<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
/ X/ Annual report under section 13 or 15(d) of the Securities Exchange Act
-- of 1934
For the Fiscal Year ended DECEMBER 31, 1999
/ / Transition report under section 13 or 15(d) of the Securities Exchange
-- Act of 1934
For the transition period from to .
------ ------
Commission file number: 333-39253
ONTRO, INC.
(Name of small business issuer in its charter)
CALIFORNIA 33-0638356
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
13250 GREGG STREET, POWAY, CALIFORNIA 92064
(Address of principal executive offices) (Zip code)
(858) 486-7200
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock no par
value
Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / X /
---
State issuer's revenues for its most recent year: $43,100
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant computed by reference to the price at which
the stock was sold, or the average bid and ask prices of such stock equity, as
of a date within the past 60 days: $14,391,000 as of March 22, 2000.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of latest practicable date:
As of March 22, 2000: Common Stock: 6,547,121
Warrants to purchase Common Stock: 3,980,587
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format:
Yes No X
----- -----
<PAGE>
PART I
ITEM 1. 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 UNDER THE CAPTION "RISK
FACTORS," AND ELSEWHERE IN THIS FORM 10-KSB AND IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS.
OVERVIEW
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has the rights to 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 alcoholic beverages.
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 likely require final design
improvements, testing, and marketing studies before it will be manufactured and
marketed. The Company's other potential products will require additional
research and development before they will be ready for testing and further
market studies. There can be no assurance these efforts will be successfully
completed.
The Company believes it is in the final stages of completing development of
its self-heating beverage container; production equipment is currently installed
in order to complete additional testing and improvements to different aspects of
the containers before the current demonstration models are intended to be put
into commercial production. Additional refinements which the Company anticipates
completing include, but are not limited to, the areas of seam failure, heat
transfer, content related issues, heating control, sterilization, timing and
temperature ranges, appearance, and packaging. There can be no assurance these
refinements 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 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 and successfully manufacture and market them. The Company's principal
strategies include:
TARGETING MAJOR FOOD AND BEVERAGE COMPANIES.
The Company's principal marketing strategy is to target major food and
beverage companies to use Ontro's integrated thermal container technology with
their branded products. These companies are expected to label, fill, market and
distribute containers under their own brand names. Management believes this
approach should allow the Company to access the marketing, name brand and
distribution capabilities without the high overhead costs of plant, equipment
and labor. The Company believes its integrated thermal containers could assist
food and beverage companies in offering a value-added product to complement
existing product lines and assist in expanding market share. To successfully
implement this strategy, the Company will have to complete its product
development, and market the proposed products to these food and beverage
2
<PAGE>
companies 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.
LICENSING STRATEGY TO CONTAINER MANUFACTURERS.
Concurrently with seeking food and beverage companies who will market their
branded products utilizing Ontro's technology, the Company is seeking container
manufacturers who will license Ontro's technology for the mass manufacturing of
self-heating containers. The Company signed a letter of intent with a European
manufacturer, RPC Containers Ltd., who is interested in licensing Ontro's
patents in order to manufacture and supply self-heating containers in Europe.
The Company will seek similar arrangements in the United States and elsewhere.
Management believes that its expertise lies in the research and development
of its technology. The Company's facility can supply limited quantities of
containers for market testing with its customers. If market research convinces
food and beverage companies that there is consumer demand for such a product,
Ontro will rely on large container manufacturers to mass produce self-heating
containers.
DEVELOP INTEGRATED THERMAL TECHNOLOGY FOR OTHER APPLICATIONS.
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 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.
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 9 ounces of coffee,
soup, tea, hot chocolate or alcoholic beverage, to safely warm to a
predetermined range of temperatures within a specified range of time periods.
The container can then be opened by a typical style pop top for immediate
consumption. At its current stage of development the Company's initial proposed
product has been manufactured, and test marketed in limited quantities. The
product will likely require further design improvements, testing, and marketing
studies before it is introduced into the marketplace.
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. 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.
Management believes the key attributes of its technology 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.
