving effect to the
receipt of the net proceeds from the sale by the Company of 4,000,000 Units
offered hereby at an estimated Offering Price of $5.50 per Unit (assuming no
part of the Offering Price is allocated to the Warrants), and after deduction of
estimated underwriting discounts and commissions and offering expenses to be
incurred by the Company in connection with this Offering, and after the
repayment of Bridge Loans (and related write-off of $73,700 of deferred
financing costs), the related accrued interest, and repayment of the December
1997 Loans and existing capital leases, the pro forma net tangible book value of
the Company at September 30, 1997 adjusted for the Recent Issuances would have
been approximately $18,362,000, or $2.59 per share based on 7,089,478 shares of
Common Stock to be outstanding. This represents an immediate increase in such
pro forma net tangible book value of $2.82 per share to existing shareholders
and an immediate dilution of $2.91 per share to new investors purchasing the
Units offered herein, which dilution amounts to approximately 53% of the
Offering Price per Common Share.
The following table illustrates the per share dilution resulting from this
Offering:
<TABLE>
<S> <C> <C> <C>
Assumed Offering Price per share(1)...................................................... $ 5.50
Negative tangible book value per share September 30, 1997.............................. $ (0.35)
Adjustment for the Recent Issuances(2)................................................. 0.12
---------
Negative tangible book value after Recent Issuances.................................... (0.23)
Increase in net tangible book value per share attributable to new investors............ 2.82
---------
Pro forma net tangible book value per share after Offering............................... 2.59
---------
Dilution per share to new investors(3)(4)................................................ 2.91
---------
---------
</TABLE>
- ------------------------------
(1) Assumes no allocation of the Offering Price to the Warrants.
(2) Pro forma reflects the Recent Issuances.
(3) Does not reflect the issuance of up to: (i) 600,000 shares contained in the
Units issuable upon exercise of the Warrants included as part of
Over-Allotment Option; (ii) 4,000,000 shares issuable upon exercise of the
Warrants included as part of the Units offered hereby; (iii) 800,000 shares
issuable upon exercise of the Representative's Option and the
Representative's Warrants included in the Representative's Option; (iv)
545,400 shares reserved for issuance under the Company's 1996 Stock Plan of
which options to acquire 113,000 shares have been granted prior to the date
of this Prospectus; and (v) 1,667,093 shares underlying other options and
warrants granted prior to the date of the Prospectus. See "Management,"
"Description of Securities," and "Underwriting."
(4) If all outstanding options and warrants were fully vested and were exercised
on September 30, 1997, dilution per share to new investors would increase to
$3.23 per share.
The following table sets forth, as of September 30, 1997, after giving
effect to the Recent Issuances: (i) the number of shares of Common Stock
purchased from the Company by the existing shareholders, the total consideration
paid and the average price per share paid for such shares by the existing
shareholders; and (ii) the number of Common Shares to be sold by the Company to
the purchasers of the 4,000,000 Units offered hereby, the total consideration to
be paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.................................... 3,089,478 43.6% $2,047,000 8.5% $ 0.66
New Investors............................................ 4,000,000 56.4 22,000,000 91.5 $ 5.50(1)
--------- ----- ---------- -----------
Total.................................................. 7,089,478(2) 100.0% $24,047,000 100.0%
--------- ----- ---------- -----------
--------- ----- ---------- -----------
</TABLE>
- ------------------------------
(1) Of the assumed $5.50 Offering Price, $5.40 is attributed to one Common Share
and $0.10 is attributed to one Warrant.
(2) Does not reflect the issuance of up to: (i) 600,000 shares contained in the
Units issuable upon exercise of the Warrants included as part of
Over-Allotment Option; (ii) 4,000,000 shares issuable upon exercise of the
Warrants included as part of the Units offered hereby; (iii) 800,000 shares
issuable upon exercise of the Representative's Option and the
Representative's Warrants included in the Representative's Option; (iv)
545,400 shares reserved for issuance under the Company's 1996 Stock Plan of
which options to acquire 113,000 shares have been granted prior to the date
of this Prospectus; and (v) 1,667,093 shares underlying other options and
warrants granted prior to the date of the Prospectus. See "Management,"
"Description of Securities," and "Underwriting."
26
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company: (i) actual at September 30, 1997; (ii) pro forma to reflect the Recent
Issuances; and (iii) pro forma as adjusted to reflect the Recent Issuances and
the sale by the Company of 4,000,000 Units offered hereby at an estimated
Offering Price of $5.50 per Unit and the initial application of the estimated
net proceeds of approximately $19.2 million of this Offering (after deducting
the underwriting discounts and commissions and estimated related expenses to be
incurred). The table should be read in conjunction with the audited and
unaudited financial statements and notes thereto appearing elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
------------- ------------- -------------
<S> <C> <C> <C>
Short term debt(3)................................................... $ 1,245,000 $ 1,395,000 --
------------- ------------- -------------
------------- ------------- -------------
Preferred Stock, no par value, 5,000,000 shares authorized, no shares
issued and outstanding............................................. $ -- $ -- $ --
Common Stock, no par value 20,000,000 shares authorized, 3,006,071
shares issued and outstanding actual; 3,089,478 shares issued and
outstanding pro forma; 7,089,478 shares issued and outstanding pro
forma as adjusted(4)............................................... 1,714,300 2,047,200 21,197,200
Additional paid-in capital........................................... 993,800 1,117,900 1,117,900
Deficit accumulated during the development stage..................... (3,322,200) (3,439,200) (3,512,900)
Deferred compensation................................................ (431,000) (431,000) (431,000)
------------- ------------- -------------
Total shareholders' equity (deficit)................................. (1,045,100) (705,100) 18,371,200
------------- ------------- -------------
Total capitalization................................................. $ (1,045,100) $ (705,100) $ 18,371,200
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Pro forma reflects the Recent Issuances and the December 1997 Loans.
(2) Adjusted to reflect the Recent Issuances and the sale by the Company of the
4,000,000 Units offered hereby at an assumed Offering Price of $5.50 per
Unit, and the application of the estimated net proceeds therefrom of
approximately $19.2 million. The pro forma as adjusted also reflects the
repayment of principal and interest (and related write-off of $73,700 of
deferred financing costs) on the Bridge Loans, repayment of the December
1997 Loans, payment of deferred consulting fees of $57,500 and the repayment
of equipment leases of approximately $145,000. See "Use of Proceeds,"
"Capitalization" and "Certain Transactions."
(3) Consists of the Bridge Loans and the December 1997 Loans received by the
Company that will be repaid from the proceeds of this Offering.
(4) Excludes: (i) 4,000,000 shares reserved for issuance upon exercise of the
Warrants; (ii) 600,000 shares issuable upon exercise of the Warrants
included within the Over-allotment Option; (iii) 400,000 shares issuable
upon exercise of the Representative's Option; (iv) 400,000 shares issuable
upon exercise of the Representative's Warrants included in the
Representative's Option; (v) 545,400 shares reserved for issuance under the
Company's 1996 Stock Plan, of which options to acquire 113,000 shares of
Common Stock have been granted prior to the date of this Prospectus; (vi)
1,266,506 shares underlying other outstanding options granted prior to the
date of this Prospectus; and (vii) 400,587 shares reserved for issuance upon
exercise of outstanding warrants issued prior to the date of this
Prospectus. See "Management," "Description of Securities," "Underwriting,"
and Note 7 of Notes to Financial Statements.
27
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and Notes thereto, and the independent
auditors' report, which contains an explanatory paragraph that states that the
Company's recurring losses from operations and net capital deficiency raise
substantial doubt about its ability to continue as a going concern, and other
financial information included elsewhere. The Statement of Operations Data for
the years ended December 31, 1995 and 1996, and the Balance Sheet Data as of
December 31, 1996 are derived from the financial statements of the Company,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent auditors. The financial statements as of December 31, 1996, and for
each of the years in the two-year period ended December 31, 1996, and the
independent auditors' report thereon, are included elsewhere in this Prospectus.
The unaudited statement of operations data for the nine months ended September
30, 1996 and 1997, and the period from November 8, 1994 (inception) through
September 30, 1997, and the unaudited balance sheet at September 30, 1997 have
been derived from the unaudited financial statements of the Company also
appearing herein. The unaudited financial statements have been prepared on a
basis consistent with the Company's audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that management
believes necessary for a fair presentation of the Company's financial position
and results of operations for these periods. Results of operations for the nine
months ended September 30, 1997 are not necessarily indicative of results to be
expected for the year ending December 31, 1997, or a full year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, FROM INCEPTION
--------------------- NINE MONTHS ENDED NINE MONTHS ENDED THROUGH
1995 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------- ---------- ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ -- $ -- $ -- $ -- $ --
Operating expenses:
Marketing, general and
administrative................ 94,500 830,400 399,700 1,127,700 2,064,900
Research and development........ 67,900 235,900 231,200 402,000 705,800
Compensation related to grant of
stock options................. -- 379,300 379,300 26,400 405,700
--------- ---------- ------------------ ------------------ ------------------
Total operating expenses...... 162,400 1,445,600 1,010,200 1,556,100 3,176,400
Interest expense................ 1,700 22,800 11,300 121,100 145,800
--------- ---------- ------------------ ------------------ ------------------
Net loss(1)..................... $(164,100) $(1,468,400) $ (1,021,500) $ (1,677,200) $ (3,322,200)
--------- ---------- ------------------ ------------------ ------------------
--------- ---------- ------------------ ------------------ ------------------
Net loss per common share(1).... $ (0.07) $ (0.49) $ (0.37) $ (0.43)
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
Weighted average common and
common equivalent shares
outstanding(1)................ 2,423,800 3,024,100 2,733,700 3,864,600
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
Dividends paid.................. $ -- $ -- $ -- $ -- $ --
--------- ---------- ------------------ ------------------ ------------------
--------- ---------- ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
PRO FORMA AS
DECEMBER 31, 1996 ACTUAL ADJUSTED(2)(3)
----------------- --------- ----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................................. $ 12,000 71,800 $ 18,043,300
Working capital (deficit)........................................ (220,800) (1,504,300) 17,878,000
Total assets..................................................... 328,600 660,100 18,557,900
Total liabilities................................................ 445,400 1,705,200 186,700
Deficit accumulated during the development stage................. (1,645,000) (3,322,200) (3,512,900)
Shareholders' equity (deficit)................................... (116,800) (1,045,100) 18,371,200
</TABLE>
- ------------------------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net loss per common share and shares used in computing net
loss per share.
(2) Pro forma reflects the Recent Issuances and the December 1997 Loans.
(3) Adjusted to reflect the Recent Issuances and the sale by the Company of the
4,000,000 Units offered hereby at an assumed Offering Price of $5.50 per
Unit, and the application of the estimated net proceeds therefrom of
approximately $19.2 million. The pro forma as adjusted also reflects the
repayment of principal and interest (and related write-off of $73,700 of
deferred financing costs) on the Bridge Loans, repayment of the December
1997 Loans, payment of deferred consulting fees of $57,500 and the repayment
of equipment leases of approximately $145,000. See "Use of Proceeds"
"Capitalization," and "Certain Transactions."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL
INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE
CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE
TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS
PROSPECTUS. SEE "FORWARD-LOOKING STATEMENTS." THE COMPANY'S ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Ontro, Inc. is engaged in the research and development of integrated thermal
containers. The Company, through a related entity, has worldwide, exclusive
rights to patented and patent pending products and technology for self-heating
and self-cooling containers. The Company plans on licensing its integrated
thermal containers to food, beverage, and container manufacturers who will
manufacture, market, and sell the containers under their own brand names or to
third parties. At this time the Company is still in its development stage with
no commercially available products and there can be no assurance that the
Company will successfully develop, manufacture, and market its proprietary
containers or technologies.
The Company has never generated any revenue from product sales or through
licensing agreements and has relied on private equity financing, Bridge Loans
and the December 1997 Loans. The Company has been unprofitable since its
inception and expects to incur additional operating losses in 1997 and 1998. As
of September 30, 1997, the Company's accumulated deficit was $3,322,200, and it
had a working capital deficiency of $1,504,300. Until September, 1996, the
Company's shareholders elected to have the Company be treated as an S
Corporation in which all losses passed through to the shareholders to be
reported on their personal tax returns. In September 1996, the Company elected
to be treated as a C Corporation for tax reporting purposes. At December 31,
1996, the Company had available net operating loss carry forwards of
approximately $548,000 for federal income tax reporting purposes which expire in
2011.
The Company's recurring operating losses and cash flow deficiencies and
working capital and shareholders' deficiencies as of December 31, 1996, raise
substantial doubt about the Company's ability to continue as a going concern.
Therefore, Management believes the Company will need substantial funds from debt
or equity financing such as the funds that would be provided if this Offering
were consummated.
LIQUIDITY AND CAPITAL RESOURCES
From inception the Company financed its operations primarily through private
placements of equity securities, which provided aggregate net proceeds of
approximately $2,047,000 and loans received during the past year of $1,395,000.
The Company raised $1,245,000 from sales of the Bridge Loans from December,
1996 through May, 1997 and $150,000 from the December 1997 Loans. At September
30, 1997, the Company's current liabilities exceeded its current assets by
approximately $1,504,300 and its cash balance was $71,800. Since that date, the
Company has received the proceeds from the Recent Issuances and the December
1997 Loans and the Company's cash position continues to decline.
Net cash used by operating activities for the years ended 1995 and 1996 was
$132,100 and $693,800 respectively. The Company's net cash flow used by
investing activities was $32,500 in 1995 and $150,100 in 1996. Net cash flow
from financing activities was $146,000 in 1995 and $854,300 in 1996.
29
<PAGE>
During the 12-month period following the consummation of this Offering the
Company plans to spend $4,450,000 for capital equipment and $750,000 for
improvement to its new facility.
The Company's future capital requirements will depend upon numerous factors,
including the amount of revenues generated from operations (if any), the cost of
the Company's sales and marketing activities and the progress of the Company's
research and development activities, none of which can be predicted with
certainty. The Company anticipates the proceeds of this Offering, together with
existing capital resources and cash generated from operations, if any, will be
sufficient to meet the Company's cash requirements for at least the next 24 to
30 months at its anticipated level of operations. However, the Company may seek
additional funding during the next 30 months and could seek additional funding
after such time. There can be no assurance any additional financing will be
available on acceptable terms, or at all, when required by the Company.
Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors purchasing the Units offered hereby. The Company
has experienced in the past, and may continue to experience, operational
difficulties and delays in its product development due to working capital
constraints. Any such difficulties or delays could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes to Financial Statements.
RESULTS OF OPERATIONS
The Company incurred a loss of $1,677,200 in the nine months ended September
30, 1997 (the "1997 first nine months"); $1,021,500 in the nine months ended
September 30, 1996 (the "1996 first nine months"); $1,468,400 for the year ended
December 31, 1996 ("1996"); and $164,100 for the year ended December 31, 1995
("1995").
Research and development expenses increased $170,800 to $402,000 for the
1997 first nine months from $231,200 for the 1996 first nine months and
increased $168,000 to $235,900 for 1996 from $67,900 for 1995. These increases
were due to additional costs of outside consultants and companies hired by the
Company to aid in its research and development efforts, as well as salaries paid
to employees in 1996. Prior to May, 1996, the Company did not pay any salaries
to employees.
The Company's marketing, general and administrative expenses increased
$728,000 to $1,127,700 in the 1997 first nine months from $399,700 in the 1996
first nine months, and increased $735,900 to $830,400 in 1996 from $94,500 in
1995. These increases were due to a number of factors including the following:
(1) the hiring of business consultants to develop long-term marketing and
business strategies, (2) employee salaries in 1996, (3) increase in professional
fees, and (4) overall increase in corporate expenses due to increased business
activities at the Company.
During 1996, the Board of Directors granted and the stockholders approved
1,216,506 stock options outside the 1996 Stock Plan at a price range of $0.001
to $3.00 to non-employees. The Company recognized $379,300 of compensation
expense to non-employees relating to these options during 1996 and deferred
$405,700 of compensation expense for options that have not vested as of December
31, 1996 using the prescribed valuation methods of SFAS No. 123. The Company
determined that the per share weighted average fair value of stock options
granted during 1996 was $0.67 on the date of grant.
Interest expense was $121,100 in the 1997 first nine months compared to
$11,300 in the 1996 first nine months and increased $21,100 to $22,800 in 1996
from $1,700 in 1995 due to short term borrowings and equipment financing.
30
<PAGE>
NEW ACCOUNTING STANDARDS
In February, 1997, the FASB issued SFAS No. 128, "EARNINGS PER SHARE." This
statement specified the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. This statement shall be effective for financial statements for
both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. At this time the Company does not believe that
this statement will have a significant impact on the financial position or
results of operations for the year ending December 31, 1997.
In February, 1997, the FASB issued SFAS No. 129, "DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURE." This statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company does not believe that this statement will have a
significant impact on the financial position or results of operations for the
year ending December 31, 1997.
In June, 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purposes financial statements. This statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time the Company does not believe that this statement will
have a significant impact on the financial position or results of operations for
the year ending December 31, 1998.
In June, 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement shall be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. At this time the
Company does not believe that this statement will have a significant impact on
the financial position or results of operations for the year ending December 31,
1998.
31
<PAGE>
BUSINESS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, STATEMENTS REGARDING FUTURE EVENTS AND THE COMPANY'S PLANS AND
EXPECTATIONS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THE PROSPECTUS OR INCORPORATED HEREIN BY
REFERENCE. SEE "FORWARD-LOOKING STATEMENTS."
OVERVIEW
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has the rights to
exploit a unique proprietary technology which it has incorporated into a
proposed product line of fully contained self-heating beverage containers
designed to heat liquid contents such as coffee, tea, hot chocolate, soups, and
baby formula. These containers are similar to typical beverage containers in
size and shape, and are activated by the consumer to heat the contents within a
few minutes. The Company seeks to market its container technology to develop and
expand a consumer market for remote and mobile heating of beverages and other
products.
The Company's products are still in development and are not currently sold
commercially. The Company's first anticipated commercial product is a
self-heating beverage container which will require additional research and
development, including further design improvements, testing, and marketing
studies before it or any of the Company's other potential products under
development will be able to be successfully manufactured and marketed. There can
be no assurance these efforts will be successfully completed.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, significant additional work
testing or verifying different aspects of the containers is required before the
current demonstration models will be ready for commercial production. Additional
development issues which must be completed include, but are not limited to the
areas of seam failure, heat transfer, content related issues, heating control,
pasteurization, timing and temperature ranges, appearance, and packaging. There
can be no assurance these development issues will be successfully concluded.
The Company believes substantial market opportunities exist for the
exploitation of the Company's integrated thermal container technology. The
Company believes as society has become more mobile, demand has risen for remote
heating of goods, and conventional heating sources do not supply truly remote
consumption due primarily to inconvenience and the inability of consumers to
access these sources in a mobile environment. The Company's self-heating
containers are expected to meet the needs of consumers such as mothers requiring
warmed baby formula, commuters, mobile professionals, sports enthusiasts and
others without quick and convenient access to conventional heating sources.
The Company intends to become a leading provider of integrated thermal
containers and related technology to food, beverage and other manufacturers. In
order to do so the Company will have to complete the development of its proposed
products so they may be successfully manufactured and marketed. The Company's
principal strategies include:
SUB-LICENSE AGREEMENTS WITH MAJOR FOOD, BEVERAGE AND CONTAINER COMPANIES.
The Company's principal marketing strategy is to target major food, beverage
and container manufacturers for the sub-license of its integrated thermal
container technologies. These manufacturers are expected to manufacture, label,
fill, market and distribute containers under their own brand name or for third
parties in exchange for providing the Company royalties and/or research and
development and marketing assistance. Management believes this approach should
allow the Company to access the manufacturing, marketing, name brand and
distribution capabilities of potential licensees without the high overhead costs
of plant, equipment and labor. The Company believes its integrated thermal
containers
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could assist manufacturers in offering a value-added product to complement
existing product lines and assist in expanding market share. To date, the
Company has entered into an evaluation agreement with Nestle USA Inc. ("Nestle")
and a distribution agreement with Knickerbocker (see below). To successfully
implement this strategy, the Company will have to complete its product
development, and market the proposed products to potential sublicensees who will
have to be independently satisfied with the products and the market opportunity.
There can be no assurance the Company will be able to complete these objectives.
STRATEGIC MANUFACTURING AND MARKETING.
Concurrently with seeking sub-license agreements, the Company plans to
directly produce and market self-heating beverage containers to selected niche
markets. The Company believes such manufacturing and marketing should provide
substantial benefits including: (i) additional revenues to fund marketing
efforts to major food, beverage and container companies as described above; (ii)
demonstration of product feasibility and the manufacturing process; and (iii)
providing evaluation units for use in conducting marketing and product
feasibility studies by the Company and others. The Company plans to selectively
market to customers and distributors whom the Company believes would not
interfere with potential sub-licenses the Company intends to seek with major
food and beverage container manufacturers. The Company intends to use a portion
of the net proceeds of this Offering to complete its development of a full-scale
production facility. In addition to completing its manufacturing facility and
successfully demonstrating its capacity to manufacture commercial quantities of
completed products, the Company will have to identify and obtain distribution
channels in such niche markets. There can be no assurance the Company will be
able to complete these objectives.
DEVELOP INTEGRATED THERMAL TECHNOLOGY FOR OTHER APPLICATIONS.
The Company plans to develop additional integrated thermal containers to
further access the beverage market. The Company is designing a proprietary
reusable thermos-Registered Trademark- type container with insertable thermal
cartridges, which would allow the consumer to heat and re-heat, an integrated
thermal container filled by the consumer with the liquid of his/her choice. The
Company is developing a disposable self-heating baby bottle, which could be
pre-filled with formula and heated on demand. The Company's plans also include
additional research and development into designs and potential uses of
integrated thermal containers for medical, pharmaceutical, health, and beauty
products, as well as other potential industrial applications. The Company
intends to utilize the expertise of its management and Advisory Board to
identify market opportunities for its technology. There can be no assurance the
Company will be able to complete the design and development of, or market any
such integrated thermal containers.
The Company has entered into an evaluation agreement (the "Evaluation
Agreement") with Nestle which allows Nestle an exclusive period to review the
Company's designs and technology in order to determine Nestle's interest in
acquiring rights for the commercial use of the Company's self-heating food and
beverage containers. The Evaluation Agreement requires Nestle to cooperate with
the Company in evaluating certain commercial uses and markets for the Company's
technology, and includes an obligation to pay for one-half of the cost of
certain market research studies that are currently underway.
The Company has also entered into the LLK Agreement with Knickerbocker, a
marketer of specialty products. The Company and Knickerbocker are working to
develop certain specialty lines of beverages which would utilize the Company's
integrated thermal containers and be marketed by Knickerbocker.