MINIMUM RETOOLING BY FILLERS -- The Company's products are designed to be
easily integrated into a beverage filler's existing production system. The
current design of the self-heating container is similar to a 16 oz. beverage
container, which configuration should allow fillers to integrate containers on
an existing assembly line for filling without substantial modification to their
existing manufacturing processes.
3
<PAGE>
In addition, the Company's container is designed to be easily modified to
provide heated contents at a pre-determined range of temperatures within a
specified range of time periods.
EASE OF DISPLAY BY RETAIL DISTRIBUTORS -- The container's design is
configured to 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
container 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 varied viscosity contents; maintaining structural
integrity of the container; temperature control; and ease of use. Certain
aspects of its proposed products are still under development.
OTHER PROPOSED PRODUCTS
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 may
develop 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 may be able to formulate differing active
ingredients to enable the contents of its integrated thermal containers to be
cooled. Currently the Company has not expended substantial research and
development efforts toward this and has not produced any prototypes of a
self-cooling container. While the Company's patents also cover the self-cooling
aspect, management believes its efforts are best focused on successful
introduction of the self-heating technology.
For the years ended December 31, 1999 and 1998, the Company expended
$2,400,900 and $754,200 respectively, on research and development.
MARKETING
The Company's principal marketing strategy is to persuade major food and
beverage companies to test their branded products using Ontro's integrated
thermal container technologies. The initial focus of the Company's marketing
efforts will be on food and beverage companies who the Company believes may
choose to package and sell containers including such contents as coffee, tea,
hot chocolate, low-viscosity soups, and alcoholic beverages. The Company is
targeting companies which have large operations in an effort to take advantage
of their marketing and distribution capabilities and brand name recognition.
MANUFACTURING AND PRODUCTION
The Company intends to license its patents to large container
manufacturers. The Company believes this strategy could provide material
benefits, including use of the greater manufacturing expertise of such
companies, which could result in substantial reductions in container
manufacturing costs. While no license agreements have been executed to date, the
Company anticipates entering into licenses where the licensees are responsible
for purchasing the raw materials, manufacturing or contracting for the
manufacture of the container, labeling, marketing, selling, and distributing the
integrated thermal container technology or any other related technologies
licensed to them by the Company. There can be no assurance the Company will be
able to license its technology to anyone including such companies, or on what
terms.
4
<PAGE>
In January 1999 the Company moved into its administration offices and
production facility and has installed additional integrated thermal container
manufacturing equipment. The Company's new facility is dedicated to research and
development and to manufacturing and assembling integrated thermal containers.
The purpose of the manufacturing and assembly facilities is 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 for market testing with major food and
beverage companies. The Company may, on a limited basis, fill the contents of
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 to be manufactured on the Company's premises. Certain
components, including the activation device, are purchased from third party
vendors. 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.
The Company utilizes 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 resins of different types are heated and extruded into a
multi-layer 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 more accurately 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.
To ensure contents are shelf stable, that is, they are able to be stored
for long periods without benefit of refrigeration, 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
the containers allows them to be processed through most of the commonly used
methods of sterilization which are necessary to obtain shelf stability. The
Company is continuing to further the development of its designs to enable its
containers to be suitable for the "retort" method 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
liquid beverage or other food product 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 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 licensees to comply with the internationally recognized
standards known as ISO 9000. The Company plans to actively review the production
processes and to routinely test the goods produced by its licensees. 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 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.
5
<PAGE>
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.
The Company believes increases in the prices of its raw materials should be
able to be passed along by its licensees and customers and ultimately to the
consumer. The inability to pass on increased raw material prices could have a
material adverse impact on the Company's business and financial condition.
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, as well as the
capacity, supply and demand for resin and petrochemical intermediates.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's integrated thermal container technology was developed by
Ontro and Insta-Heat, Inc ("IHI") which is a wholly-owned subsidiary of the
Company.
To date, the Company and its subsidiary have six issued patents and three
patent applications pending in the United States, each one relating to various
aspects of the Company's integrated thermal container technology. Patent No.