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PRODUCTS
SELF-HEATING BEVERAGE CONTAINERS
The Company's first product is a fully contained, disposable, self-heating
beverage container similar in size and shape to an ordinary 16-ounce beverage
can. The containers are being designed to be heated by pushing a button on the
bottom of the container. Activating the heating mechanism by pressing the button
causes the contents in the container, such as approximately 10 ounces of coffee,
soup, tea, hot chocolate or baby formula, to safely warm to a pre-determined
range of temperatures within a specified range of time periods. The container
can then be opened by a typical style pop top for immediate
[GRAPHIC]
consumption. At its current stage of development the Company's initial proposed
product has been manufactured, and test marketed in limited quantities. The
product requires additional research and development including further design
improvements, testing and marketing studies before it is introduced into the
marketplace. The Company believes with the application of the proceeds of this
Offering that the development of it's initial proposed product can be completed
in a manner that would allow this product to be available to the marketplace in
the last quarter of
1998.
The Company's proposed self-heating containers heat the contents inside the
container through a patented and patent pending process developed by the
Company. The process utilizes two separate compartments in the container. One
compartment holds the beverage or food. The second compartment contains
non-toxic heat activating ingredients and water which are segregated into two
component areas.
Pressing the button causes the water to be mixed with the active ingredients
and heat develops from the resulting chemical reaction.
To date, the Company has developed several prototypes which it believes
demonstrate the feasibility of its self-heating beverage container technology.
Management believes the key attributes of its systems are the following:
EASE OF USE -- This system is designed so that a consumer can activate the
system merely by pushing a button; the contents are heated to a predetermined
range of temperatures within a specified range of time periods.
EASE OF USE BY MANUFACTURER -- The Company's products are designed to be
easily integrated into a manufacturer's existing production system. The current
design of the self-heating container is similar to a 16 oz. beverage container,
which configuration should allow manufacturers to integrate containers on an
existing assembly line for filling without substantial modification to their
existing manufacturing processes.
In addition, the Company's product is designed to be easily modified to
provide heated contents at a pre-determined range of temperatures within a
specified range of time periods. By varying the amount of heat activating
ingredients in the heating compartment, the manufacturer can tailor the time and
temperature to heat to the contents without altering the container itself.
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EASE OF DISPLAY BY RETAIL DISTRIBUTORS -- The container's current 16 oz.
style beverage configuration should allow distributors the ability to easily
integrate the product in space and point of purchase displays at supermarkets
and convenience stores without substantial modification to existing displays.
PRICING -- The Company has designed the product to be easily and simply
manufactured, with readily available components. The Company believes that
manufacturers are more likely to integrate the process with existing products so
long as the incorporation of such technology does not result in substantial
price increases to consumers.
USE OF NON-TOXIC MATERIALS -- The Company's products utilize non-toxic,
natural materials in its heating process. Management believes that consumers
could be more likely to purchase the Company's products if they believe the
beverage contents are not subject to toxic contamination from the heating
source.
The Company is continually evaluating certain design features of its
self-heating containers to refine such items as: the speed and efficiency of the
heat transfer; suitability for high viscosity contents; maintaining structural
integrity of the container; temperature control; and ease of use. Certain
aspects of the product are still under development. See "Manufacturing and
Products."
OTHER PROPOSED PRODUCTS
The Company is developing a self-heating food container which could be
pre-filled with items such as chili, soups, stews, and other food products. The
Company is also designing a proprietary reusable thermos-Registered Trademark-
type container with insertable thermal cartridges, which would allow the
consumer to heat and re-heat, or cool and re-cool, an integrated thermal
container filled by the consumer with the beverage of his/her choice.
The Company plans to develop similar containers of differing designs, which
may be able to be used for beverages or food. For example, the Company is
developing a disposable self-heating baby bottle, which could be pre-filled with
formula and heated on demand. The Company plans on conducting additional
research and development into designs and potential uses of integrated thermal
containers for medical, pharmaceutical, health and beauty products, and other
potential industrial applications.
The Company believes it can formulate differing active ingredients to enable
the contents of its integrated thermal containers to be cooled. The Company is
currently investigating the development of self-cooling technology. As of the
date of this Prospectus, the Company has not expended substantial research and
development efforts toward and has not produced any prototypes of a self-cooling
container.
For the nine months ended September 30, 1997 and the years ended December
31, 1996 and 1995, the Company expended $402,000, $235,900 and $67,900,
respectively, on research and development. The Company intends to spend a
portion of the net proceeds of this Offering on additional research and
development.
MARKETING
The Company's principal marketing strategy is to sub-license to major
manufacturers rights to integrated thermal container technologies developed by
or licensed to the Company. The initial focus of the Company's marketing efforts
will be on food and beverage and container manufacturers such as Nestle who the
Company believes may choose to package or sell containers, including such
contents as coffee, tea, hot chocolate, low-viscosity soups, and baby formula.
The Company is targeting companies such as Nestle which have large operations in
an effort to take advantage of their marketing and distribution capabilities and
brand name recognition. The Company intends to expend a portion of the proceeds
of this Offering on marketing.
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Since the Company believes securing such sub-license agreements may be a
very time consuming process, the Company also plans to produce and sell
self-heating beverage containers to customers and distributors. The Company
believes this secondary marketing strategy may assist in generating revenues
prior to the time larger volume sub-license agreements, if any, are obtained.
The Company plans to select such customers and distributors who the Company
believes would not interfere with sub-licenses the Company intends to seek with
major food and beverage container manufacturers. The Company has executed one
distributorship agreement of this type to market its integrated thermal
containers. See "Distributorship Agreement."
There can be no assurance this secondary marketing strategy of direct sales
or distribution arrangements will be successful, or if it is, that such
agreements will not preclude or impede sub-license agreements, if any, with
major food and beverage or container manufacturers. The Company intends to
retain a small sales staff to pursue such direct sale and distribution
opportunities. To assist in securing sub-license candidates and to determine the
potential market for its proposed containers, the Company intends to conduct
significant marketing studies in the next year. It is anticipated such marketing
studies will be contracted from third parties; however, the Company may conduct
a portion of such marketing studies internally. There can be no assurance the
results of such marketing studies will be favorable to the Company. If they are
not, they could have a material adverse impact on the business, financial
condition, and results from operations of the Company.
DISTRIBUTORSHIP AGREEMENT
The Company has entered into the LLK Agreement with Knickerbocker dated
April 4, 1997. The LLK Agreement grants Knickerbocker certain rights to market
and distribute certain products incorporated in the Company's integrated thermal
containers. Knickerbocker has the right to appoint sub-distributors, subject to
approval by the Company. Pursuant to the LLK Agreement, in the first calendar
month after the Company accepts an order, Knickerbocker must purchase a minimum
of 50,000 containers; the minimum requirement in the second month is 100,000
containers; a 200,000 container minimum is required in the third month; a
250,000 container minimum is required during each calendar month thereafter for
the next succeeding three month period; and a minimum of 750,000 containers is
required during each three month period thereafter. Failure to purchase the
minimum requirements is grounds for termination. Knickerbocker has agreed not to
disclose any confidential information of the Company during the term of the LLK
Agreement. The term of the LLK Agreement is five years. The price to be paid by
Knickerbocker for the containers is the published list price current at the time
of shipment. The Company is not required to ship any containers to Knickerbocker
until the applicable integrated thermal container is fully developed and ready
for commercial production. Although the Company anticipates its self-heating
containers may be ready to go to market in the fourth quarter of 1998, no date
is currently set for when any of the Company's integrated thermal containers
will be ready for commercial production. There can be no assurance Knickerbocker
will ever order any containers from the Company, or that the Company will be
able to develop any integrated thermal container to a point it is ready for
commercial production. Knickerbocker owns 858,673 shares of Common Stock, which
it purchased for $600,000 in September, 1996. Knickerbocker owns 29,262 shares
of IHI Common Stock, which it purchased for $50,000 in September, 1996. Louis L.
Knickerbocker, Chairman, Chief Executive Officer, President, and significant
shareholder of Knickerbocker, is a director of the Company.
MANUFACTURING AND PRODUCTION
The Company intends to sub-license most of the integrated thermal container
technology developed by IHI to large food, beverage, and container
manufacturers. The Company believes this strategy could provide material
benefits, including use of the greater manufacturing, marketing, and
distribution expertise of such companies, and potential reduction of substantial
manufacturing costs. While no sub-license agreements have been executed to date,
the Company anticipates entering into sub-licenses where the sub-
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licensees are responsible for purchasing the raw materials, manufacturing or
contracting for the manufacture of the container, labeling, filling, marketing,
selling, and distributing the integrated thermal container technology or any
other related technologies licensed by the Company and sub-licensed to them.
There can be no assurance the Company will be able to sub-license the IHI
technology to anyone including such companies, or on what terms.
As of the date hereof, the Company has a semi-automated production facility
located in approximately 2,000 square feet of industrial space. The production
facility is used to manufacture and assemble the components of the Company's
self-heating beverage containers. With the proceeds of this Offering, the
Company intends to move its administration offices and this production facility
to leased office-industrial space of approximately 28,400 square feet, and to
install additional integrated thermal container manufacturing equipment. The
Company's proposed new facility will be dedicated to research and development
and to manufacturing and assembling integrated thermal containers. The purpose
of the manufacturing and assembly facilities are to demonstrate the commercial
viability of the Company's manufacturing processes, to supply enough
self-heating containers for additional testing and market studies, and to
produce self-heating beverage containers which can be sold directly or to
distributors. It is anticipated containers sold directly or to distributors will
be filled, packaged, and distributed by the customer, the distributor or their
contract manufacturer. The Company does not intend to fill the contents of any
containers at its facilities. The Company's semi-automated production facility
is designed to allow most of the component parts of the Company's self-heating
beverage container, with the exception of the activating device, to be
manufactured on the Company's premises. The Company believes its production
facility will assist commercialization efforts as it is anticipated such
production efforts will assist in further refinement of the Company's integrated
thermal containers following future testing and marketing studies.
Contractors currently retained by the Company utilize the blow-molding
process to produce the main component of the Company's self-heating beverage
containers. In the blow-molding process, pellets of plastic resin are heated and
extruded into a tube of plastic. A two-piece metal mold is then closed around
the plastic tube, and high pressure air is blown into it, causing a plastic
container to form in conformance to the mold's shape. The Company believes the
blow-molding method is an established process in the plastic beverage container
industry. The Company believes the blow-molding process offers certain
advantages, including the following: it is less expensive than injection
molding; it is expected to allow the Company to completely control the thickness
of the inner and outer walls of the container thereby assisting in heat
retention and heat transfer; it generally results in a strong oxygen barrier
which could increase shelf stability; and all equipment used in the process is
generally available and can be purchased with little, if any, custom parts or
conversions. The Company intends to expend a substantial portion of the proceeds
of this Offering on acquiring and incorporating blow-molding equipment into its
production facility.
The Company has implemented certain quality control procedures for its
production facility. The Company's quality control personnel now regularly
monitor the manufacturing process and the Company anticipates they will monitor
additional items in the future such as blow-molding to assure the plastic
containers and component parts are free from defects. At such time, when the
Company sells integrated thermal containers produced by its facilities, if ever,
the Company expects some or all of its customers will impose additional quality
control standards. It is possible such customer or other required quality
control standards will require the expenditure of substantial resources over a
long period of time, or that the Company will determine such measures are not
cost-effective.
To ensure contents are not contaminated during or after packaging and to
comply with food and beverage manufacturers' requirements, the Company has
refined the design of its containers so they may be filled by the various
sterilization processes, generally in use today for food and beverage
containers. The design of its containers currently allows them to be processed
through all but one (hot fill, aseptic, ultra high temperature, pasteurization,
and irradiation) method of sterilization. The Company is continuing to further
the development of its designs to enable its containers to also be suitable for
the "retort" method
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of sterilization. Sterilization methods generally expose the containers to high
temperatures and/or pressures, for a designated period of time to sterilize the
container of microorganisms which could have an effect upon the contents
therein. Some sterilization processes place a great deal of stress on a
container because the process subjects the container to high pressure and/or
high temperature for a period of time which can challenge the seams or
compromise the integrity of a plastic container. The Company believes its
self-heating beverage containers will be able to satisfactorily endure the
various sterilization processes with a beverage or liquid inside. There can be
no assurance the Company will resolve these design issues or resolve other
design issues which may appear during testing or commercial use.
To ensure sub-licensees, if any, comply with the level of quality control
standards the Company anticipates will be essential for its success, the Company
intends to require its sub-licensees to comply with what are known as the ISO
9000 standards. The Company plans to actively review the production processes
and to routinely test the goods produced by its sub-licensees. The Company also
plans on requiring any contract manufacturers to also comply with ISO 9000
standards. The Company believes ISO 9000 standards are generally regarded as
fairly rigorous. There can be no assurance the Company will be able to
successfully require sub-licensees or contractors to comply with these
standards, or any specific quality control standards.
The Company intends to design all integrated thermal containers used by its
licensees or contract manufacturers, and intends to participate in the design of
such parties' production tooling and molds. The Company plans on requiring molds
and tooling used for the manufacture of containers utilizing its technologies to
comply with specifications and quality control parameters established by the
Company. There can be no assurance the Company will be able to adequately
monitor, require or assure such parameters are met or otherwise, adequately
control the manufacturing processes of any licensee or contract manufacturer.
The Company estimates its improved production facility utilizing a single
blow-molder and one eight hour shift should be able to produce approximately
2,000,000 containers per year, and using a double shift should be able to
produce approximately 4,000,000 containers per year. It is anticipated these
production figures could be increased with the installation of additional
equipment. There can be no assurance the proposed production facility, if
completed, will produce the estimated number of containers or if this number of
containers is produced, it will be sufficient to supply the demand, if any,
which may result for containers manufactured by the Company.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used by the Company in the manufacture of its
integrated thermal containers are plastic resins, polyvinyl chloride (plastic),
calcium oxide, water, and foil seal lids. The Company does not currently have
agreements with any of its suppliers for the purchase of its raw materials.
Since it began developing its current self-heating prototypes the Company
has relied on Johnson Controls, Inc. and Complex Tool & Mold as the sole sources
of supply for its containers and the proprietary component containing the water
and the activation trigger, respectively. With the proceeds of this Offering,
the Company intends to purchase blow-molding equipment and to manufacture
self-heating beverage containers at its semi-automated production facility,
while continuing to rely on Johnson Controls, Inc. as a supplier of related
equipment components. There can be no assurance Johnson Controls, Inc. will be
able to continue to supply the Company with adequate amounts of such components
on a timely basis, so the Company will be able to meet its production
requirements, if any. The unanticipated loss of Johnson Controls, Inc. or
Complex Tool & Mold as suppliers, or a delay in container shipments which occurs
before the Company begins to manufacture its containers, could have a material
adverse impact on the Company, although the Company believes numerous other
suppliers are available for these components. The Company does not believe it is
materially dependent upon any single source for any of its raw materials. The
Company anticipates it will enter into agreements with certain raw material
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suppliers after the completion of this Offering, although there can be no
assurance it will obtain supply agreements, if any, on acceptable terms and
conditions with any supplier.
The Company believes increases in the prices of its raw materials should be
able to be passed along to its licensees and customers. The inability to pass on
increased raw material costs could have a material adverse impact on the
Company's business, financial condition, and results from operations,
particularly if the Company is not able to pass on such price increases in the
license agreements, if any, with its intended market of food, beverage or
container manufacturers.
The primary plastic resins used by the Company are produced from
petrochemical intermediates derived from products of the natural gas and crude
oil refining processes. Natural gas and crude oil markets in the past have
experienced substantial cyclical price fluctuations as well as other market
disturbances, including shortages of supply and crises in some of the larger oil
producing regions of the world. The capacity, supply, and demand for plastic
resins and the petrochemical intermediates from which they are produced are also
subject to cyclical and other market factors. Consequently, plastic resin prices
may fluctuate as a result of natural gas and crude oil prices and the capacity,
supply and demand for resin and petrochemical intermediates.
LICENSE AGREEMENT WITH INSTA-HEAT, INC.
The Company's integrated thermal container technology was developed by
Insta-Heat, Inc., an affiliated corporation. IHI owns three issued and one
pending patent, and all intellectual property relating to the integrated thermal
container technology the Company is developing. The Company secured the
exclusive worldwide rights to IHI's proprietary technology and all associated
intellectual property from IHI, pursuant to a license agreement dated September
30, 1995, as amended. The IHI License grants the Company an exclusive worldwide
license in perpetuity to manufacture, use, sell, and promote IHI's intellectual
property and technologies and all possible commercial uses, improvements, and
products developed with IHI's technologies. The IHI License grants the Company
the right to sub-license the IHI technologies and to subcontract the manufacture
of all commercial uses and products resulting from the integrated thermal
container technology. The IHI License also grants the Company the right to
license all additional technology and intellectual property developed by IHI,
and all improvements to and continuations thereof.
The IHI License requires minimum royalty payments of $50,000 per year and
also requires additional royalty payments from the Company on the sale of
products utilizing IHI technology subject to the Company achieving $4 million
minimum annual net operating income after payment of the royalty and all taxes.
Upon achieving the required minimum net operating income the IHI License
requires additional royalty payments equal to the greater of: (i) two percent of
the gross sales of integrated thermal containers and products developed in
connection with it; or (ii) 1.5 cents per unit sold, for up to the first $30
million in sales by the Company. For sales in excess of $30 million the IHI
License requires additional royalty payments (subject to the same minimum income
levels) equal to the greater of: (i) three percent of gross annual sales in
excess of $30 million; or (ii) 1.5 cents per Unit sold. Additional royalty
payments are reduced 25% when IHI does not hold one or more issued patents or
patent applications on the IHI technology or any commercial uses or products
developed in connection therewith. Pursuant to the terms of the IHI License, the
Company is required to prosecute any patent infringement claims regarding the
IHI technology, and to defend any infringement claims brought against IHI or the
Company. In addition, the Company is required to indemnify IHI for any claims or
lawsuits brought against IHI, regarding the IHI technology. The License may be
terminated in the event the Company ceases its business, dissolves or
liquidates, or on completion of any proceeding in bankruptcy or reorganization,
or the appointment of a permanent receiver or trustee, or any other proceeding
under any law for the relief of debtors, or on any assignment for the benefit of
the Company's creditors. Termination of the IHI License would have a material
adverse impact on the business, financial condition, and results from operations
of the Company since the Company would lose all its rights to the IHI
technology.
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The IHI License includes an option in favor of the Company to purchase all
of the IHI technology and terminate the License for a payment to IHI of $3
million. The option term lasts until December 31, 1999 and may be extended for
one year at the election of the Company upon payment to IHI of $100,000. Any
prepaid minimum royalties may be applied to the option extension payments. The
Company plans to use a portion of the proceeds received from this Offering
($250,000) to prepay the minimum annual royalty payments required by the IHI
License for a period of five years.
IHI is an affiliated corporation. Messrs. Berntsen and Scudder, co-founders,
officers, directors, and significant shareholders of the Company are also
co-founders, officers, directors, and significant shareholders of IHI. The Board
of Directors of IHI is comprised of Messrs. Scudder, Berntsen, and their
spouses. These relationships raise substantial conflicts of interest with regard
to the development, licensing, marketing, and sale of the IHI technology by the
Company, as well as conflicts of interest regarding the option to purchase the
technology and interpreting the terms and conditions of the IHI License. The
interests of IHI may conflict with the interests of the Company in certain
instances regarding the IHI technology, including, but not limited to, if the
Company were unable to pay the minimum annual royalty due, if the Company sought
to amend or seek interpretations of the IHI License, if royalty payments were
late, in the event of copyright or patent infringement claims against IHI or the
Company, or adverse claims to the ownership of related technology. The common
directors of the Company and IHI may have fiduciary obligations to both the
Company and to IHI. The IHI directors may take actions which are contrary to the
interests of the Company, and which could foreseeably result in material adverse
consequences to the business and operations of the Company.
IHI, and the Company, are both California corporations and are subject to
California law. California law requires that transactions between corporations
with interested directors be either approved by the shareholders or by an
independent board of directors, and also requires a determination that the
transaction is just and reasonable. A person asserting the validity of such
transactions must prove the transaction is just and reasonable to the
corporation it is asserted against if these conditions are not met. The IHI
License agreement was approved by the shareholders of both IHI and the Company.
Any future material amendments to the IHI License agreement will require the
Company and IHI comply with these requirements of California law.
PATENTS AND PROPRIETARY TECHNOLOGY
To date, IHI has three issued patents and one patent application pending in
the United States, each one relating to various aspects of IHI's integrated
thermal container technology. Patent No. 5,461,867 was issued October 31, 1995
and includes 39 claims regarding a container with an integral module for heating
or cooling contents. Patent No. DES 371,513 was issued July 9, 1996, and
includes one claim regarding an end cap for a container. Patent No. 5,626,022
was issued May 6, 1997, and is a continuation in part of Patent No. 5,461,867
and includes 25 claims regarding a container with an integral module for heating
or cooling the contents. There can be no assurance any patents will be issued to
IHI as a result of IHI's pending application, or if issued, such patents
combined with existing IHI patents will be sufficiently broad to afford
protection against competitors using similar technology. The Company's success
will depend in large part on its ability and that of IHI to obtain patents for
integrated thermal container technologies and related technologies, if any, to
defend patents once obtained, to maintain trade secrets and to operate without
infringing upon the proprietary rights of others, both in the United States and
in foreign countries. IHI also has foreign patents pending for certain elements
of the current and earlier designs of its integrated thermal containers.
There can be no assurance any patents issued to IHI or the Company will not
be challenged, invalidated, or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. The Company is required by the IHI License agreement to
prosecute and defend all infringement claims, necessary to enforce the Company's
license rights or to determine the scope and
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validity of others' proprietary rights. U.S. patents do not provide any remedies
for infringement occurring before a patent is granted. Because patent rights are
territorial, the Company may not have an effective remedy against use of its
patented technology in any country in which IHI or the Company does not, at the
time, have an issued patent.
The commercial success of the Company may also depend upon avoiding the
infringement of patents issued to competitors and upon maintaining the IHI
License. All of the Company's currently proposed containers and all containers
currently under development are based on the IHI License. If competitors prepare
and file patent applications in the United States claiming technology also
claimed as proprietary by the Company, the Company may be forced to participate
in interference proceedings declared by the PTO to determine the priority of the
invention. Such proceedings could result in substantial costs to the Company,
even if the outcome is favorable to the Company. An adverse outcome of such
proceedings could subject the Company to significant liabilities to third
parties and could require the Company to license disputed rights from third
parties or cease using the infringing technology. The Company is aware of U.S.
patents issued to third parties that broadly claim self-heating technology
similar to IHI's. Although the Company believes its current and proposed
activities do not and will not infringe upon these patents, there can be no
assurance the Company's belief would be affirmed in any litigation over any
patent or the Company's future technological developments will be outside the
scope of these patents. A U.S. patent application is maintained under conditions
of confidentiality while the application is pending in the PTO, so the Company
cannot determine the inventions being claimed in pending patent applications
filed by its competitors. U.S. patents do not provide remedies for infringement
occurring before the patent is granted.
The Company relies on certain technologies which are not patentable and are
therefore potentially available to the Company's competitors. The Company also
relies on certain proprietary trade secrets and know-how which may not be
patentable. Although the Company has taken steps to protect its unpatented
technologies, trade secrets, and know-how, in part through the use of
confidentiality agreements with certain employees, consultants, and contractors,
there can be no assurance these agreements will not be breached, the Company
would have adequate remedies for any breach, or the Company's trade secrets will
not otherwise become known or be independently developed or discovered by
competitors.
TRADEMARKS
The Company filed two trademark applications with the United States Patent
and Trademark Office on February 10, 1997 to register the name "Ontro" and the
Company logo. The filed applications have been published and are awaiting
statement of use filings. IHI has one registered trademark, "Anytime-Anywhere,"
and has filed an application for the trademark "Insta-Heat." Pursuant to the IHI
License, IHI uses and has licensed to the Company trademarks claimed by IHI.
COMPETITION
The Company believes the market for integrated thermal containers is an
emerging market. There can be no assurance there will be sufficient demand for a
producer of such containers to profit therefrom. The plastic and beverage
container industry is highly competitive and sensitive to changing consumer
preferences and demands. The Company is aware of five firms that currently
manufacture or market self-heating containers or products sold in self-heating
containers. The Company believes one of these firms manufactures and markets its
containers in the U.S. and the other four currently manufacture and market
exclusively in foreign countries. The Company is not aware of any other current
direct competition for integrated thermal containers in the U.S. marketplace.
The Company believes the other competitors manufacture self-heating
containers for meals, a single serving hot espresso container and at least two
providers of self-heating hot sake containers. The Company believes each of
these foreign firms hold one or more U.S. patents on their designs.
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The Company believes at least two of the known competitors use a reactant
system similar to the Company's proposed self-heating containers.
The Company believes competition among marketers of self-heating beverage
containers will be based primarily on price, product safety, ease of use,
quality, product recognition, access to distribution channels, product
innovation, and packaging. The competitive position of the Company will in part
depend on the ability of the Company to remain current in plastics manufacturing
technology and to anticipate innovations in integrated thermal container
technology as well as changes in consumer preferences. If the Company's
integrated thermal containers are successfully received in the market, increased
competition is probable. Increased competition is likely to result in price
reductions, reduced operating margins, and loss of market share, any of which
could materially and adversely affect the Company's business, operating results,
and financial condition. There can be no assurance the Company will be able to
compete successfully, keep pace with technological developments, or have
sufficient funds to invest in new technologies, products, or processes.
There also can be no assurance companies in the food and beverage or
container industry, or other companies, will not enter the market for integrated
thermal containers with products that are superior to, less expensive, or which
achieve greater market acceptance than the Company's proposed containers. The
majority of food and beverage and container manufacturers are substantially
larger and more diversified than the Company; have substantially greater
financial and marketing resources than the Company; have greater name
recognition and distribution channels than the Company; and may have the ability
to develop competitively priced integrated thermal containers.
LIABILITY INSURANCE
The Company's proposed containers expose it to possible product liability
claims if, among other things, the use of its proposed containers results in
personal injury, death or property damage. There can be no assurance the Company
will have sufficient resources to satisfy any liability resulting from such
claims or will be able to cause its customers to indemnify or insure the Company
against such claims. The Company intends to obtain product liability insurance
prior to the commencement of commercial shipment of its products. There can be
no assurance such insurance coverage will be adequate in terms and scope to
protect the Company against material adverse effects in the event of a
successful claim, or that such insurance will be renewed, or the Company will be
able to acquire additional coverage when it deems it desirable to do so.
ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATIONS
All of the currently projected uses for the Company's integrated thermal
containers presently fall under the authority in the United States of the United
States Food and Drug Administration ("FDA") and the United States Department of
Agriculture ("USDA"). The FDA regulates the material content of direct-contact
food containers and packages, including certain thin wall containers
manufactured by the Company. The Company does not intend to fill any of its
proposed self-heating beverage containers on its premises and expects that
licensees or distributors will be responsible for filling the containers with
beverages and complying with appropriate FDA regulations. The Company uses
approved resins and pigments in its direct-contact food products and believes
its proposed containers will be in material compliance with all applicable FDA
and USDA regulations.
The Company, like all companies in the plastics industry, is also subject to
federal, state, and local legislation designed to reduce solid wastes by
requiring, among other things, plastics to be degradable in landfills, minimum
levels of recycled content, various recycling requirements, disposal fees and
limits on the use of plastic products. In addition, various consumer and special
interest groups have lobbied from time to time for the implementation of
additional environmental protection measures. The Company does not know of any
legislation promulgated to date or similar initiatives that would, if enacted,
have a material
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adverse effect on its business. There can be no assurance future legislative or
regulatory enactments or other similar initiatives would not have a material
adverse effect on the Company's business, financial condition, and results from
operations. See "Risk Factors--Environmental Matters."
EMPLOYEES
As of the date of this Prospectus, the Company employs eight full-time
employees. None of the Company's employees are represented by a labor union or
bound by a collective bargaining agreement. The Company believes its employee
relations are good.
PROPERTIES
The Company leases approximately 2,000 square feet of space for its
production facility located at 12625 Danielson Court, Suite 110, Poway,
California 92064, at a monthly rent of $1,142. The lease expired August 31, 1997
and has been extended to April 30, 1998. The Company also leases office space at
12675 Danielson Court, Suite 401, Poway, California 92064, at a monthly rent of
$982. That lease also expired August 31, 1997 and has been extended to April 30,
1998. The Company has entered into a lease for approximately 28,400 square feet
of space to be built in the Pomerado Business Park located in Poway, California
92064. The provisions of the lease provide for commencement of the lease term
during March, 1998. The lease has an initial term of five years with a renewal
option to the Company for an additional three years. Base rent for the initial
term is $0.445 per square foot (approximately $12,600 per month). Base rent for
the extension term is $0.56 per square foot (approximately $15,900 per month).
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
James A. Scudder..................................... 41 President, Chief Executive Officer and Director
James L. Berntsen.................................... 41 Executive Vice President, Secretary and Director
Kevin A. Hainley..................................... 40 Chief Financial Officer
Allan C. Mayer, Jr................................... 48 Vice President, Marketing
Robert F. Coston(1).................................. 64 Director
Louis L. Knickerbocker(1)............................ 53 Director
Douglas W. Moul(1)................................... 62 Director
</TABLE>
- ------------------------
(1) Members of the Audit Committee
JAMES A. SCUDDER, a co-founder of the Company, has been President, Chief
Executive Officer, and a director of the Company since its inception in 1994.
From 1986 to 1993, Mr. Scudder was President of Operations of Gourmet Quality
Foods, Inc., a frozen foods manufacturing and distribution company. From 1978 to
1986, Mr. Scudder developed, owned, and operated three restaurants in San Diego,
California.
JAMES L. BERNTSEN, a co-founder of the Company, has been Executive Vice
President, Secretary, and a director of the Company since its inception in 1994.
From 1988 to 1993, Mr. Berntsen was the President and Chief Executive Officer of
Minds in Motion, Inc., a distributor of copier and printer products. From 1978
to 1987, Mr. Berntsen developed, owned, and operated two restaurants in San
Diego, California.
ALLAN C. MAYER, JR. joined the Company as the Vice President of Marketing in
October 1996. Since 1991, he has been the President of Allan C. Mayer &
Associates, a company which provides management support in the areas of
strategic planning, new business development, marketing and communications. From
1989 to 1991, Mr. Mayer was Vice President of Marketing & Sales at Energetics
Corporation, a technology company. From 1987 to 1989, Mr. Mayer was Vice
President of Marketing at Crescent Foods, Inc., a food distribution company.
KEVIN A. HAINLEY joined the Company as Chief Financial Officer in December
1996. From 1992 to November, 1996, Mr. Hainley was corporate controller of
Hometown Buffet, Inc., a restaurant operator. From 1986 to 1992, Mr. Hainley was
an accountant with KPMG Peat Marwick LLP. Mr. Hainley is a Certified Public
Accountant.
LOUIS L. KNICKERBOCKER has been a director of the Company since February
1997. From 1985 through the present, Mr. Knickerbocker has been the President,
Chief Executive Officer, and a director of the L.L. Knickerbocker Company, Inc.,
a California-based company which specializes in selling celebrity endorsed
products through home shopping television channels.
ROBERT F. COSTON has been a director of the Company since October 1997. Mr.
Coston has been a self-employed consultant since 1990, specializing in
production and distribution of various food products. Mr. Coston was President
of Ardmore Farms, Inc., a subsidiary of the Quaker Oats Company, from 1986
through 1989. He held various positions with A.E. Staley Manufacturing Company
from 1981 to 1986. Mr. Coston was a Vice President and General Manager of the
Carnation Company from 1978 to 1981, and held various positions with General
Foods Corp. from 1959 to 1978. He has a B.S. in Civil Engineering from Lehigh
University.
DOUGLAS W. MOUL has been a director of the Company since December 1997. Mr.
Moul joined American Can Company of Canada Ltd. in 1958. He held various
management and executive positions with the
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Canadian company and its United States parent over the ensuing 28 years, and was
Senior Vice President and General Manager when the company was sold to Triangle
Industries in 1986. He served as Senior Vice President for the successor
American National Can Company until his retirement in 1989. Mr. Moul is a past
director of the National Food Processors Association and the Can Makers
Institute. He has served as a director of Morgan Foods Inc. of Austin, Indiana
since 1990. Mr. Moul holds a B.S. in Mechanical Engineering from the University
of British Columbia.
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors, if any. The Company's
Articles provide that a classified Board of Directors will automatically become
effective when shares of Common Stock of the Company become listed on Nasdaq,
NYSE or AMEX, and the Company has at least 800 shareholders as of the record
date for the most recent annual meeting of shareholders. The classified Board of
Director provisions, when and if effective, divide the Board of Directors into
two classes of directors serving staggered two-year terms. Upon consummation of
this Offering, the Common Shares are anticipated to be listed on Nasdaq, and
therefore, a classified Board of Directors will likely become operative
following such consummation. Directors currently receive no cash compensation
for serving on the Board of Directors and may receive reimbursement of
reasonable expenses incurred in attending meetings. All executive officers serve
at the discretion of the Board of Directors. There are no family relationships
between any of the directors or executive officers of the Company.
The Company has agreed, for a period of four years from the closing of this
Offering, if so requested by the Representative, to allow the Representative to
designate one nominee for election as a director of the Company, and if the
Company is unable to maintain directors and officers liability insurance, the
Representative has the right to designate a consultant to the Company's Board of
Directors who has the right to attend directors' meetings and will be
compensated on the same basis as outside members of the Board of Directors.
Messrs. Scudder and Berntsen and Knickerbocker have entered into agreements with
the Representative to vote their shares in favor of the election of the
Representative's designee to the Board of Directors. The Representative has not
yet exercised its right to designate such a person.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Audit Committee. The Board of
Directors does not have a Compensation Committee or a Nominating Committee. The
functions of the compensation and nominating committees are currently performed
by the Board of Directors.
AUDIT COMMITTEE
The Audit Committee recommends a public accounting firm to be appointed by
the Board of Directors, subject to ratification by the shareholders, as
independent auditors to audit the Company's financial statements and to perform
services related to the audit. The Audit Committee also has the responsibility
to review the scope and results of the audit with the independent auditors,
review with management and the independent auditors the Company's interim and
year-end operating results, consider the adequacy of the internal accounting and
control procedures of the Company, review any non-audit services to be performed
by the independent auditors, and consider the effect of such performance on the
auditor's independence. The Audit Committee was established in January 1997, and
currently consists of Messrs. Knickerbocker, Coston, and Moul.
ADVISORY BOARD
The Company's Advisory Board is composed of persons with expertise in fields
related to the Company's business. Since the Company's technology, financing and
business plans are in the development stage, the advisors currently meet
routinely as a group, but meetings of all advisors may not be held or may not be
held as often in the future. Certain of these advisors and other advisors and
consultants also meet from time to time with the Company's personnel and
management to discuss the Company's present and
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long-term planning, research and development, marketing, and finance matters.
Members of the Advisory Board are not presently compensated by the Company as
members of the Advisory Board, except with respect to stock options granted to
them as discussed herein. The Company currently provides reimbursement of
advisors' expenses, and has no plans to provide additional compensation to its
advisors, but may do so in the future. The Company presently has written
consulting arrangements with four of these advisors; Messrs. Hanson, Petterson,
Potomac, and Thorogood, who provide more definitive or extensive consulting
services to the Company. These advisor/consultants are being compensated by the
Company.
The Company has not required the members of its Advisory Board to agree not
to provide services to other entities that might conflict with the activities
they provide as advisors. All advisors are expected to devote only a small
portion of their time to the Company, are generally employed by employers other
than the Company, and may have commitments to and/or consulting or advisory
contracts with other entities that may limit their availability to the Company.
These entities may also be competitors or potential customers of the Company.
Furthermore, inventions or processes unrelated to integrated thermal containers
discovered by advisors will not, unless otherwise agreed, become the property of
the Company, but will remain such inventor's property, or the property of their
employers. The Company does not believe it is dependent on any member of the
Advisory Board, and believes the loss of any member will not have a material
adverse impact on the business or operations of the Company. The Company
believes it could obtain comparable services from other advisors in each given
field should the Company lose any member of its Advisory Board. Each member of
the Advisory Board has been granted options to purchase Common Stock of the
Company in consideration for their service on the Advisory Board. See "Certain
Transactions." The members of the Advisory Board currently are:
C. ROWLAND HANSON is the founder of C.R.H. Associates a management
consulting firm specializing in strategic planning, marketing, and
communications. Prior to forming C.R.H., Mr. Hanson was Vice President of
Corporate Communications at Microsoft Corporation. Before joining Microsoft
Corporation, Mr. Hanson was Vice President of Marketing for Neutrogena
Corporation, and held various marketing positions with the Carnation Company and
General Mills, Inc. Mr. Hanson received a B.B.A. in Marketing from Loyola
University, and an MBA from the University of Pennsylvania Wharton School of
Business.
ROBERT B. HORSMAN is the President and a director of San Diego National
Bank, where he has held various positions since 1981. From 1972 to 1981, Mr.
Horsman held various positions with California First Bank. He received his
B.B.A. in Finance/Banking from Texas Tech University.
FRED HULL is the immediate past President of Nestle Brands Foodservice
Company, the food service division of Nestle U.S.A. Mr. Hull joined the
Carnation Company in 1959, which was acquired by Nestle in 1985. He received a
B.S. in Business Administration from the University of Colorado.
SUZANNE JOHNSON is a co-founder, Vice President, and member of the
Management Committee of Vantis International a subsidiary of The BASES Group.
Ms. Johnson joined The BASES Group in 1985. Prior to joining The BASES Group,
Suzanne worked for Walker Research and prior to that she worked for Ketchum
Advertising.
JAMES W. MASON, PH.D., has been an independent consultant and President of
J. Mason Associates, Inc. from 1995 to the present. From 1991 to 1995, he was
the Chief Chemist for Seal Laboratories, where he was responsible for all
organic chemical analysis, quality control, and product development. From 1990
to 1991, Dr. Mason was an independent consultant. From 1987 to 1990, he was the
manager of the analytical service center for Baxter Health Care. Dr. Mason
specializes in the chemistry of plastics. He received his B.S. in Chemistry from
the University of California, Los Angeles, and his Ph.D. from the University of
California, Los Angeles.
SALVATORE LA BARBERA is the President of Terracommercial Real Estate
Corporation, a commercial real estate company he founded in the 1970's. Mr. La
Barbera is a licensed California Real Estate Broker, and both his and
Terracommercial's businesses are involved primarily in shopping center
development. Mr. La
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Barbera served as Chairman of the Board of Info.NET from December, 1993 through
June, 1996, when the company was merged into Simply Interactive. A former
Professor of Mathematics and Computer Programming at San Jose State University,
Mr. La Barbera also founded Passatempo Development Corporation, an importer of
agricultural equipment, developed an agricultural equipment retail agency, and
founded and was Chairman of Cal West Auto Auction, Inc. Mr. La Barbera received
his Bachelors and Masters degrees in Mathematics from San Jose State University.
TOR PETTERSON is the founder of Tor Petterson Associates, designers and
engineers of industrial products. Among other products, he was the designer of
the Ray-O-Vac Workhorse and Roughneck flashlight lines, the Snakelight and the
Nissan thermos lines. Mr. Petterson has received an honorary degree as a Doctor
of Engineering Science and is the author of numerous patents.
L. LAWRENCE POTOMAC is an Attorney, Certified Public Accountant, Certified
Financial Planner, and a licensed principal of the National Association of
Securities Dealers. Mr. Potomac has been President of Financial Insight
Corporation in La Jolla, California since 1980. Financial Insight provides
financial planning, investment analysis, tax advice, and prepares and files tax
returns and other tax reports for an international clientele. Prior to acquiring
Financial Insight Corporation, Mr. Potomac was the Chief Financial Officer for
Electron Inc., a manufacturer of electronic equipment in Rancho Bernardo
California, and prior to that was with the public accounting firms of Peat
Marwick Mitchell & Co., and Arthur Andersen & Co. Mr. Potomac is a graduate of
Stanford University and received his law degree and a Master of Business
Administration from Cornell University.
D. SCOTT THOROGOOD is the founder of the Trinalta Group LLC, a consultant to
technology companies. From 1994 to 1995, Mr. Thorogood was Chief Executive
Officer of the Info.NET Technology Corporation. Mr. Thorogood served as Chief
Executive Officer of OASiS, Inc. from 1992 until it was acquired by Sybase, Inc
in 1994. From 1990 to 1992, he worked for Texas Instruments Advanced Information
Management Division. From 1987 to 1990 he worked for Fourth Generation
Technologies. Mr. Thorogood received a B.S. in Mathematics and Psychology from
the University of Alberta.
EXECUTIVE COMPENSATION
The following table sets forth compensation for services rendered in all
capacities to the Company during the fiscal year ended December 31, 1996 paid to
the Chief Executive Officer and the Executive Vice President of the Company. No
executive officer received compensation exceeding $100,000 during the fiscal
years ended December 31, 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
-------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) ($) ($) ($)(1)
- ------------------------------------------ --------- --------- ----------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James A. Scudder, Chief Executive 1996 62,000 -- -- -- 30,000
Officer, President 1995 -- -- -- -- 17,000
and Director 1994 -- -- -- -- 4,500
James L. Berntsen 1996 62,000 -- -- -- 30,000
Executive Vice President, Secretary 1995 -- -- -- -- 17,000
and Director 1994 -- -- -- -- 4,500
</TABLE>
- ------------------------
(1) Represents consulting fees and Common Stock issued in consideration for
guaranteeing certain equipment leases to the Company.
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OPTION GRANTS
The following table sets forth certain information as of December 31, 1996,
concerning the stock option grants to all of the Company's executive officers
made for the fiscal year ended December 31, 1996. No stock appreciation rights,
restricted stock awards, or long-term performance awards have been granted as of
the date of this Prospectus.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PRICE PER SHARE DATE
- ---------------------------------- ------------------- ----------------------- ----------------- ------------
<S> <C> <C> <C> <C>
Kevin A. Hainley(2)............... 60,000 50% $ 1.00 12/30/2006
Allan C. Mayer, Jr(2)............. 60,000 50% $ 1.00 12/30/2006
</TABLE>
- ------------------------------
(1) The options granted to the Company's executive officers were all granted
under the Company's 1996 Stock Plan.
(2) Mr. Mayer joined the Company in October 1996, and Mr. Hainley joined the
Company in December 1996. Messrs. Hainley and Mayer are currently being
compensated at annual rates of $96,000 and both of their employment
agreements provide for salary increases to $120,000 per year following
completion of this Offering, and certain other conditions.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option exercises and
option holdings under the 1996 Stock Plan for the year ended December 31, 1996,
with respect to all of the Company's executive officers.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE REALIZED NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
MARKET PRICE AT OPTIONS/SAR'S AT FISCAL THE-MONEY OPTIONS/SAR'S AT
SHARES EXERCISE LESS YEAR-END FISCAL YEAR END ($)(1)
ACQUIRED ON EXERCISE PRICE -------------------------- ----------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------- ----------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kevin A. Hainley.......... -- -- 12,000 48,000 3,000 12,000
Allan C. Mayer, Jr........ -- -- 12,000 48,000 3,000 12,000
</TABLE>
- ------------------------------
(1) Assuming the market value of the Company's restricted Common Stock on
December 31, 1996 was $1.25 based on an independent appraisal.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Messrs. Scudder,
Berntsen, Hainley and Mayer. Mr. Scudder's employment agreement provides for his
employment by the Company as its President and Chief Executive Officer at an
initial annual salary of $96,000, which shall automatically increase to $144,000
per year after the completion of this Offering. Mr. Berntsen's employment
agreement provides for his employment by the Company as its Executive Vice
President at an initial annual salary of $96,000, which shall automatically
increase to $144,000 after the completion of this Offering. Messrs. Scudder and
Berntsen are party to agreements providing for an initial term expiring on
August 31, 1999. Messrs. Hainley and Mayer are party to agreements providing for
an initial term expiring on December 31, 1997. Each officer may receive bonuses
awarded in the discretion of the Board of Directors. The agreements do not
provide for any fixed or formula bonuses to be paid to the officers. The
Employment Agreements provide that Messrs. Scudder and Berntsen may, at their
election, receive a severance payment equal to 299% of their average annual base
salary and bonuses during the preceding
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five year period in the event of a change of control as defined in their
employment agreements. The Company also has employment agreements with Messrs.
Hainley and Mayer for one year terms, each at annual salaries of $96,000, which
shall increase to $120,000 for both after the completion of this Offering and
certain other conditions.
1996 STOCK OPTION PLAN
PURPOSE. The Company's 1996 Stock Plan was adopted by the Board of
Directors in November 1996, and approved by the shareholders in December 1996.
545,400 shares of the Company's Common Stock are currently reserved for issuance
pursuant to options or stock awards granted pursuant to the 1996 Stock Plan of
which options to acquire 113,000 shares of Common Stock have been granted prior
to the date of this Prospectus. The purpose of the 1996 Stock Plan is to provide
an incentive to eligible employees, officers, directors, and consultants, whose
present and potential contributions are important to the continued success of
the Company, to afford these individuals the opportunity to acquire a
proprietary interest in the Company, and to enable the Company to enlist and
retain in its employment qualified personnel for the successful conduct of its
business. It is intended this purpose will be effected through the granting of:
(i) Stock Options, including incentive stock options ("Incentive Stock Options")
under Section 422 of the Internal Revenue Code and non-qualified stock options
("Non-qualified Stock Options") which are not intended to meet the requirements
of such section; (ii) stock appreciation rights ("Stock Appreciation Rights");
(iii) restricted stock ("Restricted Stock"); and (iv) long-term performance
awards ("Long Term Performance Awards").
Officers, directors, consultants, and other employees of the Company whom
the Board of Directors deems to have the potential to contribute to the success
of the Company shall be eligible to receive awards under the 1996 Stock Plan.
The 1996 Stock Plan provides that Non-qualified Stock Options, Stock
Appreciation Rights, Restricted Stock, and Long-Term Performance Awards may be
granted to employees (including officers), directors, and consultants of the
Company or any parent or subsidiary of the Company. The 1996 Stock Plan provides
Incentive Stock Options may only be granted to employees (including officers) of
the Company or any parent or subsidiary of the Company.