5,461,867 was issued to IHI on 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 to IHI on July 9, 1996, and includes one claim regarding
an end cap for a container. Patent No. 5,626,022 was issued to IHI on 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. Patent No. 5,809,786 was issued to IHI on September 22, 1998 and is a
continuation of Part of Patent No. 5,626,022 and includes seven claims regarding
a container with an integral module for heating or cooling the contents. Patent
No. 5,941,078 was issued to IHI on August 24, 1999, and is a continuation in
part of Patent No. 5,809,786 and includes eight claims regarding a container
with an integral module for heating or cooling the contents. Patent No.
5,979,164 was issued to IHI on November 9, 1999, and is a continuation in part
of Patent No. 5,626,022 and includes four 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 applications, or
if issued, such patents combined with existing 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 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. The Company also has foreign patents accepted and pending
for certain elements of the current and earlier designs of its integrated
thermal containers, and has received approval on certain of these applications.
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 competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. 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 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. 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 United States Patent and Trademark
Office ("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
6
<PAGE>
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 the Company'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 has two registered trademarks for the name "Ontro" and the
Company logo. IHI has two registered trademarks, "Anytime Anywhere," and
"Insta-Heat."
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 six firms that currently
manufacture or market self-heating containers or products sold in self-heating
containers. The Company believes two of these firms manufacture and market
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 beverages, meals, a single serving espresso and hot sake. The
Company believes each of the foreign firms holds one or more U.S. patents on
their designs. The Company believes at least three 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.
7
<PAGE>
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 increased 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 expects that licensees or distributors
will be responsible for filling the containers with beverages and complying with
appropriate FDA regulations. However, in the event containers are filled at its
own facility, the Company expects to comply with such 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 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.
EMPLOYEES
As of March 15, 2000, the Company employs 26 full-time employees. None of
the Company's employees are represented by a labor union or bound by a
collective bargaining agreement. The Company does not anticipate hiring
additional employees at this time.
8
<PAGE>
RISK FACTORS
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 December 31, 1999, the Company had a deficit
accumulated in the development stage of approximately $10.7 million. The Company
expects to incur additional operating losses through at least 2000 and possibly
thereafter. The Company has generated no significant 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. 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.
SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS; 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 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 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 12 months at its anticipated level of operations, however, the Company
believes it could implement cost saving measures in order to meet the Company's
cash requirements for the next 18 months. The Company will seek additional
funding during the next 18 months and may 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. 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.
The Company has limited 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.
EARLY STAGE OF DEVELOPMENT; ABSENCE OF PRODUCTS
The Company is a development stage enterprise. It has not completed the
final development of any product and, 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 final design improvements,
testing, and marketing studies before it will likely be introduced in the
marketplace. There can be no assurance such efforts will be successful, and the
self-heating beverage container or any of the Company's other potential products
9
<PAGE>
under development will be able to be manufactured at acceptable costs and
quality standards. 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 expects them to be
available to consumers sometime during the current year.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, additional work testing or
verifying different aspects of the containers is planned before the prototypes
will likely be put into commercial production. Such aspects include, but are not
limited to, the areas of seam failure, heat transfer, type of content issues,
heating control, sterilization, 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 control standards generally required of
containers for food and beverage products. The Company is 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 completing such design refinements
or achieve significant commercial distribution of its proposed products.
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 future
revenues from royalty payments, if any, by licensees 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. Commercial acceptance of its containers will
require the Company to successfully establish sales through 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.
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.
10
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in large part, on the Company's ability
to obtain patent protection for the proposed containers, both in the United
States and in foreign countries. Ontro and its wholly owned subsidiary, IHI,
currently have six patents issued, and three additional patent applications
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 file or have IHI file 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 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. If competitors prepare and file
patent applications in the United States that claim technology also claimed by
the Company or IHI, the Company may have to participate in interference
proceedings declared by the 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 Company'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, customers 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 design around aspects of IHI's technology which
may be patented, or duplicate the Company's trade secrets. In some cases, the
Company may rely on trade secrets to protect IHI or its inventions. There can be
no assurance trade secrets will be established, secrecy obligations will be
honored, 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.
LIMITED MANUFACTURING FACILITIES; PROBABLE SIGNIFICANT DEPENDENCE ON LICENSEES
FOR MANUFACTURE, MARKETING, AND SALE OF PROPOSED PRODUCTS
The Company's strategy is to license its integrated thermal technologies to
container manufacturers. The Company anticipates requiring such companies to be
responsible for the manufacture, marketing, and sale of the overwhelming
11
<PAGE>
majority of the Company's proposed containers. The Company has purchased
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 customers. The Company intends to require most of its
distributors and other customers to manufacture and market the containers they
purchase or 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; that 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
resources of the Company at this time. 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
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.
The Company's future growth and profitability is expected to depend, in
large part, on the success of its licensees, 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.
12
<PAGE>
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 Company's technology 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 2002. 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'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.
EXPOSURE TO FLUCTUATIONS IN RESIN PRICES AND SUPPLY
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. 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, 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.
SUPPLY OF RAW MATERIALS
The Company does not have agreements with the suppliers of any of its raw
materials or component parts. The Company believes certain components 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
or components. However, if the Company were to experience delays in raw
materials or component parts, it could delay the Company's ability to supply
containers to potential customers or its ability to conduct market research
studies, which in turn, could adversely impact the Company's business, financial
condition, and results of operations.
13
<PAGE>
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 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.
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 additional 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.
IMMEDIATE AND SUBSTANTIAL DILUTION
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, there will be dilution upon the exercise of such
securities to existing shareholders.
CONTROL BY PRESENT SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
SECURITIES
As of December 31, 1999 the Company's officers and directors own 1,076,227
of the outstanding shares representing 16.4% of the currently outstanding Common
Stock. The Company's officers and directors also have the right to acquire an
additional 853,550 shares of Common Stock, which are reserved for issuance upon
the exercise of existing options. Accordingly, if the Company's officers and
directors exercised all of the options they currently hold, they could own up to
26.1% of the Company's outstanding Common. The price range for the officers' and
directors' options is $1.00 to $3.38 per share. The concentration of ownership
by the Company's officers and directors may discourage potential acquirers from
seeking control of the Company through the purchase of Common Stock, and this
14
<PAGE>
possibility could have a depressive effect on the price of the Company's
Securities.
DILUTIVE AND OTHER ADVERSE EFFECTS OF OUTSTANDING OPTIONS AND WARRANTS
Under the terms of the options issued under the Company's 1996 Stock Plan,
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.
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.
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
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 the New York Stock Exchange ("NYSE") or
the American Stock Exchange ('AMEX"), or if listed on the Nasdaq National Market
System ("Nasdaq NMS") and the Company has at least 800 shareholders as of the
record date for the most recent meeting of shareholders. Cumulative voting is
currently in effect for the Company. 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
15
<PAGE>
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 NYSE or
AMEX, or if listed on Nasdaq NMS 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, divides 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 would extend the time required to
change the composition of the Board of Directors. The Common Shares and Warrants
are listed on Nasdaq which results in no classified Board of Directors until
potentially some time in the future.
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.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ AND POSSIBLE MARKET ILLIQUIDITY
While the Company's Common Stock and Warrants are currently listed on
Nasdaq there can be no assurance the Company will meet the criteria for
continued listing of these securities on Nasdaq. Based on existing listing
criteria, a Nasdaq listing will generally require the Company to have total
assets (excluding goodwill) which are $2,000,000 in excess of its total
liabilities, plus have a minimum public distribution of 500,000 shares of Common
Stock with a minimum of 300 public holders of 100 shares or more, a minimum bid
price of $1.00 per share, and aggregate market value of publicly held shares of
$1,000,000. Nasdaq has rules which make continued listing of companies on Nasdaq
more difficult than in the past and Nasdaq has significantly increased its
enforcement efforts with regard to Nasdaq listing standards. Removal from
Nasdaq, if it were to occur, could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's Common Stock and
the ability of purchasers of the Company's Common Stock to sell their securities
in the secondary market. Trading, if any, in the Common Stock would then be
conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the Nasdaq listing requirements, or
in what are commonly referred to as the "pink sheets." As a result, an investor
would find it more difficult to dispose of, or to obtain accurate quotations as
to the price of, the Company's Common Stock. There is no assurance the Company
will be successful in maintaining its listing.