The 1996 Stock Plan is administered by the Board of Directors, or a duly
appointed committee thereof. Subject to the provisions of the 1996 Stock Plan,
the Board of Directors or a committee thereof has full power to select the
eligible individuals to whom awards will be granted, to make any combination of
awards to any participant and to determine the specific terms of each grant. The
interpretation and construction of any provision of the 1996 Stock Plan by the
Board of Directors shall be final and conclusive. The Board of Directors shall
have discretion in determining the number of shares and other terms of each
option granted to each recipient. Each option grant shall be evidenced by an
option agreement that shall specify the option price, the duration of the
option, the number of shares to which the option pertains, the percentage of the
option that may be exercised on specified dates in the future, and such other
provisions as the Board of Directors shall determine.
The option price for each grant of an option shall be determined by the
Board of Directors, provided that, in the case of Incentive Stock Options, the
option price shall not be less than the fair market value of a share of the
Company's Common Stock, or in the case of Incentive Stock Options granted to the
holder of 10% or more of the Company's Common Stock, at least 110% of the fair
market value of such shares on the date of grant.
All options granted under the 1996 Stock Plan shall expire no later than 10
years from the date of grant, subject to the limitations set forth in the 1996
Stock Plan. Options may be granted authorizing exercise by payment to the
Company of cash or by surrender of shares of the Company's Common Stock already
owned by the employee, a combination of cash and such shares, or such other
consideration as is approved by the Board of Directors.
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<PAGE>
The 1996 Stock Plan places limitations on the exercise of options under
certain circumstances upon or after termination of employment or in the event of
the death, disability, or termination associated with a change in control (as
defined in the 1996 Stock Plan) of the Company. At the discretion of the Board
of Directors the agreement evidencing the grant of a stock option may contain
additional limitations upon the exercise of the option under specified
circumstances, or may provide certain limited rights to exercise such options
under specified circumstances. The granting of an option under the 1996 Stock
Plan does not accord the recipient the rights of a shareholder, and such rights
shall only accrue after the exercise of an option, and the issuance of the
underlying shares of Common Stock in the recipient's name.
The 1996 Stock Plan provides for the award of shares of Common Stock of the
Company which are subject to certain restrictions ("Restricted Stock") provided
in the 1996 Stock Plan or otherwise determined by the Board of Directors.
Restricted Stock awards pursuant to the 1996 Stock Plan will be represented by a
stock certificate registered in the name of a recipient to whom the award is
made subject to the restrictions upon which it is granted. Upon the grant of
Restricted Stock, such recipient will be entitled to vote the Restricted Stock
and to exercise other rights as a shareholder of the Company, including the
right to receive all dividends and other distributions paid or made with respect
to the Restricted Stock. Pursuant to the 1996 Stock Plan, a Restricted Stock
award recipient may not sell, transfer, pledge, exchange, hypothecate, or
otherwise dispose of the Restricted Stock during the restriction period
designated by the Board of Directors, except by testamentary disposition, or as
may otherwise be determined by the Board of Directors. When the conditions of a
Restricted Stock award established by the Board of Directors lapse or are
satisfied, the Company will deliver stock certificates representing the shares
of Common Stock which are no longer subject to any restrictions, except those
required by applicable law.
Pursuant to the 1996 Stock Plan, the Board of Directors in its discretion
may grant Stock Appreciation Rights ("SARs"). A Stock Appreciation Right
generally will entitle the holder to receive money or stock from the Company in
an amount equal to the excess, if any, of the aggregate fair market value of the
Company's Common Stock which is subject to such right over the fair market value
of the same stock on the date of grant. The Company may grant SARs allowing for
the payment of the amount to which the participant exercising the SAR is
entitled by delivering shares of the Company's Common Stock or cash or a
combination of stock and cash as the Board of Directors in its sole discretion
may determine. SARs may contain additional rights, limitations, terms, and
conditions which the Board of Directors otherwise deems desirable.
The 1996 Stock Plan also permits the granting of Long-Term Performance
Awards. Such awards, if issued, are anticipated to be based upon Company,
subsidiary, and/or individual performance over designated periods based on such
performance factors or other criteria as the Board of Directors deems
appropriate. Performance objectives may vary from participant to participant,
group to group, and period to period. Such awards will generally be granted for
no cash consideration. The Board of Directors may adjust Long-Term Performance
Awards as they deem necessary or appropriate in order to avoid windfalls or
hardships or to compensate for changes in tax, accounting, legal rules, or other
circumstances. Long-Term Performance Awards may be payable in cash or Common
Stock (including Restricted Stock).
Options, SARs, Restricted Stock Awards, and Long-Term Performance Awards
granted pursuant to the 1996 Stock Plan will generally be nontransferable by the
participant, other than by will or by the laws of descent and distribution, and
may generally be exercised only by the participant during the lifetime of the
participant.
Subject to the 1996 Stock Plan's change in control provisions, in the event
of a sale of all or substantially all of the assets of the Company or the merger
of the Company with or into another corporation, each outstanding Option, SAR,
Restricted Stock award, or Long-Term Performance Award shall be assumed or
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event the successor corporation does not agree to
such assumption or substitution, the
50
<PAGE>
administrators shall, in lieu of such assumption or substitution, provide for
the participant to have the right to exercise the Option, SAR, Restricted Stock
award, or Long-Term Performance Award as to all or a portion of the Common Stock
subject to the option, including shares of Common Stock as to which the option
would not otherwise be exercisable.
As of the date of this Prospectus, options to purchase an aggregate of
113,000 shares of Common Stock at an exercise price range of $1.00 to $3.00 were
granted under the 1996 Stock Plan, such options vesting at the rate of 20% to
33.3% per year.
The Company has agreed with the Representative that except with respect to
options granted under the 1996 Stock Plan at an exercise price equal to the fair
market value on the date of grant, it will not, for a period of 18 months from
the date of this Prospectus, issue any options, or warrants, or sell any shares
of capital stock without the prior written consent of the Representative.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Articles that eliminate to the
fullest extent permissible under California law the liability of its directors
to the Company for monetary damages. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Articles and Bylaws provide that the Company shall indemnify
its directors and officers to the fullest extent permitted under California law,
and the forms of indemnification include indemnification in circumstances in
which indemnification is otherwise discretionary under California law. The
Company has entered into indemnification agreements with its officers and
directors containing provisions that may require the Company, among other
things, to indemnify the officers and directors against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from intentional or knowing and culpable violations of
law) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. The Company has obtained an
insurance policy covering officers and directors for claims made that such
officers or directors may otherwise be required to pay or for which the Company
is required to indemnify them, subject to certain exclusions. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors of the Company pursuant to the foregoing provision, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee, or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened material litigation or proceeding which may result in a claim for
such indemnification.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Common Stock on a pro forma
basis as of the date of this Prospectus, and as adjusted to reflect the sale of
the 4,000,000 Units offered hereby by: (i) each person (or group of affiliated
persons) who is known by the Company to own beneficially more than five percent
of the Company's Common Stock; (ii) each of the Company's directors; (iii) each
executive officer of the Company; and (iv) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
SHARES BENEFICIALLY OWNED(2)
BENEFICIALLY ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C>
James A. Scudder(3)(4)................................................ 1,258,217 39.0% 17.6%
James L. Berntsen(3).................................................. 453,923 14.1 6.4
Robert F. Coston(5)................................................... 30,000 * *
Kevin A. Hainley(6)................................................... 68,000 2.1 1.0
Allan C. Mayer, Jr.(7)................................................ 60,000 1.9 *
Louis L. Knickerbocker(8)(9)
30055 Commerce, Rancho Santa Margarita, CA 92688.................... 858,673 26.6 12.1
All directors and executive officers as a group (6 persons)(4)(9)..... 2,728,813 84.5 38.5
</TABLE>
- ------------------------------
* Less than 1%
(1) Calculated pursuant to Rule 13d-3(d)1 of the Exchange Act. Shares not
outstanding that are subject to options or other rights which may be
exercised by the holder thereof within 60 days of the date of this
Prospectus and, in addition, including all shares subject to the outstanding
options in favor of Robert Coston, Kevin Hainley, and Allan Mayer, are
deemed outstanding for the purposes of calculating the number and percentage
owned by such shareholder and all directors and officers as a group, but are
not deemed outstanding for the purpose of calculating the percentage owned
by any other shareholder listed.
(2) Percentage of ownership is based on 3,089,478 shares of Common Stock
outstanding as of the date of this Prospectus and 7,089,478 shares of Common
Stock outstanding after the Offering, without consideration of the Warrants,
the Representative's Option, the Over-allotment Option, other outstanding
options and warrants except as set forth below. The Company believes the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in these notes. Except as set forth above, the address of each
person set forth above is the address of the Company appearing elsewhere in
this Prospectus.
(3) The shareholder has entered into an agreement with the Representative to
vote these shares in favor of the election to the Board of Directors of the
designee of the Representative.
(4) Includes 696,943 shares of Common Stock which are or may become subject to a
Voting Trust Agreement dated December 31, 1996, between Manhattan West,
Inc., the trustee, and the Company ("Manhattan Trust"). The 696,943 shares
potentially subject to the Manhattan Trust include 553,841 shares which
Manhattan West, Inc. has the right to acquire upon exercise of one option
and one warrant both of which may be exercised within 60 days of the date of
this Prospectus. The term of the Manhattan Trust continues for five years,
subject to an extension for an additional term of up to 10 years upon the
written agreement of Manhattan West and the trustee and provided Manhattan
West, Inc. continues to own the Common Stock subject to the Trust. The sole
voting trustee is James A. Scudder, the Chief Executive Officer and a
director of the Company. The trustee who has sole power to vote or direct
the vote of such shares. The trustee does not have any power to exercise the
option to acquire the shares underlying the option, is not entitled to any
dividends paid to the shares subject to the Manhattan Trust, if any, may not
hypothecate the shares subject to the Manhattan Trust, is not entitled to
any proceeds form the sale of the shares, and does not have any power to
sell or direct the sale of any of the shares held in the Manhattan Trust.
Mr. Scudder disclaims beneficial ownership of the 143,102 shares held in the
Manhattan Trust, and the additional 553,841 shares which may be held in the
Manhattan Trust. David F. Bahr is the sole officer of Manhattan West, Inc.,
Tariq S. Khan is the sole director and Manhattan West, International, Ltd.,
a British Virgin Islands corporation is the sole shareholder of Manhattan
West, Inc. The beneficial owners of Manhattan West International, Ltd. are
Wolfgang Marxer, Michael Parton and Urs Stirnimann, each a resident of the
British Virgin Islands.
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<PAGE>
(5) Represents 30,000 shares which Mr. Coston has the right to acquire upon
exercise of options, only 15,000 of which may be exercised within 60 days of
the date of this Prospectus.
(6) Includes 48,000 shares which Mr. Hainley has the right to acquire upon
exercise of options, 12,000 of which may be exercised within 60 days of the
date of this Prospectus.
(7) Includes 60,000 shares which Mr. Mayer has the right to acquire upon
exercise of options, only 24,000 of which may be exercised within 60 days of
the date of this Prospectus.
(8) Louis L. Knickerbocker, a director of the Company, is the President, Chief
Executive Officer and Chairman of the L.L. Knickerbocker Company, Inc. Mr.
Knickerbocker and his spouse own approximately 40% of the common stock of
the L.L. Knickerbocker Company, Inc.
(9) Includes 858,673 shares owned by Knickerbocker. Knickerbocker has entered
into an agreement with the Representative to vote these shares in favor of
the election to the Board of Directors of the designee of the
Representative.
CONCURRENT OFFERING BY SELLING SECURITY HOLDERS
An aggregate of 70,587 shares of Common Stock owned by the Selling Security
Holders and 70,587 shares of Common Stock issuable upon exercise of the warrants
also owned by the Selling Security Holders (the "Security Holders' Warrants")
are being registered simultaneously with this Offering for resale by the Selling
Security Holders from time to time and at any time following the commencement of
the Offering. The Security Holders' Common Stock, including the Common Stock
underlying the Security Holders' Warrants will not be subject to any restriction
on sale and may be sold at any time following this Offering.
The following table sets forth information with respect to the Selling
Security Holders, who will own an aggregate of 141,174 shares of Common Stock
including 70,587 shares of Common Stock issuable upon exercise of the Security
Holders' Warrants all of which are being registered hereby. The shares of Common
Stock owned by the Selling Security Holders including the shares of Common Stock
issuable upon exercise of the Security Holders' Warrants may be sold from time
to time in the future. The Security Holders' Warrants may be exercised and the
Common Stock underlying the Security Holders' Warrants may be purchased and sold
at the earliest on the effective date of this Prospectus or any prospectus
covering any Common Stock of the Company. The Company will not receive any of
the proceeds from the sale of the Common Stock by the Selling Security Holders,
although the Company will receive proceeds from the exercise of the Security
Holders' Warrants. The costs of qualifying these shares under federal and state
securities laws, will be paid by the Company. Sales by the Selling Security
Holders, or even the potential of such sales, could have an adverse effect on
the market prices of the Common Shares or the Warrants.
<TABLE>
<CAPTION>
SHARES OWNED
SHARES AFTER
NAME OFFERED(1) OFFERING
- ---------------------------------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Francesca Daniels................................................................. 11,764 --
Grant King........................................................................ 82,352 --
Henri B. Schkud................................................................... 47,058 --
-------
Total........................................................................... 141,174 --
-------
-------
</TABLE>
- ------------------------------
(1) Includes shares underlying Selling Security Holders' Warrants.
Francesca Daniels is the President of Financial Sciences of America,
("FSA"). FSA has provided investor relations services to Knickerbocker as an
independent contractor since November 1995. Grant King is the President of a
Knickerbocker subsidiary located in Bangkok, Thailand. There are no other
material relationships between any of the Selling Security Holders and the
Company, nor have any such material relationships existed within the past three
years. The Company has been informed by the Representative and the other
Underwriters that there are no agreements between the Representative and
53
<PAGE>
the other Underwriters and any Selling Security Holder regarding the
distribution of the Common Stock held by the Selling Security Holders or the
Common Stock underlying the Security Holders' Warrants.
The sale by the Selling Security Holders of the Common Stock and the Common
Stock underlying the Security Holders' Warrants may be effected from time to
time in transactions (which may include block transactions by or for the account
of the Selling Security Holders) on an exchange or in negotiated transactions, a
combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.
Selling Security Holders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Security Holders, or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time on an exchange,
in negotiated transactions or otherwise. Such broker-dealers, if any, may
receive compensation in the form of discounts, concessions or commissions from
the Selling Security Holders and/or the purchasers from whom such broker-dealer
may act as an agent or to whom they may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary commissions).
At the time a particular offer to sell Common Stock is made by or on behalf
of a Selling Shareholder, to the extent required, a prospectus shall be
distributed which will set forth the number of shares being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for shares
purchased from the Selling Security Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
If any of the following events occur, the prospectus will be amended to
include additional disclosure before an offer or sale of Common Stock by the
Selling Security Holders are made: (a) to the extent such securities are sold at
a fixed price or by option at a price other than the prevailing market price,
such price would be set forth in the prospectus; (b) if the securities are sold
in block transactions and the purchaser wishes to resell, such arrangements
would be described in the prospectus; and (c) if the compensation paid to
broker-dealers is other than usual and customary discounts, concessions or
commissions, disclosure of the terms of the transaction would be included in the
prospectus. The prospectus would also disclose if there are other changes to the
stated plan of distribution, including arrangements that either individually or
as a group would constitute an orchestrated distribution of the securities.
Under applicable rules and regulations of the Securities Exchange Act of
1934 (the "Exchange Act"), any person engaged in the distribution of the Common
Stock may not simultaneously engage in market making activities with respect to
any securities of the Company for a period of at least one (and possibly five)
business days prior to the commencement of the pricing of the Common Stock.
Accordingly, in the event the Representative or any of the other Underwriters is
engaged in a distribution of the Common Stock, they will not be able to make a
market in the Company's securities during the applicable restrictive period.
However, none of the Underwriters has agreed to nor are any of them obligated to
act as a broker-dealer in the sale of the Common Stock by the Selling Security
Holders. In addition, each Selling Security Holder desiring to sell Common Stock
will be subject to the applicable provisions of the Exchange Act and the rules
and regulations thereunder, including without limitation Regulation M Rules 101,
102 and 104, which provisions may limit the timing of the purchases and sales of
shares of the Company's securities by such Selling Security Holders.
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities may be deemed underwriting
discounts and commissions under the Securities Act.
54
<PAGE>
CERTAIN TRANSACTIONS
Messrs. Scudder and Berntsen acquired 652,946 and 435,298 shares,
respectively, of the Company's Common Stock in exchange for $21,000 and $14,000,
respectively, in December 1994. 95,693 of these shares were subsequently
transferred by Mr. Scudder, and 20,550 of these shares were subsequently
transferred by Mr. Berntsen to parties unrelated to the Company.
On September 30, 1995, the Company entered into the IHI License with IHI,
which was subsequently amended on April 4, 1997 and December 4, 1997. The IHI
License grants to the Company the exclusive worldwide rights in perpetuity to
manufacture, use, sell, promote and sublicense all IHI intellectual property,
all additional IHI technology and all improvements or continuations thereof. The
IHI License requires minimum royalty payments of $50,000 per year and also
requires additional royalty payments from the Company on the sale of products
using the IHI technology subject to certain conditions. See "Business--License
Agreement with Insta-Heat, Inc."
James Scudder was issued 28,120 shares of Common Stock of the Company on
June 8, 1996, in exchange for the guarantee along with certain other guarantors
of equipment lease payments to the Company with a value of approximately
$200,000. A portion of the net proceeds of this Offering will be used to repay
these leases.
James Berntsen was issued 28,120 shares of Common Stock of the Company on
July 7, 1996, in exchange for his guarantee of equipment lease payments in the
amount of $65,518 for the benefit of the Company. A portion of the net proceeds
of this Offering will be used to repay these leases.
In 1995, Steve McKay, a shareholder, loaned the Company the principal amount
of $8,000 which was repaid with interest in 1996.
Between February 29, 1996 and October 2, 1996, IHI loaned an aggregate of
$92,000 to the Company, interest free. All of these amounts were repaid by
October 2, 1996.
On March 6, 1995, May 16, 1995, June 30, 1995, June 30, 1995, October 31,
1995, and November 30, 1995, James Berntsen loaned the Company the principal
sums of $15,000; $5,000; $3,900; $9,963; $5,063; $5,000; and $1,000,
respectively, all of which were represented by promissory notes payable on
demand and bearing interest at the rate of eight percent per anum. The Company
also owed Mr. Berntsen accrued consulting fees in the amount of $16,500 as of
December 31, 1996. As of September 30, 1997 the balance of the above noted
promissory notes and accrued consulting fees owed by the Company was $0.
On July 1, 1996, the Company entered into a consulting agreement with Scott
Thorogood, a member of the Company's Advisory Board, to provide administrative,
financial, and organizational advice and services. The agreement was extended on
August 1, 1997 for an additional term of one year. Mr. Thorogood receives $7,500
per month for his part-time consulting services.
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc. to assist the Company in locating and arranging distributor
agreements. The agreement is for a term of 30 months. Manhattan West, Inc. is to
receive $15,000 per month from July 15, 1996 through April 15, 1997, and $5,000
per month for the remainder of the term for its part-time consulting services.
Manhattan West, Inc. has agreed to defer collection of a portion of its
consulting fees until after the initial public offering of the Company's
securities. See "Related Party Transactions."
On July 15, 1996, the Company issued 143,102 shares of Common Stock to
Manhattan West, Inc., for a total consideration of $100,000, and granted an
option to Manhattan West to purchase 543,841 shares of Common Stock at an
exercise price of $.0002 per share. See "Related Party Transactions."
On August 5, 1996, the Company entered into a consulting agreement with L.
Lawrence Potomac, a member of the Company's Advisory Board, to provide financial
and administrative services to the
55
<PAGE>
Company. The agreement extends through July 31, 1998. Mr. Potomac receives
$1,000 per month for his part-time consulting services.
On August 15, 1996, the Company entered into a consulting agreement with
C.R.H. & Associates to provide marketing and strategic planning advice and
assistance. C. Rowland Hanson, a member of the Company's Advisory Board, is the
principal member of C.R.H. & Associates. The agreement was amended to be by and
between the Company and Mr. Hanson and was extended through December 31, 1999.
Mr. Hanson receives $7,500 per month for his part-time consulting services,
which increases to $10,000 per month upon completion of an initial public
offering of the Company's securities.
On September 20, 1996, the Company issued 858,673 shares of Common Stock to
Knickerbocker for $600,000.
On December 31, 1996, the Board of Directors granted Scott Thorogood an
option to acquire 250,930 shares of Common Stock for $.001 per share.
On December 31, 1996, the Board of Directors granted Rowland Hanson an
option to acquire 198,000 shares of Common Stock for $.001 per share.
On December 31, 1996, the Board of Directors granted L. Lawrence Potomac an
option to acquire 59,400 shares of Common Stock for $.001 per share. On July 24,
1997, Mr. Potomac exercised a portion of this option and purchased 5,000 shares
of Common Stock for $5.00.
On December 31, 1996 the Board of Directors granted Kevin Hainley, Chief
Financial Officer of the Company, an incentive stock option under the 1996 Stock
Plan to purchase 60,000 shares of Common Stock for $1.00 per share, which may be
exercised for 10 years. 20% of such option vested immediately and an additional
20% vests at the end of each year thereafter, provided Mr. Hainley is employed
by the Company as its Chief Financial Officer. On March 14, 1997, Mr. Hainley
exercised a portion of this option and purchased 12,000 shares of Common Stock
for $12,000.
On December 31, 1996, the Board of Directors granted Allan Mayer, Vice
President-Marketing of the Company, an incentive stock option under the 1996
Stock Plan, to purchase 60,000 shares of Common Stock for $1.00 per share, which
may be exercised for 10 years. 20% of such option vested immediately and an
additional 20% vests at the end of each year thereafter, provided Mr. Mayer is
employed as an officer of the Company at the end of each year.
On December 31, 1996, the Board of Directors granted Robert Coston, a
director of the Company, an option to acquire 20,000 shares of Common Stock for
$2.50 per share. The option vests 25% at the end of each year over the first
four years of its five year term, provided Mr. Coston is a member of the Board
of Directors or the Advisory Board at the end of each year.
On December 31, 1996, the Board of Directors granted James Mason, a member
of the Advisory Board, an option to acquire 20,000 shares of Common Stock for
$2.50 per share. The option vests 25% at the end of each year over the first
four years of its five year term, provided Mr. Mason is a member of the Advisory
Board at the end of each year.
On December 31, 1996, the Board of Directors granted Robert Horsman, a
member of the Advisory Board, an option to acquire 20,000 shares of Common Stock
for $2.50 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Mr. Horsman is a member of the
Advisory Board at the end of each year.
On December 31, 1996, the Board of Directors granted Tor Petterson, a member
of the Advisory Board, an option to acquire 20,000 shares of Common Stock for
$2.50 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Mr. Petterson is a member of the
Advisory Board at the end of each year.
56
<PAGE>
On February 15, 1997, the Board of Directors granted Fred Hull, a member of
the Advisory Board, an option to acquire 20,000 shares of Common Stock for $2.50
per share. The option vests 25% at the end of each year over the first four
years of the five year term, provided Mr. Hull is a member of the Advisory Board
at the end of each year.