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 Common Stock and/or warrants (collectively "Securities") were
delisted from Nasdaq 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
16
<PAGE>
annual income exceeding $200,000 individually, or $300,000 together with their
spouse). 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 the Common Stock and Warrant holders to sell any of
the Securities acquired 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
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.
ITEM 2. PROPERTIES
The Company leases approximately 42,000 square feet of space for its
production facility located at 13250 Gregg Street, Poway, California, 92064. 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 $18,700 per month) with yearly increases of 4%. Base rent
for the extension term is $0.56 per square foot (approximately $23,500 per
month) with yearly increases of 4%. In addition, the lease calls for Ontro to
establish a letter of credit for two years to the benefit of the landlord in an
amount representing two years' rent.
The Company has entered into a short-term sublease for approximately 10,000
square feet of its space, not currently needed for manufacturing purposes to an
unrelated third party.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Common Stock Warrants are traded on the
Nasdaq Small Cap Market under the symbols, "ONTR" and "ONTRW", respectively. The
Company's Units sold as part of the initial public offering were separated into
Common Stock and Warrants on May 11, 1998. The over-the-counter quotations
provided, reflect inter-dealer prices without retail mark-ups, mark-downs, or
commissions and may not reflect actual transactions. The following table sets
forth the range of high and low sales prices for the Common Stock on the Nasdaq
Small Cap Market for the 1999 periods indicated:
17
<PAGE>
Beginning Date Ending Date High Low
-------------- ----------- ---- ----
January 1 March 31 $4.00 2.50
April 1 June 30 3.13 2.44
July 1 September 30 2.88 1.75
October 1 December 31 3.50 1.13
During the last two fiscal years the Company did not declare or pay any
cash dividends on its Common Stock. The Company currently plans to retain all of
its earnings, if any, to support the development and expansion of its business,
and has no present intention on paying any dividends on the Common Stock in the
foreseeable future.
The Board of Directors authorized ongoing issuances of restricted common
stock to the Company's outside Directors and legal counsel as consideration for
a portion of legal counsel's monthly legal services and any extraordinary fees
paid to outside directors for services rendered other than attending meetings.
During 1999 the Company issued 2,832 common shares at a weighted average price
of $2.22. The Company relied upon the exemptions provided by Section 4(2) and
Regulation D of the Securities Act. Legends were placed on all certificates.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 UNDER THE CAPTION "RISK
FACTORS," AND ELSEWHERE IN THIS FORM 10-KSB AND IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS.
OVERVIEW
Ontro, Inc. is engaged in the research and development of integrated
thermal containers. The Company, through a wholly-owned subsidiary, has
worldwide 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 container manufacturers who will manufacture
and sell the containers to food and beverage companies who will fill and
distribute under their own brand names. 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 generated minimal revenues from product sales and research
and development projects and no licensing agreements have been signed. The
Company has relied on public and private equity financing as well as bridge
loans as the major sources of funds. The Company has been unprofitable since its
inception and expects to incur additional operating losses in 2000. As of
December 31, 1999, the Company's accumulated deficit was approximately $10.7
million.
RESULTS OF OPERATIONS
The Company incurred losses of $4,216,100, or $(0.65) per share, and
$2,691,700, or $(0.51) per share, for the years ended December 31, 1999 ("1999")
and December 31, 1998 ("1998"), respectively.
In 1999 the Company earned revenues of $43,100. These revenues related to
payments by a customer for research and development services and molds.