On February 15, 1997, the Board of Directors granted Suzanne Johnson, a
member of the Advisory Board, an option to acquire 5,000 shares of Common Stock
for $3.00 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Ms. Johnson is a member of the
Advisory Board at the end of each year.
On April 4, 1997, the Company entered into the LLK Agreement with
Knickerbocker to develop certain specialty lines of beverages which would
utilize the Company's integrated thermal containers and be marketed by
Knickerbocker. See "Business--Distribution Agreement," and "Related Party
Transactions."
On April 8, 1997, Manhattan West, Inc. loaned the Company $55,000 as part of
the Bridge Loans, and in consideration therefor acquired a warrant to purchase
10,000 shares of the Company's Common Stock for $1.00 per share at any time
during the earlier to occur of: (i) 25 months from the date thereof; or (ii) 30
days from the date the loan is fully repaid. The Bridge Loans are all
anticipated to be repaid with a portion of the net proceeds of the Offering.
On May 22, 1997, the Board of Directors granted Salvatore La Barbera, a
member of the Advisory Board, an option to acquire 20,000 shares of Common Stock
for $3.00 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Mr. La Barbera is a member of the
Advisory Board at the end of each year.
On October 27, 1997, the Board of Directors granted Robert Coston, a
director, an option to acquire 10,000 shares of Common Stock for $5.00 per share
in consideration for his agreement to become a member of the Company's Board of
Directors. The option has a five year term.
All future transactions by the Company with officers, directors, and five
percent shareholders and their affiliates will be entered into only if the
Company believes that such transactions are reasonably expected to benefit the
Company and the terms of such transactions are no less favorable to the Company
than could be obtained from unaffiliated parties. Furthermore, such transactions
will be approved by a majority of disinterested directors.
BRIDGE LOANS
BRIDGE LOANS. Between December, 1996 and May, 1997, the Company entered into
Bridge Loans totaling $1,245,000 with twelve investors for the purpose of
providing operating capital for the Company. In addition to receiving a
promissory note bearing interest at a rate of 10%, each bridge lender was issued
a warrant to purchase 20,000 shares of the Company's Common Stock for every
$110,000 loaned to the Company. The warrants issued in connection with the
Bridge Loans are exercisable at $1.00 per share. All but one of the warrants are
exercisable until the later to occur of: (1) 24 months from the date of the
Bridge Loan; or (2) 30 days after repayment of the Bridge Loan. One Bridge Loan
included a warrant exercisable for 48 months and also included a right in favor
of the Company to convert that Bridge Loan into common stock at a share value of
one-half of the Offering Price. The Company intends to repay the Bridge Loans
plus accrued interest with a portion of the proceeds of the Offering in the
estimated amount of $1,348,000.
DECEMBER 1997 LOANS. In December 1997, the Company borrowed a total of
$150,000 from two investors. The loans bear interest at 12% per annum and are
due and payable upon the earlier to occur of 5 business days after the
completion of the Offering, or 120 days.
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<PAGE>
RELATED PARTY TRANSACTIONS
MANHATTAN WEST, INC. The Company has entered into certain transactions with
Manhattan West, Inc., a California corporation.
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc. Pursuant to the consulting agreement, Manhattan West, Inc.
is to assist the Company in locating and arranging distributor agreements.
Manhattan West, Inc. introduced the Company to Knickerbocker. The consulting
agreement is for a term of 30 months, and requires Manhattan West, Inc. be paid
$15,000 per month from July 15, 1996, through April 15, 1997 and $5,000 per
month for the remainder of the term. Manhattan West, Inc. has agreed to defer
collection of a portion of its consulting fees until after completion of the
initial public offering of the Company's securities.
Also, on July 15, 1996, Manhattan West, Inc. purchased 143,102 shares of the
Company's Common Stock for a total consideration of $100,000 or $.70 per share,
and the Company granted an option to Manhattan West, Inc. to purchase 543,841
shares of the Company's Common Stock at an exercise price of $.01 per share
subject to certain conditions. In the event Manhattan West, Inc. exercises its
option, shareholders of the Company will experience significant additional
dilution. See "Certain Transactions" and "Dilution." On the same day Manhattan
West, Inc. was granted an option to purchase 25,749 shares of the common stock
of IHI at an exercise price of $.001 per share subject to certain conditions.
In connection with these transactions, Manhattan West, Inc. entered into the
Manhattan Trust in order for Mr. Scudder to maintain voting control of any of
the Company's Common Stock held by Manhattan West, Inc. The shares subject to
the Manhattan Trust include 553,841 shares which Manhattan West, Inc. has the
right to acquire upon exercise of the option granted to Manhattan West, Inc. on
July 15, 1996 and the warrant acquired by Manhattan West, Inc. in connection
with one Bridge Loan in the amount of $55,000. On April 8, 1997, Manhattan West,
Inc. loaned $55,000 to the Company as a Bridge Loan. The term of the Manhattan
Trust is five years, subject to an extension for an additional term of up to 10
years upon the written agreement of Manhattan West, Inc. and the trustee. The
trust is specific to Manhattan West, Inc. and does not encumber the shares
following a transfer of such shares by Manhattan West, Inc. to a third party.
The sole voting trustee is James A. Scudder, the Chief Executive Officer and a
director of the Company. The trustee who has sole power to vote or direct the
vote of such shares. The trustee does not have any power to exercise the option
or the warrant in favor of Manhattan West, Inc., is not entitled to any
dividends paid to the shares subject to the Manhattan Trust, may not transfer or
hypothecate the shares subject to the Manhattan Trust, is not entitled to any
proceeds from the sale of the shares, and does not have any power to sell or
direct the sale of any of the shares held in the Manhattan Trust. Mr. Scudder
disclaims beneficial ownership of the 143,102 shares held in the Manhattan Trust
and the additional 553,932 shares which may be held in the Manhattan Trust. See
"Principal Shareholders."
The sole officer of Manhattan West, Inc. is David F. Bahr. The sole director
is Tariq S. Khan, and the sole shareholder is Manhattan West International,
Ltd., a British Virgin Islands corporation. The beneficial owners of Manhattan
West International, Ltd. are Wolfgang Marxer, Michael Parton and Urs Stirnimann,
each a resident of the British Virgin Islands.
L.L. KNICKERBOCKER & COMPANY, INC. In September, 1996, Knickerbocker
purchased 858,673 shares of the Company's common stock for $600,000. On the same
day Knickerbocker purchased 29,260 shares of the common stock of IHI for
$50,000. The Company entered into the LLK Agreement with Knickerbocker on April
4, 1997. The founder, Chairman, Chief Executive Officer and President of
Knickerbocker is Louis L. Knickerbocker, a director of the Company. The Company
and Knickerbocker are working to develop certain specialty lines of beverages
which would utilize the Company's integrated thermal containers and could be
marketed by Knickerbocker. The LLK Agreement grants Knickerbocker certain rights
to market and distribute the Company's integrated thermal containers in defined
potential markets subject to certain conditions. See "Business--Distributorship
Agreement."
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Knickerbocker has agreed to provide up to 600,000 Common Shares included in
the Units which may be issued upon exercise of the Over-allotment Option. The
sale by Knickerbocker of Common Shares included in the the Units within the
Over-allotment Option would result in a substantial benefit to Knickerbocker.
See "Description of Securities," "Risk Factors--Offering to Benefit Existing
Stockholders and Related Parties" and "Description of Securities."
INSTA-HEAT, INC. The Company has obtained all of the core technology for its
integrated thermal containers through the IHI License with Insta-Heat, Inc. The
IHI License requires the Company to pay IHI minimum royalty payments of $50,000
per year and also requires additional royalty payments from the Company on the
sale of products utilizing IHI technology subject to the Company achieving
minimum annual net income of no less than $4 million after payment of the
royalty and all taxes. See "Business-- License Agreement with Insta-Heat, Inc."
Messrs. Berntsen and Scudder are co-founders, officers, directors, and
significant shareholders of the Company. They are also co-founders, officers,
directors, and significant shareholders of IHI. The Board of Directors of IHI is
comprised of Messrs. Scudder, Berntsen, and their spouses. The Company and IHI
currently have substantially similar shareholders. These relationships raise
substantial potential conflicts of interest with regard to the development,
licensing, marketing, and sale of the IHI technology by the Company, as well as
conflicts of interest in the interpretation of the terms and conditions of the
IHI License. In addition, Messrs. Scudder and Berntsen, Knickerbocker, Manhattan
West, Inc., and the other IHI shareholders could receive substantial dividends
from their ownership of IHI stock even if the Company is not successful and is
only able to pay the minimum royalty payments to IHI. See "Risk Factors--IHI
License" and "Risk Factors--Conflicts of Interest."
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DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Company's Articles and Bylaws is a summary and is qualified in
its entirety by the provisions of the Articles and Bylaws, which have been filed
as exhibits to the Company's Registration Statement, of which this Prospectus is
a part.
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, no par value, and
5,000,000 shares of Preferred Stock, no par value ("Preferred Stock"). As of the
date of this Prospectus, 3,089,478 shares of Common Stock were outstanding,
there were 70 holders of record of the Company's Common Stock, and no Preferred
Stock was outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. The holders of
Common Stock are entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority shareholders will be able
to elect directors on the basis of their votes alone. The shareholders right to
cumulative voting will terminate automatically when the Company shares are
listed on Nasdaq, NYSE or AMEX, and the Company has at least 800 shareholders as
of the record date for its most recent meeting of shareholders. The Common Stock
is anticipated to be listed on Nasdaq after the consummation of the Offering
and, therefore, it is not anticipated that cumulative voting rights will
continue. See "Possible Anti-Takeover Effect of Certain Provisions of the
Company's Articles of Incorporation." Subject to preferences that may be
applicable to any then outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding Preferred Stock. Holders of Common Stock have no preemptive
rights and no right to convert their Common Stock into any other securities.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are, and all shares of Common
Stock to be outstanding upon completion of this Offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series, and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.
It should be expected that the holders of any series of Preferred Stock, when
and if issued, will have priority claims to dividends and to any distributions
upon liquidation of the Company, and possibly other preferences over the holders
of Common Stock.
The Board of Directors may issue one or more series of Preferred Stock
without action of the shareholders of the Company. Accordingly, the issuance of
Preferred Stock may adversely affect the rights of the holders of the Common
Stock. In addition, the issuance of Preferred Stock may be used as an "anti-
takeover" device without further action on the part of the shareholders.
Issuance of Preferred Stock may dilute the voting power of a holder of Common
Stock (such as by issuing Preferred Stock with super-voting rights), may
discourage bids for the Company's Common Stock, and may render more difficult
the removal
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of current management, even if such removal may be in the shareholders' best
interest. The Company has no current plans to issue any Preferred Stock.
PRESENTLY OUTSTANDING WARRANTS
As of the date of this Prospectus, the Company has outstanding warrants to
purchase 400,587 shares of Common Stock. 70,587 of these Warrants comprise the
Security Holders' Warrants. All of the remaining warrants may be exercised for
up to 36 months from the date of issuance, and will all expire by the end of
May, 2000. The exercise price of 230,000 of these warrants is $1.00 per share,
and the exercise price of the remaining 100,000 is $3.00 per share. The exercise
price of each of these warrants is subject to adjustment in the event of stock
splits, stock dividends and similar events, and if at any time the Common Stock
of the Company trades on an exchange, Nasdaq, the OTC Bulletin Board, or in the
pink sheets for $8.00 per share for 20 out of 30 consecutive trading days, the
Company has the right to shorten the exercise period for these warrants by
providing 10 days prior written notice to the warrant holder, granting the
warrant holder 45 days after the last day of the 30 day trading period to
exercise the warrant. The Company must have an effective registration statement
covering all of the shares of Common Stock underlying the warrants before it can
provide notice to shorten the exercise period. The Company must also use its
best efforts to keep the registration statement effective for a minimum period
of six months after the termination of the shortened exercise period.
The Security Holders' Warrants may be exercised to purchase 70,587 shares of
Common Stock on substantially identical terms as the Warrants offered herein.
OPTIONS
As of the date of this Prospectus, options to purchase a total of 1,379,506
shares of Common Stock were outstanding. 609,665 of the shares underlying these
options are capable of being exercised as of the date of this Prospectus. An
additional 543,841 of the shares underlying these options will be capable of
being exercised upon completion of this Offering. The Company has granted
Incentive Stock Options to certain of its employees for the purchase of up to an
aggregate of 113,000 shares of Common Stock pursuant to the 1996 Stock Plan. An
aggregate of 545,400 shares of Common Stock are currently reserved under the
1996 Stock Plan, and options may be granted under the 1996 Stock Plan which can
be exercised for a period of up to 10 years and may contain such other terms as
the Board of Directors or a committee appointed to administer the 1996 Stock
Plan may determine. See "Management--Stock Option Plan."
UNITS
Each Unit consists of one Common Share and one Warrant. Each Warrant
entitles the holder thereof to purchase one Common Share. The Warrants may be
exercised for three years from the date of this Prospectus. Upon completion of
the Offering the Warrants and Common Shares comprising the Units will be
immediately detachable and separately transferable from the date of this
Prospectus. The Offering Price of the Units is allocated $5.40 to the Common
Share and $.10 to the Warrant.
WARRANTS
In connection with this Offering, the Company has authorized the issuance of
up to 5,000,000 Warrants (including 600,000 Warrants that may be issued by the
Company upon exercise of the Over-allotment Option, and 400,000 warrants that
may be issued upon exercise of the Representative's Option), and has reserved
5,000,000 shares of Common Stock for issuance upon exercise of such Warrants.
Each Warrant entitles the holder to purchase one Common Share at an exercise
price equal to 150% of the Offering Price of the Common Shares subject to
adjustment, for a period of three years commencing from the date of this
Prospectus. The Warrants will trade separately immediately after this Offering.
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Each Warrant will be redeemable by the Company for $.05 per Warrant at any
time upon 30 days prior written notice to the holder, at any time the closing
bid price per share of the Company's Common Stock equals or exceeds 200% of the
Offering Price of a Common Share for 20 consecutive trading days within the 30
day period prior to the date notice of redemption is given, and further provided
at such time there is a current effective registration statement covering the
Common Shares underlying the Warrants. The Company presently expects to call all
of the Warrants for redemption as soon as legally possible, but several factors
may modify that intention. In the event the Company provides a notice of
redemption, a holder of the Warrants would be forced to exercise such holder's
Warrants within the period set forth in the notice of redemption and pay the
exercise price including at a time when it may be disadvantageous for such
holder to do so, or to sell the Warrants at the current market price including
at a time when such holder might otherwise wish to hold the Warrants, or to
accept the redemption price which will likely be substantially less than the
market value of the Warrants.
The Warrants will be issued in registered form under a Warrant Agreement
between the Company and ChaseMellon Shareholder Services, as warrant agent (the
"Warrant Agent"). The Common Shares underlying the Warrants, when issued upon
exercise of a Warrant in accordance with its terms, will be fully paid and
nonassessable, and the Company will pay any transfer tax incurred as a result of
the issuance of Common Shares to the holder upon its exercise.
Holders of the Warrants will be able to sell the Warrants, if a market
exists, rather than exercise them. However, there can be no assurance that a
market will develop, or if developed, will continue for the Warrants.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the formal subscription form on the reverse side of the Warrant certificate
properly completed and executed, together with payment of the exercise price to
the Warrant Agent. Prior to their expiration or redemption by the Company, the
Warrants may be exercised in whole or, from time to time, in part. If less than
all of the Warrants evidenced by a Warrant certificate are exercised, a new
Warrant certificate will be issued for the remaining number of Warrants.
Prior to the exercise of the Warrants, the holders of the Warrants will not
have any of the rights or privileges of shareholders of the Company (except to
the extent they own Common Stock of the Company). The exercise price of the
Warrants and the number of Common Shares issuable upon the exercise thereof are
subject to adjustment upon the occurrence of certain events such as stock
splits, stock dividends, recapitalizations, mergers or consolidations, as set
forth in the Warrant Agreement. No adjustment of the exercise price will be
required unless such adjustment would require an increase or decrease of at
least one percent in the number of Common Shares issuable upon exercise of the
Warrants; however, any such adjustment not made will be carried forward and
taken into account in any subsequent adjustment.
For the life of the Warrants, the Warrant holders have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the Common Shares issuable upon the exercise of the
Warrants, with a resulting dilution in the interest of the Company's
shareholders by reason of the exercise of Warrants at any time, if ever, when
the exercise price of the Warrants is less than the market price for the Common
Stock. The terms on which the Company may be able to obtain additional capital
during the life of the Warrants may be adversely affected as a result of the
outstanding Warrants. The Warrant holders may exercise their Warrants at a time
when the Company would seek capital by offering Common Stock on terms more
favorable to the Company than those provided in the Warrants. In such an event
the existence of the outstanding Warrants could have a material adverse impact
on the price and/or terms the Company may be able to obtain from an offering of
its Common Stock.
For a holder to exercise the Warrants there must be a current registration
statement in effect with the Commission and registration or qualification with,
or approval from, various state securities agencies with
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respect to the shares underlying the Warrants. The Company has agreed to use its
best efforts to cause a registration statement with respect to such shares under
the Securities Act to continue to be effective during the term of the Warrants
and to take such other actions under the laws of various states as may be
required to cause the sale of Common Shares upon exercise of the Warrants to be
lawful. However, the Company will not be required to honor the exercise of
Warrants if, in the opinion of the Company's Board of Directors upon advice of
counsel, the sale of the underlying shares upon exercise would be unlawful.
The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value of
such fractional shares. A holder of the Warrants will not possess any voting or
any other rights as a shareholder of the Company unless he or she exercises the
Warrants.
The Warrant exercise price was arbitrarily determined by negotiation between
the Company and the Representative. The Company may reduce the exercise price of
the Warrants or extend the warrant expiration date upon notice to Warrant
holders. The foregoing is merely a summary of the rights and privileges of the
holders of Warrants, and is qualified in its entirety by reference to the
Warrant Agreement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain federal income tax consequences,
under current law, which may result from the purchase and ownership of the
Units, and the Common Shares and Warrants constituting the Units. The Company
has not requested and does not intend to request a ruling from the Internal
Revenue Service or a formal tax opinion from its counsel on any tax aspect of
this Offering. This tax discussion is intended only as a descriptive summary and
does not purport to be a complete analysis or listing of all potential federal
income tax effects resulting from or which may result from the purchase and
ownership of the Units, Common Shares, or Warrants. Prospective purchasers of
the Units should consult their own tax advisors with respect to the tax
consequences to them from the purchase and ownership of the Securities, and the
applicability and effect of federal, state, local, foreign and other tax laws.
The Company has allocated the cost of each Unit between each of its elements
(one Common Share at a cost of $5.40 and one Warrant to purchase one Common
Share at a cost of $0.10) in accordance with their perceived relative fair
market values at the time of issuance. The portion of the cost of a Unit
allocated to each element will constitute the initial tax basis of such element
for federal income tax purposes.
No gain or loss will be recognized by a holder of a Warrant on the holder's
purchase of Common Shares for cash upon exercise of the Warrant. The adjusted
tax basis of the Common Shares so acquired will be equal to the tax basis of the
Warrant plus the exercise price. The holding period of the Common Shares
acquired upon the exercise of the Warrant will begin on the date the Warrant is
exercised.
The sale of Common Shares or the sale of a Warrant will result in the
recognition of gain or loss to the holder in an amount equal to the difference
between the amount realized (generally the cash and fair market value of other
property received) and the holder's adjusted tax basis therein. Such a sale of
Common Shares will result in capital gain or loss, provided the Common Shares
are a capital asset in the hands of the holder. The sale of a Warrant will
likewise result in capital gain or loss, provided the Warrant is a capital asset
in the hands of the holder and the Common Shares underlying the Warrant would be
a capital asset to the holder if acquired by the holder.
Under Section 305 of the Internal Revenue Code of 1986, as amended, certain
actual or constructive distributions of stock (including warrants to purchase
stock) with respect to such stock (or warrants) may be taxable to the
shareholders (or Warrant holders) of the Company. Adjustments in the exercise
price of the Warrants, or the number of shares which may be purchased upon
exercise of the Warrants, in each case
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made pursuant to certain provisions of the Warrants, may result in a
distribution which is taxable as a dividend to the holders of Warrants.
If a Warrant is not exercised and allowed to expire, the Warrant will be
deemed to have been sold or exchanged for no consideration on the expiration
date. Any loss to the holder of a Warrant will be a capital loss if the Warrant
was held as a capital asset and if the Common Shares underlying the Warrant
would have been a capital asset had such Warrant been exercised.
No gain or loss will be recognized by the Company upon the acquisition,
exercise or expiration of any Warrants.
REPRESENTATIVE'S OPTION
At the closing of this Offering, the Company has agreed to sell to the
Representative the Representative's Option for an aggregate purchase price of
$400 ($0.001 per underlying Unit). The Representative's Option grant to the
Representative the right to purchase up to 400,000 Units from the Company (each
Unit consisting of one Common Share, and one warrant to purchase one Common
Share each of which to be under terms substantially identical to the Common
Shares and Warrants offered herein). The Representative's Option may be
exercised for a period of four years commencing one year after the date of this
Prospectus at an exercise price of 160% of the Offering Price of the Units, and
will contain certain anti-dilution provisions. The Representative's Option will
be restricted from sale, assignment, transfer or hypothecation prior to its
exercise date except to officers of the Representative and members of the
selling group and officers and partners thereof.
The Representative's Option to acquire up to 400,000 Units contains certain
registration rights under the Securities Act relating to the shares of Common
Shares and Representative's Warrants included in the Units underlying the
Representative's Option and the shares of Common Stock issuable upon exercise of
the Representative's Warrants included in such Units (collectively, the
"Representative Shares"). Under the terms of the Representative's Option, the
Company is obligated to register all or part of the Representative Shares if it
receives a request to do so by the holders owning or entitled to purchase a
majority of the Representative Shares, provided that the request is made 12
months after the date of this Prospectus. The Representative's Option provides
for one such request, at the Company's expense. The demand registration right
contained in the Representative's Option will expire five years from the date of
this Prospectus. In addition, if the Company proposes to register any of its
securities under the Securities Act for its own account, holders of the
Representative's Option or Representative's Shares are entitled to notice of
such registration and the Company is obligated to use all reasonable efforts to
cause the Representative Shares to be included, provided that the underwriter of
any such offering shall have the right to limit the number of shares included in
the registration. The Company is responsible for all expenses incurred in
connection with any such piggyback registration of the Representative Shares.