Research and development costs increased $1,646,700 to $2,400,900 in 1999
compared to $754,200 in 1998. This increase is due to (1) additional costs of
outside consultants and companies hired by the Company to aid in its research
and development efforts, (2) increase in salaries from hiring additional
full-time employees and increases in wages to existing employees, (3) increases
related to testing prototypes of self-heating containers as well as laboratory
testing of various elements of the container, materials, and the self-heating
18
<PAGE>
process, (4) increases in uses of supplies and other operational expenses, (5)
increases in depreciation related to research and development equipment, and (6)
higher rent on the Company's new facility.
The Company's marketing, general and administrative expenses increased
$83,700 to $2,132,200 in 1999 compared to $2,048,500 in 1998. This increase is
due to increases in salaries to existing employees as well as the hiring of
additional employees and overall increases in general corporate spending due to
increased business activities.
Interest expense was $18,500 in 1999 compared to $259,100 in 1998. The
decrease was a result of repayment of substantially all of the Company's debt
following its IPO.
Interest income decreased $77,700 to $292,400 in 1999 compared to $370,100
in 1998. Interest income continues to decrease as a result of a decreasing cash
balance available for investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
public and private sales of its equity securities as well as bridge financing.
As of December 31, 1999, the Company's cash and cash equivalents and investments
totaled $3,547,100.
Primary uses of cash during the year included $2,520,500 for the Company's
operations and working capital requirements, patent costs of $56,000, payments
on capital lease obligations of $18,600, and purchase of equipment and leasehold
improvements of $3,250,100. The Company plans to continue its policy of
investing excess funds in short- and long-term, investment-grade,
interest-bearing instruments.
The Company's future cash 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 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 12 months at its anticipated level of
operations, however, the Company believes it could implement cost saving
measures in order to meet the Company's cash requirements for the next 18
months. The Company will seek additional funding during the next 18 months and
may seek additional funding after such time. There can be no assurance any
additional funding 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 current shareholders. The Company has experienced
in the past, and may in the future, experience operational difficulties and
delays in its production 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.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133, as amended by SFAS No. 137,
requires companies to recognize all derivatives as either assets or liabilities
with the instruments measured at fair value and is effective for all fiscal
years beginning after June 15, 2000. The accounting for charges in fair value
gains and losses depends on the intended use of the derivative and its resulting
designation. Management does not believe the adoption of SFAS No. 133 will have
a material impact on our consolidated financial statements.
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ONTRO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report 21
Consolidated Balance Sheets 22
December 31, 1998 and 1999
Consolidated Statements of Operations: 23
For the years ended December 31, 1998 and 1999
Period from inception (November 8, 1994) to December 31, 1999
Consolidated Statements of Shareholders' Equity (Deficit): 24
Period from inception (November 8, 1994) to December 31, 1999
Consolidated Statements of Cash Flows: 25
For the years ended December 31, 1998 and 1999
Period from inception (November 8, 1994) to December 31, 1999
Notes to Consolidated Financial Statements 26
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ontro, Inc.:
We have audited the consolidated financial statements of Ontro, Inc. and
subsidiary (a development stage enterprise) as listed in the accompanying index.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ontro, Inc. and
subsidiary (a development stage enterprise) as of December 31, 1998 and 1999,
and the results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 1999 and for the period from November
8, 1994 (inception) to December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG, LLP
- --------------
San Diego, California
February 18, 2000
21
<PAGE>
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1998 and 1999
<CAPTION>
ASSETS 1998 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,279,000 2,848,800
Investments held-to-maturity 2,009,400 698,300
Prepaid expenses and other current assets 222,000 284,100
-------------- --------------
Total current assets 8,510,400 3,831,200
Investments held-to-maturity 1,026,700 --
Property and equipment, net 1,246,700 3,790,500
Deposits and other assets 1,194,300 152,700
Intangible assets, net 348,500 389,300
-------------- --------------
$ 12,326,600 8,163,700
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued expenses $ 519,600 256,200
Current portion of capital lease obligations 16,100 28,000
Notes payable -- 83,600
-------------- --------------
Total current liabilities 535,700 367,800
Capital lease obligations, excluding current portion 25,100 11,500
Accrued rent -- 18,100
-------------- --------------
Total liabilities 560,800 397,400
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued -- --
Common stock, no par value, 20,000,000 shares authorized,
6,489,478 and 6,539,145 shares issued and outstanding in
1998 and 1999, respectively 17,471,600 17,478,300
Additional paid-in capital 808,300 1,054,500
Deficit accumulated during the development stage (6,503,700) (10,719,800)
Deferred compensation (10,400) (46,700)
-------------- --------------
Total shareholders' equity 11,765,800 7,766,300
-------------- --------------
Commitments and contingencies $ 12,326,600 8,163,700
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
<CAPTION>
FROM
INCEPTION
(NOVEMBER 8,
1994) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1998 1999 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ -- 43,100 43,100
Operating expenses:
Marketing, general and administrative 2,048,500 2,132,200 6,909,200
Research and development 754,200 2,400,900 4,039,000
-------------- -------------- --------------
Total operating expenses 2,802,700 4,533,100 10,948,200
-------------- -------------- --------------
Other income (expense):
Interest expense (259,100) (18,500) (482,200)
Interest income 370,100 292,400 667,500
-------------- -------------- --------------
Total other income (expense) 111,000 273,900 185,300
-------------- -------------- --------------
Net loss $ (2,691,700) (4,216,100) (10,719,800)
============== ============== ==============
Basic and diluted net loss per share $ (0.51) (0.65)
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity (Deficit)
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN
DATE SHARES AMOUNT CAPITAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Issuance of common stock at $.032 per share 12/94 1,088,200 $ 35,000 --
Net loss -- -- --
-------------- -------------- --------------
Balance at December 31, 1994 1,088,200 35,000 --
Issuance of common stock at $.032 per share 5/95 177,100 5,700 --
Issuance of common stock at $.889 per share 6/95 - 12/95 98,400 87,500 --
Net loss -- -- --
-------------- -------------- --------------
Balance at December 31, 1995 1,363,700 128,200 --
Issuance of common stock at $.699 per share 9/96 - 10/96 1,001,800 700,000 --
Issuance of common stock at $.71 per share
for services 10/96 42,200 29,900 --
Issuance of common stock at $.889 per share 1/96 - 6/96 119,500 106,300 --
Issuance of common stock at $.889 per share
for services 1/96 - 7/96 59,100 52,500 --
Issuance of common stock at $.889 per share
in exchange for loan guarantees 6/96, 7/96 140,600 125,000 --
Fair value of detachable warrants on debt 12/96 -- -- 7,000
Issuance of stock options -- -- 785,000
Net loss -- -- --
-------------- -------------- --------------
Balance at December 31, 1996 2,726,900 1,141,900 792,000
Fair value of detachable warrants on debt 1/97 - 5/97 -- -- 94,500
Issuance of stock options to nonemployees 2/97 -- -- 16,400
Exercise of stock options 3/97, 7/97 17,000 12,000 --
Issuance of common stock and warrants 5/97 222,222 444,400 55,600
Issuance of common stock at $2.00 per share
for services 6/97, 8/97 8,000 16,000 --
Issuance of common stock at $3.13 per share 9/97 31,949 100,000 --
Issuance of common stock at $3.13 per share 10/97 12,820 40,000 --
Issuance of common stock and warrants at
$4.25 per unit 10/97 70,587 292,900 7,100
Compensation related to grant of stock options -- -- --
Net loss -- -- --