The piggyback registration rights contained in the Representative's Option will
expire no later than five years from the date of this Prospectus. The exercise
of such registration rights by the Representative may result in dilution in the
interests in the Company of then-present stockholders, hinder efforts by the
Company to arrange future financings of the Company and/or have an adverse
effect on the market price of the Company's Common Stock and Warrants. See
"Underwriting."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION
The holders of Common Stock are currently entitled to one vote for each
common share held of record on all matters submitted to a vote of the
shareholders other than the election of directors, in which event any holder may
demand cumulative voting. Under cumulative voting, the holders of Common Stock
are entitled to cast for each share held the number of votes equal to the number
of directors to be elected, which is currently four. A holder may cast all of
his or her votes for one nominee or distribute them among any number of nominees
for election. The Company's Articles provide that the shareholders' right to
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cumulative voting will terminate automatically when the Company's shares are
listed on Nasdaq, NYSE or AMEX, provided further the Company has at least 800
shareholders as of the record date for the most recent annual meeting of its
shareholders. Upon consummation of this Offering, the Company's Common Shares
are anticipated to be listed on Nasdaq and therefore cumulative voting will
likely terminate after consummation of this Offering. The absence of cumulative
voting may have the effect of limiting the ability of minority shareholders to
effect changes in the Board of Directors, and may have the effect of deterring
hostile takeovers or delaying or preventing changes in control or management of
the Company.
The Company's Articles also include a provision ("Fair Price Provision")
that requires the approval of the holders of two-thirds of the Company's voting
stock as a condition to a merger or certain other business transactions with, or
proposed by a holder of 15% or more of the Company's voting stock (an
"Interested Shareholder"), except in cases where the continuing directors
approve the transaction or certain minimum price criteria and other procedural
requirements are met. A "Continuing Director" is a director who is not
affiliated with an Interested Shareholder and was elected prior to the time such
Interested Shareholder became an Interested Shareholder, or any successor chosen
by a majority of the Continuing Directors. The minimum price criteria generally
require that, in a transaction in which shareholders are to receive payments,
holders of Common Stock must receive a value equal to the higher of either the
price paid by the Interested Shareholder for Common Stock during the prior two
years, the Fair Market Value (as defined in the Articles) at the time, or the
amount paid in the transaction in which such person became an Interested
Shareholder, and that such payment be made in cash or in the type of
consideration paid by the Interested Shareholder for the greatest portion of its
shares. The Company's Board of Directors believes the Fair Price Provision will
help assure all of the Company's shareholders will be treated similarly if
certain kinds of business combinations are effected. However, the Fair Price
Provision may also make it more difficult to accomplish certain transactions
that could be beneficial to shareholders but are opposed by the incumbent Board
of Directors.
The Company's Articles provide for a classified Board of Directors to
automatically become effective when the shares of Common Stock of the Company
are listed on Nasdaq, NYSE or AMEX, and when the Company has at least 800
shareholders as of the record date for the most recent annual meeting of its
shareholders. The classified Board of Director provisions, when and if
effective, divide the Board of Directors into two classes of directors serving
staggered two-year terms. The classification of directors has the effect of
making it take more time to change the composition of a majority of the Board of
Directors. Upon consummation of this Offering, the Company's Common Shares are
anticipated to be listed on Nasdaq and therefore a classified Board of Directors
will likely become operative following consummation of the Offering.
The Company's Articles also require any action required or permitted to be
taken by shareholders of the Company must be effected at a duly called meeting
of shareholders and may not be effected by a consent in writing. The Company's
Articles also provide newly created directorships resulting from any increase in
the authorized number of directors may be filled by a majority vote of the
directors then in office. In addition, the Articles of the Company require
shareholders give advance notice to the Company's Secretary of any director
nominations or other business to be brought by shareholders at any shareholders'
meeting. The Articles also require the approval of two-thirds of the Company's
voting stock to amend certain provisions of the Articles. Each of these
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company. See "Risk Factors--Anti-
Takeover Provisions; Limitation on Voting Rights" and "Management."
NASDAQ LISTING
The Company has applied for a listing of the Common Shares and Warrants on
Nasdaq under the symbols "ONTR" and "ONTRW", respectively. This Offering is the
initial public offering of the Securities and, accordingly, there is currently
no public trading market for any such Securities. Even if the Common Shares and
Warrants are accepted for trading on Nasdaq, there can be no assurance that a
public trading
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market will ever develop or, if one develops, that it will be maintained.
Although it has no legal obligation to do so, the Representative from time to
time may act as a market maker and otherwise effect transactions for its own
account, or for the account of others, in the Securities. The Representative, if
it so participates, may be a dominating influence in any market that may develop
for any of the Securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and the
Warrant Agent for the Company's Warrants is ChaseMellon Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 7,089,478 shares of
Common Stock outstanding, assuming no exercise of the Warrants, the
Over-allotment Option, the Warrants included in the Representative's Option, and
other outstanding warrants and options. All of the 4,000,000 Common Shares sold
in this Offering (plus any Common Shares sold upon exercise of the
Over-allotment Option) will be freely transferable and tradable without
restriction or further registration under the Securities Act except for any
shares purchased or held by any affiliate of the Company, which will be subject
to the resale limitations of Rule 144 under the Securities Act. An aggregate of
141,174 shares of Common Stock, including 70,587 underlying the Security
Holders' Warrants are being registered simultaneously with this Offering for
resale by the Selling Security Holders from time to time. When sold, such shares
will be freely tradable without restrictions or further registration under the
Securities Act. See "Concurrent Offering by Selling Security Holders." The
remaining 3,018,891 shares of Common Stock were issued and sold by the Company
in private transactions ("Restricted Shares") and are eligible for public sale
only if registered under the Securities Act, sold in accordance with Rule 144
thereunder, or pursuant to an exemption from such registration requirements.
Holders of the Warrants included in the Units offered hereby will be
entitled to purchase an aggregate of 4,000,000 Common Shares upon exercise of
the Warrants at any time during the three-year period following the date of this
Prospectus, provided the Company satisfies certain securities registration
requirements with respect to the shares underlying the Warrants. See
"Description of Securities-- Warrants." Any and all Common Shares purchased upon
exercise of the Warrants will be freely tradable, provided such registration
requirements are met.
Up to 400,000 Common Shares and 400,000 Warrants may be purchased by the
Representative during the four year period commencing upon the first anniversary
date of this Prospectus through the exercise of the Representative's Option and
the Representative's Warrants included therein. Any and all securities purchased
upon exercise of the Representative's Option will not be freely tradable unless
the Company satisfies certain securities registration requirements. See
"Underwriting."
Approximately 339,087 of the Restricted Shares are currently eligible for
sale in the public market pursuant to Rule 144(k). All of these shares are
subject to the lock-up agreement not to sell which is described below. In
addition, as of the date of this Prospectus, 545,400 shares are reserved for
issuance pursuant to the 1996 Stock Plan of which options to acquire 113,000
shares have been granted, and in addition another 1,266,506 shares are reserved
for issuance upon the exercise of other outstanding options and 400,587 shares
are reserved for issuance upon exercise of outstanding warrants. All of the
shares underlying outstanding options and 330,000 of the shares underlying
outstanding warrants are subject to the lock-up agreement described below.
Approximately 1,555,760 of all outstanding options and warrants shall be capable
of being exercised upon completion of this Offering, 1,483,506 which are all
subject to the lock-up agreement described below.
The Company, its executive officers and directors, and certain other
shareholders of the Company owning an aggregate of approximately 3,018,891
shares of Common Stock and an additional 1,379,506 shares subject to outstanding
options and warrants, have agreed they will not, without the prior written
66
<PAGE>
consent of the Representative, sell or otherwise transfer or dispose of, pledge
or hypothecate any securities of the Company for a period of 12 months from the
date of this Prospectus (the "Lock-up Period"). The Representative, in its sole
discretion at any time and without notice to the public, may release any or all
of the Company's securities from these lock-up agreements and permit holders of
the Company's securities to resell all or any portion of the securities held by
them at any time prior to the expiration of the Lock-up Period.
In general, under Rule 144 as currently in effect, (beginning 90 days after
the date of this Prospectus), any holder of Restricted Shares, including an
affiliate of the Company, as to which at least one year has elapsed since the
later of the date of their acquisition thereof from the Company or from an
affiliate, would be entitled within any three month period to sell a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock (approximately 55,895 shares immediately after the
completion of this Offering assuming no exercise of the Over-allotment Option)
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 are subject to certain requirements relating to
notice and availability of current public information about the Company.
However, a person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who beneficially owns Restricted Shares is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above; provided that at least two years have lapsed since the date the shares
were acquired. The foregoing is a summary of Rule 144 and is not intended to be
a complete description of the rule and other applicable regulations.
Prior to this Offering, there has been no public market for the Company's
securities. Following this Offering, the Company cannot predict the effect, if
any, that market sales of the Common Stock, or the availability of such shares
for sale pursuant to Rule 144, registration rights or otherwise, will have on
the market price prevailing from time to time. Nevertheless, sales by the
existing shareholders of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices for the Company's
securities and the ability of the Company to obtain additional equity financing.
In addition, the availability for sale of substantial amounts of Common Shares
acquired through the exercise of the Warrants, other options or warrants, or the
Representative's Option and the Representative's Warrants included therein could
adversely affect prevailing market prices for the Common Stock.
67
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Joseph Charles & Associates, Inc., is
acting as the Representative, have severally agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriters named below, the
aggregate number of Securities set forth opposite their respective names in the
table below at the price to the public less underwriting discounts set forth on
the cover page of this Prospectus. The Units are being sold on a firm commitment
basis. The Underwriting Agreement provides, however, the obligations of the
Underwriters to pay for and accept delivery of the Units are subject to certain
conditions precedent. The Underwriters are committed to purchase all of the
Securities offered hereby if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF UNITS
UNDERWRITERS TO BE PURCHASED
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Joseph Charles & Associates, Inc. ...........................................
---------------
Total.................................................................... 4,000,000
---------------
---------------
</TABLE>
The Representative has informed the Company the Underwriters do not expect
to sell any Units to any accounts over which they have discretionary authority.
The Representative has advised the Company the Underwriters propose to offer
the Units directly to the public at the Offering Price set forth on the cover
page of this Prospectus, and to selected dealers at that price, less a
concession of not more than $ per Unit. The Underwriters may allow a discount
of not more than $0. per Unit on sales to certain dealers. After the initial
offering to the public, the price to the public of the Units of Common Shares
and Warrants and the other terms may be changed.
The Company has granted the Representative an option, which may be exercised
during the 45 day period following the date of this Prospectus, to purchase up
to 600,000 additional Units at the Offering Price, less the underwriting
discounts and commissions. The Underwriters may exercise such option only for
the purpose of covering any over-allotments in the sale of the Units offered
hereby.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 2% of the gross proceeds received by the Company from the sale of
the Units. In addition to the Underwriters' discount and the non-accountable
expense allowance, the Company is required to pay the costs of qualifying the
Securities under federal and state securities laws, together with legal and
accounting fees, printing and other costs incurred by the Company in connection
with this Offering.
The Company has also agreed to retain the Representative as a financial
consultant for a period of two years from the date of this Prospectus for a fee
of $3,000 per month, payable in advance at the closing of the Offering. The
financial consulting services to be provided by the Representative include
assisting in the development of a long-term financial strategy and working with
financial analysts.
The Company has also agreed, for a period of four years from the date of
this Prospectus, at the option of the Representative, to nominate a designee of
the Representative reasonably acceptable to the
68
<PAGE>
Company, for election to the Company's Board of Directors or, at the option of
the Representative, if the Company is unable to obtain directors and officers
insurance satisfactory to the Representative, to designate a consultant to the
Board of Directors who will have the right to attend all Board of Directors and
committee meetings thereof, and who will be compensated on the same basis as
non-employee members of the Board. The Representative has not yet exercised its
right to designate such a person.
The Company has agreed with the Representative if the Company redeems the
Warrants the Representative will act as the Company exclusive solicitation agent
and the Company will pay the Representative a fee of 2% of the aggregate
exercise price if: (i) the exercise of the Warrant was solicited by a member of
the National Association of Securities Dealers, Inc. who is so designated in
writing by the holder exercising the Warrant; (ii) the Warrant is not held in a
discretionary account except where prior specific written approval for the
exercise has been received; (iii) disclosure of compensation arrangements was
made both at the time of the Offering and at the time of exercise of the
Warrant; (iv) the solicitation of the exercise of the Warrant was not in
violation of applicable rules promulgated under the Exchange Act; and (v) the
Representative provides bona fide services in connection with the solicitation
of the Warrant. No solicitation fee will be paid to the Representative on
Warrants exercised within one year of the date of this Prospectus or on Warrants
voluntarily exercised at any time without solicitation. In addition, unless
granted an exemption by the Commission from applicable rules under the Exchange
Act, the Representative will be prohibited from engaging in any market making
activities or solicited brokerage activities until the later of the termination
of such solicitation activity or the termination by waiver or otherwise of any
right the Representative may have to receive a fee for the exercise of the
Warrants following such solicitation. Such a prohibition, while in effect, could
impair the liquidity and market price of the Securities.
At the closing of this Offering, and subject to the terms and conditions of
the Underwriting Agreement between the Company and the Representative, the
Company has agreed to sell to the Representative the Representative's Option for
an aggregate purchase price of $400 as additional compensation in connection
with this Offering. The Representative's Option grants to the Representative the
right to purchase up to 400,000 Units (each consisting of one Common Share and
one Warrant) at a price equal to 160% of the Offering Price. The Warrants
underlying the Representative's Option will have an exercise price and other
terms identical to the Warrants being offered to the public pursuant to this
Prospectus.
The Representative's Option may be exercised for a four-year period,
commencing one year from the date of this Prospectus. The Representative's
Option will be restricted from sale, transfer, assignment, or hypothecation for
a period of one year from the date of this Prospectus, except to officers, and
employees of the Representative, other Underwriters and/or their officers and
employees. The Representative's Option will also contain anti-dilution
provisions for stock splits, stock dividends, recombinations and
reorganizations, a one-time demand registration provision (at the Company's
expense), and piggyback registration rights (which registration rights will
expire five years from the date of this Prospectus).
Except in connection with acquisitions or the grant of options to the
Company's officers and employees under the Company's 1996 Stock Plan, and at an
exercise price equal to the fair market value the Company has agreed, for a
period of 18 months from the closing of this Offering, not to issue, sell, or
purchase any shares of Common Stock or other equity securities of the Company
without the prior written consent of the Representative. The officers,
directors, and certain shareholders have agreed they will not except in certain
circumstances, offer, sell, or otherwise dispose of any securities of the
Company owned by them for a period of 12 months from the closing of this
Offering without the prior written consent of the Representative, which consent
may be withheld in its sole discretion. The Representative may, in its
discretion and without notice to the public, waive such restrictions and permit
such holders to sell any or all of their securities of the Company, the effect
of which could be a substantial decline in the trading price of the Company's
Common Stock or Warrants.
69
<PAGE>
Prior to this Offering, there has been no public market for the Common
Shares or Warrants and there can be no assurance a market will develop or be
sustained following this Offering. The Offering Price of the Common Shares and
Warrants and the exercise price of the Warrants were determined by negotiations
between the Representative and the Company. Among the factors considered in
determining the Offering Price and the exercise price of the Warrants were the
prospects for the Company, an assessment of the industry in which the Company
operates, the assessment of management, the number of Common Shares and Warrants
offered, the price purchasers of the Securities might be expected to pay given
the nature of the Company and the general condition of the securities markets at
the time of the Offering. Accordingly, the Offering Price set forth on the cover
page of this Prospectus should not necessarily be considered an indication of
the actual value of the Company or the Common Shares or Warrants. The price of
the Securities is subject to change as a result of market conditions and other
factors, and no assurance can be given the Common Shares or Warrants can be
resold at their respective Offering Price.
Certain persons participating in the Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Shares and Warrants at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchases, for the purpose of
pegging, fixing or maintaining the price of the Common Shares or Warrants. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the Offering. A penalty bid means an
arrangement that permits the Representative to reclaim a selling concession from
a syndicate member in connection with the Offering when Common Shares or
Warrants sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on Nasdaq or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Securities
offered hereby have been passed upon for the Company by Fisher Thurber LLP.
David A. Fisher is the owner of an option to purchase 50,000 shares of Common
Stock at $2.50 per share and is a partner of Fisher Thurber LLP. Certain legal
matters will be passed upon for the Underwriters by Freshman, Marantz, Orlanski,
Cooper & Klein, a law corporation, Beverly Hills, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for the
years ended December 31, 1995 and 1996, and the period from November 8, 1994
(inception) through December 31, 1996 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the December 31, 1996 financial
statements contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations and has a net capital deficiency that
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
70
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 ("Registration
Statement") under the Securities Act with the Commission in Washington, D.C.
with respect to the Units offered by this Prospectus. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in or annexed as exhibits to the Registration Statement
and the exhibits and schedules thereto on file with the Commission pursuant to
the Securities Act and the rules and regulations of the Commission thereunder.
For further information with respect to the Company and the Units offered by
this Prospectus, reference is made to the Registration Statement and to the
financial statements, schedules and exhibits filed as part thereof. Copies of
the Registration Statement, together with such financial statements and
exhibits, may be obtained from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at 500 West Madison Street,
Chicago, Illinois 60661 and 75 Park Place, New York, New York 10007, upon
payment of the charges prescribed therefor by the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete, and in each instance reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Commission maintains a World Wide Web site containing reports,
proxy and information statements and other information regarding registrants who
file electronically with the Commission. The address of the site is
http://www.sec.gov.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ONTRO, INC.
Independent Auditors' Report............................................................................... F-2
Balance Sheets:
December 31, 1996
Unaudited September 30, 1997............................................................................. F-3
Statements of Operations:
Years ended December 31, 1995 and 1996,
Period from inception (November 8, 1994) through December 31, 1996,
Unaudited nine months ended September 30, 1996 and 1997, and
Unaudited period from inception (November 8, 1994) through September 30, 1997............................ F-4
Statements of Shareholders' Equity (Deficit):
Years ended December 31, 1995 and 1996
Unaudited period from inception (November 8, 1994) through September 30, 1997............................ F-5
Statements of Cash Flows:
Years ended December 31, 1995 and 1996,
Period from inception (November 8, 1994) through December 31, 1996,
Unaudited nine months ended September 30, 1996 and 1997, and
Unaudited period from inception (November 8, 1994) through September 30, 1997............................ F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ontro, Inc.:
We have audited the accompanying balance sheet of Ontro, Inc. (a development
stage enterprise) as of December 31, 1996, and the related statements of
operations, shareholders' equity (deficit), and cash flows for the years ended
December 31, 1995 and 1996 and the period from November 8, 1994 (inception)
through December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ontro, Inc. (a development
stage enterprise) as of December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996 and the period
from November 8, 1994 (inception) through December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
San Diego, California
February 14, 1997
F-2
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------- SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 12,000 $ 71,800
Prepaid expenses and other current assets......................................... 2,500 11,800
------------- -------------
Total current assets............................................................ 14,500 83,600
Property and equipment, net......................................................... 287,200 439,900
Deferred financing costs............................................................ 7,000 73,700
Other assets........................................................................ 13,600 53,700
Intangible assets, net.............................................................. 6,300 9,200
------------- -------------
$ 328,600 $ 660,100
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued consulting fees........................................................... $ 85,500 $ 72,500
Other accrued expenses............................................................ 111,000 207,800
Current portion of capital lease obligations...................................... 26,800 37,300
Payroll taxes payable............................................................. 12,000 25,300
Notes payable (bridge loans)...................................................... -- 1,245,000
------------- -------------
Total current liabilities....................................................... 235,300 1,587,900
Note payable (bridge loans)......................................................... 110,000 --
Capital lease obligations, excluding current portion................................ 100,100 117,300
------------- -------------
Total liabilities............................................................... 445,400 1,705,200
------------- -------------
Shareholders' equity (deficit):
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued...... -- --
Common stock, no par value, 20,000,000 shares authorized, 2,726,900 and 3,006,071
shares issued and outstanding as of December 31, 1996, and September 30, 1997,
respectively.................................................................... 1,141,900 1,714,300
Additional paid-in capital........................................................ 792,000 993,800
Deficit accumulated during the development stage.................................. (1,645,000) (3,322,200)
Deferred compensation............................................................. (405,700) (431,000)
------------- -------------
Total shareholders' equity (deficit)............................................ (116,800) (1,045,100)
------------- -------------
Commitments and contingencies (note 12)
$ 328,600 $ 660,100
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED FROM INCEPTION
SEPTEMBER 30, (NOVEMBER 8, 1994)
FROM INCEPTION ------------------------ THROUGH SEPTEMBER 30,
YEAR ENDED YEAR ENDED (NOVEMBER 8, 1994) 1996 1997 1997
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31, ----------- ----------- ---------------------
1995 1996 1996
------------ ------------- -------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Marketing, general and
administrative...... $ 94,500 $ 830,400 $ 937,200 $ 399,700 $1,127,700 $ 2,064,900
Research and
development......... 67,900 235,900 303,800 231,200 402,000 705,800
Compensation related
to grant of stock
options............. -- 379,300 379,300 379,300 26,400 405,700
------------ ------------- ----------- ----------- ----------- -----------
Total operating
expenses........ 162,400 1,445,600 1,620,300 1,010,200 1,556,100 3,176,400
Interest expense........ 1,700 22,800 24,700 11,300 121,100 145,800
------------ ------------- ----------- ----------- ----------- -----------
Net loss.......... $ (164,100) $(1,468,400) $ (1,645,000) ($1,021,500) ($1,677,200) $(3,322,200)
------------ ------------- ----------- ----------- ----------- -----------
------------ ------------- ----------- ----------- ----------- -----------
Net loss per
common share.... $ (0.07) $ (0.49) $ (0.37) $ (0.43)
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM NOVEMBER 8, 1994 (INCEPTION) THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING THE SHAREHOLDERS'
-------------------- PAID-IN DEVELOPMENT DEFERRED EQUITY
SHARES AMOUNT CAPITAL STAGE COMPENSATION (DEFICIT)
--------- --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 8, 1994 (inception)... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock at $.032 per
share................................... 1,088,200 35,000 -- -- -- 35,000
Net loss.................................. -- -- -- (12,500) -- (12,500)
--------- --------- ----------- ----------- ------------ ------------
Balance at December 31, 1994.............. 1,088,200 35,000 -- (12,500) -- 22,500
Issuance of common stock at $.032 per
share................................... 177,100 5,700 -- -- -- 5,700
Issuance of common stock at $.889 per
share................................... 98,400 87,500 -- -- -- 87,500
Net loss.................................. -- -- -- (164,100) -- (164,100)
--------- --------- ----------- ----------- ------------ ------------
Balance at December 31, 1995.............. 1,363,700 128,200 -- (176,600) -- (48,400)
Issuance of common stock at $.699 per
share................................... 1,001,800 700,000 -- -- -- 700,000
Issuance of common stock at $.71 per share
for services............................ 42,200 29,900 -- -- -- 29,900
Issuance of common stock at $.889 per
share................................... 119,500 106,300 -- -- -- 106,300
Issuance of common stock at $.889 per
share for services...................... 59,100 52,500 -- -- -- 52,500
Issuance of common stock at $.889 per
share in exchange for loan guarantees... 140,600 125,000 -- -- -- 125,000
Fair value of detachable warrants on
debt.................................... -- -- 7,000 -- -- 7,000
Issuance of stock options................. -- -- 785,000 -- (405,700) 379,300
Net loss.................................. -- -- -- (1,468,400) -- (1,468,400)
--------- --------- ----------- ----------- ------------ ------------
Balance at December 31, 1996.............. 2,726,900 1,141,900 792,000 (1,645,000) 405,700 (116,800)
Exercise of stock options (unaudited)..... 17,000 12,000 -- -- -- 12,000
Fair value of detachable warrants on debt
(unaudited)............................. -- -- 94,500 -- -- 94,500
Issuance of common stock at $2.25 per
share and warrants (unaudited).......... 222,222 444,400 55,600 -- -- 500,000
Issuance of common stock at $3.13 per
share (unaudited)....................... 31,949 100,000 -- -- -- 100,000
Issuance of stock options (unaudited)..... -- -- 51,700 -- (40,800) 10,900
Issuance of common stock at $2.00 per
share for services (unaudited).......... 8,000 16,000 -- -- -- 16,000
Compensation related to grant of stock
options (unaudited)..................... -- -- -- -- 15,500 15,500
Net loss (unaudited)...................... -- -- -- (1,677,200) -- (1,677,200)
--------- --------- ----------- ----------- ------------ ------------
Balance at September 30, 1997
(unaudited)............................. 3,006,071 $1,714,300 $ 993,800 ($3,322,200) $ (431,000) $(1,045,100)
--------- --------- ----------- ----------- ------------ ------------
--------- --------- ----------- ----------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM NOVEMBER 8, 1994 (INCEPTION) THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER FROM INCEPTION
31, (NOVEMBER 8, 1994) NINE MONTHS ENDED FROM INCEPTION
--------------------- THROUGH DECEMBER SEPTEMBER 30, (NOVEMBER 8, 1994)
1995 1996 31, 1996 ------------------------ THROUGH SEPTEMBER
--------- ---------- ------------------ 1996 1997 30, 1997
----------- ----------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(164,100) $(1,468,400) $ (1,645,000) ($1,021,500) ($1,677,200) $ (3,322,200)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 800 26,700 27,600 8,700 47,700 75,300
Amortization of debt issue
discount cost............... -- -- -- -- 27,800 27,800
Issuance of common stock for
services.................... -- 207,400 207,400 177,500 16,000 223,400
Compensation related to grant
of stock options............ -- 379,300 379,300 379,300 26,400 405,700
(Increase) decrease in prepaid
and other current assets.... (1,300) (1,200) (2,500) 1,300 (9,300) (11,800)
Increase in other assets...... (900) (12,700) (13,600) (12,600) (40,100) (53,700)
Increase in accrued
expenses.................... 33,400 175,100 208,500 115,700 97,100 305,600
--------- ---------- ------------------ ----------- ----------- ------------------
Net cash used in operating
activities................ (132,100) (693,800) (838,300) (351,600) (1,511,600) (2,349,900)
--------- ---------- ------------------ ----------- ----------- ------------------
Cash flows from investing
activities:
Intangible assets............... (6,500) -- (9,000) -- (4,700) (13,700)
Purchase of property and
equipment..................... (26,000) (150,100) (176,100) (85,800) (146,500) (322,600)
--------- ---------- ------------------ ----------- ----------- ------------------
Net cash used in investing
activities................ (32,500) (150,100) (185,100) (85,800) (151,200) (336,300)
--------- ---------- ------------------ ----------- ----------- ------------------
Cash flows from financing
activities:
Proceeds from issuance of common
stock......................... 93,200 806,300 934,500 806,300 612,000 1,546,500
Proceeds from notes payable..... -- 110,000 110,000 -- 1,135,000 1,245,000
Net proceeds from (payments on)
notes payable to
shareholder................... 52,900 (52,900) -- (47,000) -- --
Payments on advance from
shareholder................... (100) -- -- -- -- --
Net proceeds from (payments on)
advances from related party... -- -- -- 92,500 -- --
Payments on capital lease
obligations................... -- (9,100) (9,100) (3,200) (24,400) (33,500)
--------- ---------- ------------------ ----------- ----------- ------------------
Net cash provided by
financing activities...... 146,000 854,300 1,035,400 848,600 1,722,600 2,758,000
--------- ---------- ------------------ ----------- ----------- ------------------
Net increase (decrease) in cash... (18,600) 10,400 12,000 411,200 59,800 71,800
Cash, beginning of period......... 20,200 1,600 -- 1,600 12,000 --
--------- ---------- ------------------ ----------- ----------- ------------------
Cash, end of period............... $ 1,600 $ 12,000 $ 12,000 $ 412,800 $ 71,800 $ 71,800
--------- ---------- ------------------ ----------- ----------- ------------------
--------- ---------- ------------------ ----------- ----------- ------------------
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest...................... $ -- $ 24,300 $ 24,300 $ 11,300 $ 27,300 $ 51,600
Supplemental disclosure of
non-cash transactions:
Equipment acquisitions under
capital lease................. $ -- $ 136,000 $ 136,000 $ 136,000 $ 52,100 $ 188,100
Warrants issued in connection
with debt..................... $ -- $ 7,000 $ 7,000 $ -- $ 94,500 $ 101,500
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(1) NATURE OF OPERATIONS
Ontro, Inc. ("Ontro" or the "Company"), (formerly Self-Heating Container
Corporation of California), was incorporated on November 8, 1994 under the
laws of the state of California.
Through a license agreement with Insta-Heat, Inc. (Note 8), Ontro has
exclusive worldwide rights to produce, market, and distribute a self-heating
container.
The Company is a development stage enterprise. Accordingly, the Company's
operations have been directed primarily toward raising capital, developing
business strategies, research and development, establishing sources of
supply, acquiring operating assets, initial production, and recruiting
personnel. The Company commenced operations during 1994. Operations prior to
January 1, 1995 were not significant.
Ontro has been unprofitable and has not generated revenue from the sale of
products or other sources since inception. The Company expects to incur
losses as it expands its development activities and pursues
commercialization of its technologies. The future success of the Company is
dependent upon its ability to obtain additional working capital to develop,
manufacture and market its products and, ultimately, upon its ability to
attain future profitable operations.
The Company has suffered recurring operating losses and has net capital and
working capital deficiencies. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
In order to provide financing to continue its development activities and
commercialization of its technologies as planned, the Company will pursue
financing in both public and private markets, while continuing its licensing
efforts.
(2) SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost with depreciation provided using
the straight-line method over the estimated useful lives of such assets,
which range from three to five years. Equipment held under capital leases
and leasehold improvements are amortized over the shorter of the lease term
or estimated useful life of the asset.
INTANGIBLE ASSETS
Intangible assets consist of patents, trademark, and organization costs, and
are carried at cost less accumulated amortization. Costs are amortized on a
straight-line basis over an estimated useful life of 5 years. Accumulated
amortization at December 31, 1996 was $2,700.
STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
No. 123"), which permits entities to recognize as expense over the vesting
period, the fair value of all stock-based awards on the date of
F-7
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
grant. Alternatively, SFAS No. 123 also allows entities to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB Opinion No. 25"). Under APB Opinion No.
25, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. If
the provisions of APB Opinion No. 25 are applied, pro forma net loss
disclosures for employee stock option grants made in 1996 and future years
must be provided as if the fair-value-based method defined in SFAS No. 123
had been applied (Note 7). The Company has elected to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
INCOME TAXES
Until September 1996, the Company's shareholders elected to have the Company
be treated as an S Corporation in which all income, losses and credits pass
through to the shareholders to be reported on their personal tax returns.
Thus, no deferred federal taxes were provided since the Company was not
liable for federal income taxes, and state deferred taxes were immaterial.
In September 1996, the Company became a C corporation.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO
BE DISPOSED OF. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair values of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not have a
material impact on the Company's financial position, results of operations,
or liquidity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,"
requires that fair values be disclosed for the Company's financial
instruments. The carrying amounts of cash, prepaid expenses and other
current assets, accrued consulting fees, and other accrued expenses
approximate fair values due to the short-term nature of these instruments.
F-8
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The carrying amount of the note payable is a reasonable estimate of fair
value as terms of the note payable are substantially similar to terms which
could be obtained by the Company from similar parties.
NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average number
of common shares and common equivalent shares (using the treasury stock
method) outstanding. Common equivalent shares are not included in the
per-share calculations where the effect of their inclusion would be anti-
dilutive, except that, in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 83, all common and common equivalent shares
issued during the twelve-month period prior to the initial filing of the
initial public offering have been included in the calculation as if they
were outstanding for all periods using the treasury stock method at the
anticipated initial public offering price of common stock.
The weighted average common and common equivalent shares outstanding used in
the calculation of net loss per common share are 2,423,800, and 3,024,100,
for the years ended December 31, 1995 and 1996, respectively, and 2,733,700,
and 3,864,600, for the nine month periods ended September 30, 1996 and 1997,
respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amount of expenses during the reporting period to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim financial information as of September 30, 1997, and
for the nine month periods ended September 30, 1996 and 1997, is unaudited
and, in the opinion of management, reflects all adjustments that are
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the periods then ended. All such
adjustments are of a normal and recurring nature.
F-9
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
DECEMBER 31, -------------
1996
------------ (UNAUDITED)
<S> <C> <C>
Machinery and equipment......................................... $ 205,000 $ 354,300
Molds........................................................... 56,500 93,200
Office equipment................................................ 20,400 32,900
Leasehold improvements.......................................... 30,200 30,200
------------ -------------
312,100 510,600
Less accumulated depreciation and amortization.................. (24,900) (70,700)
------------ -------------
$ 287,200 $ 439,900
------------ -------------
------------ -------------
</TABLE>
(4) INCOME TAXES
The Company has no significant taxable temporary differences which would
require recognition of deferred tax liabilities and, due to the uncertainty
of future realizability, has not recognized any deferred tax assets for
deductible temporary differences and tax operating loss carry forwards. At
December 31, 1996, the Company's net deferred tax asset, which principally
relates to the tax operating loss carry forwards, was approximately $214,000
which was offset by a valuation allowance in the same amount. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
the historical losses incurred to date and uncertainty of projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is not more likely than not that the
Company will realize the benefits of these deductible differences.
At December 31, 1996, the Company had available net operating loss carry
forwards of approximately $548,000 for federal income tax reporting purposes
which expire in 2011. The net operating loss carry forwards for state
purposes, which expire in 2001, are approximately 50% of federal amounts.
In accordance with Internal Revenue Code Section 382, the annual utilization
of net operating loss carry forwards and credits existing prior to a change
in control may be limited upon a change in control.
(5) LEASES
The Company leases office and plant facilities in Poway, California and
office and plant equipment under noncancelable operating lease agreements
that expire on various dates through October 1999. The Company also
maintains capital leases on equipment. Assets recorded under capital leases
had a total cost of $136,000 less accumulated amortization of $6,600 as of
December 31, 1996, and are included in property and equipment in the
accompanying balance sheet.
F-10
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Future minimum lease payments under capital and noncancelable operating
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASE LEASE
- ---------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
1997.................................................................. $ 57,000 $ 26,100
1998.................................................................. 57,000 3,500
1999.................................................................. 53,600 2,000
2000.................................................................. 27,400 --
---------- -----------
Total minimum lease commitments....................................... 195,000 $ 31,600
-----------
-----------
Less amount representing interest (at rates ranging from 12.0% to
28.1%).............................................................. (68,100)
----------
Present value of future minimum capital lease obligations............. 126,900
Less current portion of capital lease obligations..................... (26,800)
----------
Capital lease obligations, excluding current portion.................. $ 100,100
----------
----------
</TABLE>
Rent expense was $8,600 and $25,500 for the years ended December 31, 1995 and
1996, respectively.
(6) NOTE PAYABLE
The Board of Directors authorized the Company to borrow up to $1,320,000 in
bridge loan financing. The general terms of this financing are two year
notes at a 10% interest rate, and provide for the granting of warrants to
purchase 20,000 shares of common stock for every $110,000 borrowed by the
Company (Note 7). Payment of principal and interest are due at the earlier
of two years or the completion of an Initial Public Offering ("IPO"). In
addition, this financing imposes restrictions on dividend payments during
the term of such indebtedness. At December 31, 1996 and September 30, 1997,
the Company had $110,000 and $1,245,000 outstanding on the bridge loan
financing, respectively. (Note 7)
(7) SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized for issuance
with no par value. No shares have been issued.
STOCK OPTIONS
During the year ended December 31, 1996, the Board of Directors adopted an
incentive stock option plan for executives and key employees (the "Plan").
The Plan authorizes the granting of options to purchase shares of the
Company's common stock. Options generally vest evenly over four years from
the date of grant. Options expire ten years after the date of grant, or at
the employee's termination date, if earlier. The number of shares authorized
for the Plan is 357,400. On October 27, 1997, the number of shares
authorized was increased to 545,400.
F-11
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
At December 31, 1996, there were 237,400 shares available for grant under the
Plan. Using the Black Scholes pricing model, the Company determined, that the
per share weighted average fair value of stock options granted during 1996
was $0.38 on the date of grant. The following weighted average assumptions
were included in this method for 1996: no expected dividend yield, volatility
rate of 37.5%, risk-free interest rate of 6.0%, and an expected life of five
years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the financial
statements for its stock options issued to employees or directors of the
Company. Had the Company determined compensation cost for its stock options
based on the fair value at the grant date under SFAS No. 123, the Company's
net loss in 1996 would have been increased to the pro forma amount indicated
below:
<TABLE>
<S> <C>
Net loss, as reported........................................... $1,468,400
Pro forma net loss.............................................. 1,489,200
Pro forma net loss per common share............................. (0.47)
</TABLE>
Pro forma net loss reflects only options granted in 1996. Pro forma net loss
stated in accordance with SFAS No. 123 may not be representative of the
effects on reported net loss in future years.
The following is a summary of option activity for the period of January 1,
1996 through September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1996..................................... -- --
Granted............................................................ 120,000 $1.00
---------
Outstanding at December 31, 1996................................... 120,000 $1.00
Exercised.......................................................... (12,000) $1.00
Granted............................................................ 5,000 $3.00
---------
Outstanding at September 30, 1997.................................. 113,000 $1.00 - $3.00
---------
---------
Exercisable at September 30, 1997.................................. 12,000 $1.00
---------
---------
</TABLE>
The weighted average remaining contractual life for options outstanding as of
December 31, 1996 was approximately 10 years.
During 1996, the Board of Directors granted and the shareholders approved
1,216,506 stock options outside the Plan at a price range of $0.001 to $3.00
to non-employees. The Company recognized $379,300 of compensation expense to
non-employees relating to these options during 1996 and deferred $405,700 of
compensation expense for options that had not vested as of December 31, 1996
using the prescribed valuation methods of SFAS No. 123. Using the Black
Scholes option pricing model, the Company determined that the per share
weighted average fair value of stock options granted during 1996 was $0.67 on
the date of grant. The following weighted average assumptions were included
in this method for 1996: no expected dividend yield, volatility rate of
37.5%, risk-free interest rate of 6.0%, and an expected life of five years.
F-12
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
During the nine months ended September 30, 1997, the Board of Directors
granted and the shareholders approved 45,000 stock options outside the Plan
at a price range of $2.50 to $3.00 to non-employees. The Company recognized
$26,400 of compensation expense to non-employees relating to these options
during the nine months ended September 30, 1997 and deferred $40,800 of
compensation expense for options that had not vested as of September 30, 1997
using the Black Scholes option pricing model. The Company determined that the
per share weighted average fair value of stock options granted during the
nine months ended September 30, 1997 ranged from $1.25 to $2.00 on the date
of grant. The following weighted average assumptions were included in this
method for 1997: no expected dividend yield, volatility rate of 37.5%,
risk-free interest rate of 6.0%, and an expected life ranging from three to
five years.
At December 31, 1996, there were 542,665 options to non-employees fully
vested, 543,841 which vest upon completion of an IPO, and 80,000 options to
non-employees which vest over four years and expire after five years.
WARRANTS
In conjunction with obtaining bridge loan financing in December 1996 (Notes 6
and 11), the Company granted warrants to purchase 20,000 shares of common
stock at an exercise price of $1.00 per share. Using a prescribed valuation
method of SFAS 123, the Company determined, based upon an independent
appraisal, that the per share weighted average value of these warrants was
$0.35 on the date of grant and these warrants were deemed to have an
aggregate fair value of $7,000. The Black Scholes option pricing model used
to value these warants assumed the following: no expected dividend yield,
volatility rate of 37.5%, risk-free interest rate of 6.0%, and an expected
life of two years. The Company has recorded the value ascribed to the
warrants of $7,000 as deferred financing costs and is amortizing the amount
over the life of the related debt.
In conjunction with obtaining bridge loan financing in January 1997 through
May 1997 (Notes 6 and 11), the Company granted warrants to purchase 210,000
shares of common stock at an exercise price of $1.00 per share. Using a
prescribed valuation method of SFAS 123, the Company determined that the per
share weighted average value of these warrants was $0.45 on the date of grant
and these warrants were deemed to have an aggregate fair value of $94,500.
The Black Scholes option pricing used to value these warrants assumed the
following: no expected dividend yield, volatility rate of 37.5%, risk-free
interest rate of 6.0%, and an expected life of two years. The Company has
recorded the value ascribed to the warrants of $94,500 as deferred financing
costs and is amortizing the amount over the life of the related debt.
Amortization of such costs for the nine months ended September 30, 1997 was
$27,800.
STOCK SPLIT
On December 31, 1996, the Company completed a 28.12-for-1 stock split in the
form of a stock dividend payable to all existing shareholders. All references
in the accompanying financial statements to average number of shares
outstanding and related prices, per share amounts, stock option plan, and
warrant data have been restated to reflect the split.
F-13
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(8) LICENSE AGREEMENT
The Company is party to a license agreement with Insta-Heat, Inc. ("IHI"),
an affiliated company through common ownership. This agreement grants the
Company an exclusive worldwide license in perpetuity with respect to the
patents and technology developed by IHI. The Company is obligated to
prosecute infringement claims regarding the IHI technology and to defend any
infringement claims brought against IHI or the Company. The license
agreement requires the Company to make annual continuing royalty payments to
IHI based on a percentage of sales but not less than a minimum annual
royalty of $25,000. In March 1997, the license agreement was amended to
increase the minimum annual royalty for future periods to $50,000 and also
requires additional royalty payments from the Company on the sale of
products utilizing IHI technology subject to the Company achieving minimum
annual net operating income after payment of all taxes of no less than $4
million. Upon achieving the minimum net operating income, the IHI license
requires royalty payments equal to the greater of (i) 2% of the gross sales
of integrated thermal container and products developed in connection with
it, or (ii) $.015 per unit sold up to the first $30 million in sales by the
Company. For sales in excess of $30 million the IHI License requires royalty
payments (subject to the same minimum income levels) equal to the greater of
(i) 3% of the gross annual sales in excess of $30 million, or (ii) $.015 per
unit sold.
The Company recognized the minimum royalty liability to IHI of $25,000
during 1996.
The IHI license provides an option to the Company to purchase all of the IHI
technology and terminate the IHI license. However this option requires the
Company to pay IHI $3 million and is only available through December 31,
2000 including a one year right to extend upon the payment of $100,000.
(9) RELATED PARTY TRANSACTIONS
During 1996, IHI advanced money to the Company to be used for working
capital purposes. These balances were repaid and there was no balance
outstanding at December 31, 1996.
The Company paid accrued consulting fees to its founding shareholders during
1995 and 1996. At December 31, 1996, the Company owed $16,500 in accrued
consulting fees to one of those shareholders, which was repaid in 1997.
The Company has entered into various consulting agreements with members of
its Advisory Board resulting in current monthly commitments of approximately
$20,000 with terms expiring on various dates between August 1997 and
December 1999.
During 1996, various shareholders made loans to the Company. These loans
were payable on demand at 8% annual interest. There were no amounts owed to
shareholders at December 31, 1996.
The Company entered into various equipment lease arrangements during 1996
which were guaranteed by the Company's two officers.
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc, a stockholder of the Company. Pursuant to the
consulting agreement, Manhattan West, Inc. is to assist the Company in
locating and arranging distributor agreements. The consulting agreement is
for a
F-14
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
term of 30 months, and requires Manhattan West, Inc. be paid $15,000 per
month from July 15, 1996, through April 15, 1997 and $5,000 per month for
the remainder of the term. Manhattan West, Inc. has agreed to defer
collection of a portion of its consulting fees until after completion of the
initial public offering of the Company's securities.
(10) EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company sponsored a salary reduction
simplified employee pension plan. Employees who have completed one year of
service and are 21 years of age or older are eligible to participate.
Eligible employees may elect to defer up to 15% of annual compensation,
subject to limitations. The Company may make discretionary contributions to
the plan. The Company made no contributions to the plan during 1996.
(11) SUBSEQUENT EVENTS (UNAUDITED)
From January through May 1997, the Company borrowed $1,135,000 through
bridge loan financing. These loans included an interest rate of 10% per
annum with accrued principal and interest due at the earlier of an IPO by
the Company or 24 months. Attached to these loans are warrants to purchase
210,000 shares of common stock of the Company at a price of $1.00 per share.
One loan for $55,000, from a related party, also includes a provision which
allows the Company, at its discretion, to convert the amount of principal
and interest owed to common stock in the event of an IPO, based on a price
per share which is 50% of the IPO price.
During February through October 1997, the Board of Directors authorized the
issuance of and granted to members of its Advisory Board and Board of
Directors 55,000 non-qualified stock options (outside the Plan) at prices
ranging from $2.50 to $5.00.
In March 1997, the Company issued 12,000 shares of common stock to Kevin A.
Hainley, Chief Financial Officer, for total consideration of $12,000, or
$1.00 per share, upon exercise of an outstanding incentive stock option.
In April 1997, the Company entered into a distribution agreement with L.L.
Knickerbocker Company, Inc. ("Knickerbocker"), a shareholder of the Company,
to develop certain specialty lines of beverages which would utilize the
Company's integrated thermal containers and be marketed by Knickerbocker.
In May 1997, the Company issued 222,222 shares of common stock and warrants
to purchase 100,000 shares of common stock for $3.00 per share, for total
consideration of $500,000.
In June 1997, the Company issued 4,000 shares of common stock to Mr. Hainley
in lieu of accrued salary of $8,000 ($2.00 per share).
In July 1997, the Company issued 5,000 shares of common stock to an Advisory
Board member for total consideration of $5.00, or $0.001 per share, upon
exercise of an outstanding non-qualified stock option.
In August 1997, the Company issued 4,000 shares of common stock to Mr.
Hainley in lieu of accrued salary of $8,000 ($2.00 per share).
F-15
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
In September 1997, the Company issued 31,949 shares of common stock, for
total consideration of $100,000 ($3.13 per share).
In October 1997, the Company issued 12,820 shares of common stock, for total
consideration of $40,000 ($3.13 per share).
Also in October 1997, the Company issued 70,587 units consisting of one
share of common stock and a warrant to purchase one share of common stock
for total consideration of $300,000. The warrants expire in four years and
the exercise price is 150% of the Company's IPO price in the event of an
IPO.
In December 1997, the Company borrowed a total of $150,000 from two
investors. The loans bear interest at 12% per annum and are due and payable
upon the earlier to occur of 5 business days after the completion of the
Offering, or 120 days.
(12) COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain officers which provide
such officers, at their discretion, severance payments equal to 299% of
their average annual base salary and bonuses during the preceding five-year
period in the event of a change of control as defined in their employment
agreements.
F-16
<PAGE>
INSIDE REAR COVER--DIAGRAMS AND ARTWORK
DESCRIPTIONS AND CAPTIONS
1. Background: Brown
2. Top Center Text: "The Ontro self-heating container is designed to provide a
hot beverage anytime, anywhere...at the push of a button."
3. Center of Page: Diagram from label of container.
<TABLE>
<CAPTION>
HEATING INSTRUCTIONS
- ---------------------------------------------------
<S> <C>
1. Diagram of hand opening foil cover of bottom of Place can on flat surface and peel
can off foil.
Using your thumb push plastic center
2. Diagram of thumb pushing bottom of can inward approximately 1/2 inch
3. Diagram of top of can with "30 SEC." Above WAIT A FULL 30 SECONDS
4. Diagram of Self Heating Can upside down and After 30 seconds Turn can over
turned right side up. (right side up)
In 5 minutes, open top and enjoy a
Diagram of top of open can with steam emitting from hot beverage! (Note: It takes 3
opening "5 min." above minutes until can feels warm.)
</TABLE>
4. Bottom Right: Company logo
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST BE NOT
RELIED UPON AS HAVING BEEN AUTHORIZED THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR
AN OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 24
Dividend Policy........................................................... 25
Dilution.................................................................. 26
Capitalization............................................................ 27
Selected Financial Data................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 29
Business.................................................................. 32
Management................................................................ 44
Principal Shareholders.................................................... 52
Concurrent Offering by Selling Security Holders........................... 53
Certain Transactions...................................................... 55
Bridge Loans.............................................................. 57
Related Party Transactions................................................ 58
Description of Securities................................................. 60
Shares Eligible for Future Sale........................................... 66
Underwriting.............................................................. 68
Legal Matters............................................................. 70
Experts................................................................... 70
Additional Information.................................................... 71
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
4,000,000 UNITS
EACH UNIT CONSISTS OF
ONE SHARE OF COMMON STOCK AND
ONE COMMON STOCK PURCHASE WARRANT
---------------------
PROSPECTUS
---------------------
JOSEPH CHARLES & ASSOCIATES, INC.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The statutes, charter provisions, Bylaws, Indemnification Agreements, or
other arrangements under which any controlling person, director, or officer of
the Registrant is insured or indemnified in any manner against any liability
which he or she may incur in his or her capacity as such, are as follows:
(a) Section 317 of the California General Corporation Law provides for
the indemnification of officers and directors of the Company against
expenses, judgments, fines, and amounts paid in settlement under certain
conditions and subject to certain limitations.
(b) Article V of the Bylaws of the Company provides that the Company
shall have power to indemnify any person who is or was an agent of the
Company as defined in Section 317 of the California General Corporation Law
through Bylaw provisions, agreements with agents, vote of the stockholders
or disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California General Corporation
Law, subject to applicable limits set forth in Section 204 of the California
General Corporation Law with respect to actions for breach of duty to the
corporation and its shareholders.
(c) Article IV of the Company's Articles of Incorporation provides that
the liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under California law.
Accordingly, a director will not be liable for monetary damages for breach
of duty to the Company or its shareholders in any action brought by or in
the right of the Company. However, a director remains liable to the extent
required by California law. The provisions will not alter the liability of
directors under federal securities laws.
(d) Pursuant to authorization provided under the Articles of
Incorporation, the Company has entered into Indemnification Agreements with
each of its directors and officers. Generally, the Indemnification
Agreements attempt to provide the maximum protection permitted by California
law as it may be amended from time to time. However, an individual will not
receive indemnification for judgments, settlements or expenses if he or she
is found liable to the Company, except to the extent the court determines he
or she is fairly and reasonably entitled to indemnity for expenses, for
settlements not approved by the Company or for settlements and expenses if
the settlement is not approved by the court. The Indemnification Agreements
provide for the Company to advance to the individual any and all reasonable
expenses, including legal fees and expenses, incurred in investigating or
defending any such action, suit or proceeding. In order to receive an
advance of expenses, the individual must submit to the Company copies of
invoices presented to him or her for such expenses. Also, the individual
must repay such advances upon a final judicial decision that he or she is
not entitled to indemnification.
(e) There is directors and officers liability insurance now in effect
which insures directors and officers of the Company. Such policy expires on
December 31, 1997 and provides limits of $2,000,000 per policy year and does
not provide coverage with respect to this filing. Under the policy, the
directors and officers are insured against loss arising from claims made
against them due to wrongful acts while acting in their individual and
collective capacities as directors and officers, subject to certain
exclusions. The policy insures the Company against loss as to which its
directors and officers are entitled to indemnification. Upon completion of
this Offering, the Company intends to obtain a policy that will provide
limits of $5,000,000 per policy year and will provide coverage with respect
to this filing.
(f) The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions
by which the Underwriters have agreed to indemnify the Company, each person,
if any, who controls the Company within
II-1
<PAGE>
the meaning of Section 15 of the Securities Act of 1933 (the "Act"), each
director of the Company, and each officer of the Company who signs this
Registration Statement, with respect to information furnished in writing by
or on behalf of the Underwriters for use in the Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors of the Company pursuant to the foregoing
provision, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee and the AMEX filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee................... $ 23,500
Nasdaq listing fee.............................................. $ 36,000
NASD filing fee................................................. $ 6,600
Blue Sky fees and expenses...................................... $ *
Non-Accountable Expense Allowance to the Representative......... $ 440,000
Printing and engraving expenses................................. $ 115,000
Accounting fees and expenses.................................... $ 110,000
Legal fees and expenses......................................... $ 225,000
Transfer Agent and Registrar fees............................... $ 5,000
Miscellaneous fees.............................................. $ 238,900
---------
Total....................................................... $1,200,000
---------
---------
</TABLE>
- ------------------------
* to be filed by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since incorporation in November, 1994, the Company has sold and issued the
unregistered securities shown below, all of which reflect the fact the Company's
Common Stock was split 28.12 shares for each one share outstanding on December
31, 1996.
(1) On December 29, 1994, the Company issued 652,947 and 435,298 shares of
Common Stock to Messrs. Scudder and Berntsen, respectively, for a total
consideration of $35,000, or $.03 per share.
(2) On May 18, 1995, the Company issued 177,157 shares of Common Stock to
Harvey Ruben, Daniel Gibbs, Kevin Mineo, Dennis Webb, the McKay Trust, the
Siebert Trust, and the Christopher Trust, for a total consideration of $5,695.20
or $.03 per share.
(3) On June 26, 1995, the Company issued 28,120 shares of Common Stock to
Alan Ligi for a total consideration of $25,000, or $.89 per share.
(4) On August 24, 1995, the Company issued a total of 28,120 shares of
Common Stock to Yale Fowler and Curtis Colt for a total consideration of
$25,000, or $.89 per share.
(5) On November 22, 1995, the Company issued 28,120 shares of Common Stock
to James Hopper and Dennis Huston for a total consideration of $25,000, or $.89
per share.
(6) On December 1, 1995, the Company issued 14,060 shares of Common Stock to
Edward Villanueva for a total consideration of $12,500, or $.89 per share.
II-2
<PAGE>
(7) On January 31, 1996, the Company issued 22,496 shares of Common Stock to
James Hopper, Dennis Huston, and Richard Johnson for a total consideration of
$20,000, or $.89 per share, and issued 2,813 shares of Common Stock to the McKay
Trust for services rendered.
(8) On February 14, 1996, the Company issued 14,060 shares of Common Stock
to Fernando Fregoso and Frank Barone for services rendered, and 2,812 shares of
Common Stock to the McKay Trust for a total consideration of $2,500, or $.89 per
share.
(9) On May 15, 1996, the Company issued 29,526 shares of Common Stock to the
Kadane Trust, Alan Ligi, and Richard Johnson for a total consideration of
$26,250, or $.89 per share.
(10) On June 7, 1996, the Company issued 140,600 shares of Common Stock
(28,120 shares each) to James Hopper, Dennis Huston, Edward Villanueva, and
Messrs. Scudder and Berntsen, in exchange for their personal guarantees on
equipment leases to the Company.
(11) On June 18, 1996, the Company issued 19,684 shares of Common Stock to
James Hopper, John Caldwell, and the Christopher Trust for a total consideration
of $17,500, or $.89 per share.
(12) On June 26, 1996, the Company issued 2,812 shares of Common Stock to the
Kadane Trust for a total consideration of $2,500, or $.89 per share.
(13) On June 28, 1996, the Company issued 28,120 shares of Common Stock to
Andre Bell and William Winston for a total consideration of $25,000, or $.89 per
share.
(14) On July 1, 1996, the Company issued 42,180 shares of Common Stock each
to Jerine Rosato and Ann Davern for services rendered.
(15) On July 15, 1996, the Company issued 143,103 shares of Common Stock to
Manhattan West, Inc. for a total consideration of $100,000, or $.70 per share.
(16) On July 15, 1996, the Company issued 14,060 shares of Common Stock to
Dennis Huston for a total consideration of $12,500, or $.89 per share.
(17) On September 20, 1996, the Company issued 858,673 shares of Common Stock
to the L.L. Knickerbocker Company, Inc. for a total consideration of $600,000,
or $.70 per share.
(18) On October 1, 1996, the Company issued 42,180 shares of Common Stock to
L. Kevin Mineo for services rendered.
(19) On March 22, 1997, the Company issued 12,000 shares of Common Stock to
Kevin A. Hainley, its Chief Financial Officer, for a total consideration of
$12,000, or $1.00 per share, upon exercise of an outstanding incentive stock
option.
(20) On May 5, 1997, the Company issued 222,222 shares of Common Stock to the
Danna Trust, Salvador La Barbera, Trustee, for a total consideration of $500,000
or approximately $2.25 per share and a warrant to purchase 100,000 shares of
Common Stock for $3.00 per share.
(21) On June 1, 1997, the Company issued 4,000 shares of Common Stock to
Kevin A. Hainley, its Chief Financial Officer, in exchange for services rendered
(waiver of $8,000 in salary due or $2.00 per share).
(22) On July 24, 1997, the Company issued 5,000 shares of Common Stock to L.
Lawrence Potomac, one of its advisory board members, for a total consideration
of $5.00, or approximately $.001 per share, upon exercise of an outstanding
non-qualified stock option.
(23) On August 1, 1997, the Company issued 4,000 shares of Common Stock to
Kevin A. Hainley, its Chief Financial Officer, in exchange for services rendered
(waiver of $8,000 in salary due or $2.00 per share).
II-3
<PAGE>
(24) On September 23, 1997, the Company issued 20,000 shares of Common Stock
to C. James Moore for a total consideration of $62,600, or $3.13 per share.
(25) On September 24, 1997, the Company issued 11,949 shares of Common Stock
to Scott and Susan Moore for a total consideration of $37,400, or $3.13 per
share.
(26) On October 27, 1997, the Company issued 7,987 shares of Common Stock to
Tony Orlina and 4,833 shares of Common Stock to Stephen A. Shields for a total
consideration of $40,000, or $3.13 per share.
(27) On October 27, 1997, the Company issued to Henri B. Schkud, Grant King,
and Francesca Daniels, an aggregate of 70,587 units consisting of one share of
Common Stock and a warrant to purchase one share of Common Stock on terms
substantially similar to the Warrants for a total consideration of $300,000 or
$4.25 per unit.
The sale and issuance of securities in each of the transactions numbered 1
through 27 were deemed to be exempt under the Act by virtue of section 4(2) as
transactions by an issuer not involving any public offering. Each of the
transactions numbered 1 through 27 were also deemed to be exempt under Section
4(2) of the Act by reason of their compliance with 17 CFR 230.506. In connection
with each transaction numbered 1 through 27, the Company took such actions, and
obtained from the purchaser written representations and warranties sufficient to
provide the Company with reasonable grounds to believe: (i) all offers and sales
satisfied the terms of 17 CFR 230.501 and 17 CFR 230.502; (ii) there were no
more than 35 purchasers calculated pursuant to 17 CFR 230.501(e); (iii) each
purchaser alone or with a purchaser representative had such knowledge and
experience in financial and business matters to be capable of evaluating the
merits and risks of the investment prior to making the purchase; (iv) the
purchasers in each of the transactions numbered 15, 16 and 19 through 27 were
accredited investors as defined in 17 CFR 230.501(a); and (v) each of the
purchasers in each of transactions numbered 1 through 27 had adequate access
through employment or other relationships with the Company or its management, or
information about the Company which was supplied to them to allow them to make
an informed investment decision. In each of the transactions numbered 1 through
27, the purchasers had a previous existing personal or business relationship
with the officers and directors of the Company. Each of the transactions
numbered 1 through 27 was also deemed to be exempt pursuant to section 3(b) of
the Act as a result of being in compliance with and satisfying all of the
conditions of 17 CFR 230.505. In each of the transactions, appropriate legends
were affixed to the certificates issued in each transaction.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement. (1)
1.2 Form of Selected Dealers Agreement. (1)
3.1 Restated Articles of Incorporation filed with the California Secretary of State on March 10, 1997. (1)
3.2 Bylaws of the Registrant as amended. (1)
3.3 Form of Indemnification Agreement for Officers and Directors, and certain advisors. (1)
4.1 Form of Warrant Certificate. (1)
4.2 Form of Representative's Option. (1)
4.3 Warrant Agreement between the Company and ChaseMellon Shareholder Services. (1)
4.4 Form of Common Stock Certificate. (1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities being registered. (1)
9.1 Voting Trust Agreement between the Company, James Scudder as Trustee, and Manhattan West, Inc. (1)
10.1 Consulting Agreement effective August 22, 1996 as amended, between the Company and Rowland Hanson. (1)
10.2 Consulting Agreement dated July 15, 1996, between the Company and Manhattan West, Inc. (1)
10.3 Consulting Agreement dated August 5, 1996, between the Company and L. Lawrence Potomac. (1)
10.4 Consulting Agreement effective October 15, 1996, between the Company and Tor Petterson & Associates. (1)
10.5 Consulting Agreement dated August 11, 1997, between the Company and D. Scott Thorogood. (1)
10.6 Stock Purchase Agreement, dated July 15, 1996 between the Company and Manhattan West, Inc. (1)
10.7 Option Agreement with Manhattan West, Inc., dated July 15, 1996. (1)
10.8 Agreement of Purchase and Sale between the Company and the L.L. Knickerbocker Company, Inc., dated
September 17, 1996. (1)
10.9 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
10.10 Loan Agreement between the Company and 4D Enterprises, Inc., dated February 24, 1997. (1)
10.11 Employment Agreement between the Company and Allan C. Mayer, Jr., dated January 1, 1997. (1)
10.12 Employment Agreement between the Company and James A. Scudder, dated September 1, 1996. (1)
10.13 Employment Agreement between the Company and James L. Berntsen, dated September 1, 1996. (1)
10.14 Employment Agreement between the Company and Kevin A. Hainley, dated January 1, 1997. (1)
10.15 Distributorship Agreement with the L.L. Knickerbocker Company, Inc., dated April 4, 1997. (1)
10.16 Amended and Restated License Agreement with Insta-Heat, Inc, effective September 30, 1995. (1)
10.17 The Company's 1996 Omnibus Stock Plan. (1)
10.18 1996 Omnibus Stock Plan Form of Incentive Stock Option Agreement. (1)
10.19 1996 Omnibus Stock Plan Form of Nonqualified Stock Option Agreement. (1)
10.20 1996 Omnibus Stock Plan Form of Restricted Stock Purchase Agreement. (1)
10.21 Form of Option Agreement with Advisory Board Members listed on attached schedule. (1)
10.22 Option Agreement with David A. Fisher, dated January 6, 1997. (1)
10.23 Form of Warrant between the Company and the lenders identified on the attached schedule. (1)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.25 Stock Purchase Agreement dated May 30, 1997 between the Company and the Danna Trust. (1)
10.26 Stock Purchase Agreement dated September 23, 1997 between the Company and C. James Moore. (1)
10.27 Stock Purchase Agreement dated September 24, 1997 between the Company and Scott and Susan Moore. (1)
10.28 Evaluation Agreement dated May 23, 1997 between the Company and Nestle USA, Inc. (1)
10.29 Leases for the Company's facilities at 12625 and 12675 Danielson Court, Suites 110 and 401, dated
February 8, 1996, as amended. (1)
10.30 Lease for the Company's proposed facility to be constructed dated August 7, 1997. (1)
10.31 Stock Purchase Agreement dated October 27, 1997, between the Company and Tony Orlina. (1)
10.32 Stock Purchase Agreement dated October 27, 1997, between the Company and Stephen A. Shields. (1)
10.33 Form of Stock Purchase Agreement dated October 27, 1997 between the Company and the Selling Security
Holders. (1)
10.34 Form of Warrant between the Company and the Selling Security Holders. (1)
10.35 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
11.1 Computation of net loss per share. (1)
23.1 Consent of Fisher Thurber LLP (contained in their opinion filed as Exhibit 5). (1)
23.2 Consent of KPMG Peat Marwick LLP, Independent Public Accountants. (2)
24.1 Form of Power of Attorney. (1)
27 Financial Data Schedule. (1)
</TABLE>
- ------------------------
(1) Previously filed
(2) Filed herewith
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted, as the required information is inapplicable
or the information is presented in the Financial Statements or the notes
thereto.
ITEM 28. UNDERTAKINGS
Insofar as indemnification of liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-6
<PAGE>
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) The Registrant will provide to the underwriters at the closing(s)
specified in the underwriting agreement certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(4) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(5) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 3
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Poway, State of California, on December 16, 1997.
<TABLE>
<S> <C> <C>
ONTRO, INC.
By: JAMES A. SCUDDER
-----------------------------------------
James A. Scudder,
CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES
- --------------------------------------------------------------
JAMES A. SCUDDER LOUIS L. KNICKERBOCKER
- ------------------------------ ------------------------------
James A. Scudder Louis L. Knickerbocker
President, Chief Executive Director
Officer, By: James A. Scudder
and Director Attorney-in-Fact
December 16, 1997 December 16, 1997
JAMES L. BERNTSEN ROBERT F. COSTON
- ------------------------------ ------------------------------
James L. Berntsen Robert F. Coston
Executive Vice President, Director
Secretary By: James A. Scudder
and Director Attorney-in-Fact
December 16, 1997 December 16, 1997
KEVIN A. HAINLEY
- ------------------------------ ------------------------------
Kevin A. Hainley Douglas W. Moul
Chief Financial Officer Director
December 16, 1997 December 16, 1997
II-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
AMENDMENT NO. 3
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ONTRO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ONTRO, INC.
INDEX TO EXHIBITS
TO FORM SB-2
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement. (2)
1.2 Form of Selected Dealers Agreement. (2)
3.1 Restated Articles of Incorporation filed with the California Secretary of State on March 10, 1997. (1)
3.2 Bylaws of the Registrant as amended. (1)
3.3 Form of Indemnification Agreement for Officers and Directors, and certain advisors. (1)
4.1 Form of Warrant Certificate. (2)
4.2 Form of Representative's Option. (2)
4.3 Warrant Agreement between the Company and ChaseMellon Shareholder Services. (2)
4.4 Form of Common Stock Certificate. (2)
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities being registered. (2)
9.1 Voting Trust Agreement between the Company, James Scudder as Trustee, and Manhattan West, Inc. (1)
10.1 Consulting Agreement effective August 22, 1996 as amended, between the Company and Rowland Hanson. (1)
10.2 Consulting Agreement dated July 15, 1996, between the Company and Manhattan West, Inc. (1)
10.3 Consulting Agreement dated August 5, 1996, between the Company and L. Lawrence Potomac. (1)
10.4 Consulting Agreement effective October 15, 1996, between the Company and Tor Petterson & Associates. (1)
10.5 Consulting Agreement dated August 11, 1997, between the Company and D. Scott Thorogood. (1)
10.6 Stock Purchase Agreement, dated July 15, 1996 between the Company and Manhattan West, Inc. (1)
10.7 Option Agreement with Manhattan West, Inc., dated July 15, 1996. (1)
10.8 Agreement of Purchase and Sale between the Company and the L.L. Knickerbocker Company, Inc., dated
September 17, 1996. (1)
10.9 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
10.10 Loan Agreement between the Company and 4D Enterprises, Inc., dated February 24, 1997. (1)
10.11 Employment Agreement between the Company and Allan C. Mayer, Jr., dated January 1, 1997. (1)
10.12 Employment Agreement between the Company and James A. Scudder, dated September 1, 1996. (1)
10.13 Employment Agreement between the Company and James L. Berntsen, dated September 1, 1996. (1)
10.14 Employment Agreement between the Company and Kevin A. Hainley, dated January 1, 1997. (1)
10.15 Distributorship Agreement with the L.L. Knickerbocker Company, Inc., dated April 4, 1997. (1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- --------- ---------------------------------------------------------------------------------------------------------
10.16 Amended and Restated License Agreement with Insta-Heat, Inc, effective September 30, 1995. (1)
<S> <C>
10.17 The Company's 1996 Omnibus Stock Plan. (1)
10.18 1996 Omnibus Stock Plan Form of Incentive Stock Option Agreement. (1)
10.19 1996 Omnibus Stock Plan Form of Nonqualified Stock Option Agreement. (1)
10.20 1996 Omnibus Stock Plan Form of Restricted Stock Purchase Agreement. (1)
10.21 Form of Option Agreement with Advisory Board Members listed on attached schedule. (1)
10.22 Option Agreement with David A. Fisher, dated January 6, 1997. (1)
10.23 Form of Warrant between the Company and the lenders identified on the attached schedule. (1)
10.25 Stock Purchase Agreement dated May 30, 1997 between the Company and the Danna Trust. (1)
10.26 Stock Purchase Agreement dated September 23, 1997 between the Company and C. James Moore. (1)
10.27 Stock Purchase Agreement dated September 24, 1997 between the Company and Scott and Susan Moore. (1)
10.28 Evaluation Agreement dated May 23, 1997 between the Company and Nestle USA, Inc. (1)
10.29 Leases for the Company's facilities at 12625 and 12675 Danielson Court, Suites 110 and 401, dated
February 8, 1996, as amended. (2)
10.30 Lease for the Company's proposed facility to be constructed dated August 7, 1997. (1)
10.31 Stock Purchase Agreement dated October 27, 1997, between the Company and Tony Orlina. (1)
10.32 Stock Purchase Agreement dated October 27, 1997, between the Company and Stephen A. Shields. (1)
10.33 Form of Stock Purchase Agreement dated October 27, 1997 between the Company and the Selling Security
Holders. (1)
10.34 Form of Warrant between the Company and the Selling Security Holders. (1)
10.35 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
11.1 Computation of net loss per share. (1)
23.1 Consent of Fisher Thurber LLP (contained in their opinion filed as Exhibit 5). (2)
23.2 Consent of KPMG Peat Marwick LLP, Independent Public Accountants. (2)
24.1 Form of Power of Attorney. (1)
27 Financial Data Schedule. (1)
</TABLE>
- ------------------------
(1) Previously filed
(2) Filed herewith
<PAGE>
[Letterhead]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ontro, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Our report dated February 14, 1997, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations and has
a net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
San Diego, California
December 16, 1997