-------------- -------------- --------------
Balance at December 31, 1997 3,089,478 2,047,200 965,600
Compensation related to modification of
detachable warrants on debt 2/98 -- -- 94,300
Cancellation of stock options 3/98 -- -- (378,000)
Issuance of common stock and warrants
at $5.50 per unit, net of issuance costs 5/98 3,400,000 15,424,400 340,000
Return of equity to IHI shareholders 5/98 -- -- (397,900)
Issuance of warrants, net of issuance costs 7/98 -- -- 47,300
Issuance of stock options to a nonemployee 9/98 -- -- 137,000
Compensation related to grant of stock options -- -- --
Net loss -- -- --
-------------- -------------- --------------
Balance at December 31, 1998 6,489,478 17,471,600 808,300
Compensation related to grant of stock options -- -- 246,200
Exercise of stock options 5/99, 7/99 46,835 400 --
Issuance of common stock for services 6/99 - 12/99 2,832 6,300 --
Net loss -- -- --
-------------- -------------- --------------
Balance at December 31, 1999 6,539,145 $ 17,478,300 1,054,500
============== ============== ==============
(continued)
</TABLE>
<PAGE>
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity (Deficit)
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
DURING THE STOCKHOLDERS'
DEVELOPMENT DEFERRED EQUITY
STAGE COMPENSATION (DEFICIT)
-------------- -------------- --------------
<S> <C> <C> <C>
Issuance of common stock at $.032 per share -- -- 35,000
Net loss (12,500) -- (12,500)
-------------- -------------- --------------
Balance at December 31, 1994 (12,500) -- 22,500
Issuance of common stock at $.032 per share -- -- 5,700
Issuance of common stock at $.889 per share -- -- 87,500
Net loss (164,100) -- (164,100)
-------------- -------------- --------------
Balance at December 31, 1995 (176,600) -- (48,400)
Issuance of common stock at $.699 per share -- -- 700,000
Issuance of common stock at $.71 per share
for services -- -- 29,900
Issuance of common stock at $.889 per share -- -- 106,300
Issuance of common stock at $.889 per share
for services -- -- 52,500
Issuance of common stock at $.889 per share
in exchange for loan guarantees -- -- 125,000
Fair value of detachable warrants on debt -- -- 7,000
Issuance of stock options -- (405,700) 379,300
Net loss (1,468,400) -- (1,468,400)
-------------- -------------- --------------
Balance at December 31, 1996 (1,645,000) (405,700) (116,800)
Fair value of detachable warrants on debt -- -- 94,500
Issuance of stock options to nonemployees -- (16,400) --
Exercise of stock options -- -- 12,000
Issuance of common stock and warrants -- -- 500,000
Issuance of common stock at $2 per share for
services -- -- 16,000
Issuance of common stock at $3.13 per share -- -- 100,000
Issuance of common stock at $3.13 per share -- -- 40,000
Issuance of common stock and warrants at
$4.25 per unit -- -- 300,000
Compensation related to grant of stock options -- 23,800 23,800
Net loss (2,167,000) -- (2,167,000)
-------------- -------------- --------------
Balance at December 31, 1997, (3,812,000) (398,300) (1,197,500)
Compensation related to modification of
detachable warrants on debt -- -- 94,300
Cancellation of stock options -- 378,000 --
Issuance of common stock and warrants
at $5.50 per unit, net of issuance costs -- -- 15,764,400
Return of equity to IHI shareholders -- -- (397,900)
Issuance of warrants, net of issuance costs -- -- 47,300
Issuance of stock options to a nonemployee -- -- 137,000
Compensation related to grant of stock options -- 9,900 9,900
Net loss (2,691,700) -- (2,691,700)
-------------- -------------- --------------
Balance at December 31, 1998 (6,503,700) (10,400) 11,765,800
Compensation related to grant of stock options -- (36,300) 209,900
Exercise of stock options -- -- 400
Issuance of common stock for services -- -- 6,300
Net loss (4,216,100) -- (4,216,100)
-------------- -------------- --------------
Balance at December 31, 1999 (10,719,800) (46,700) 7,766,300
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE>
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<CAPTION>
FROM
INCEPTION
(NOVEMBER 8,
1994) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1998 1999 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,691,700) (4,216,100) (10,719,800)
Adjustments to reconcile net loss to net cash used in
operating activities, excluding effect of acquisition:
Depreciation and amortization 97,800 745,200 979,700
Amortization of deferred financing costs 155,400 -- 195,800
Issuance of common stock for services -- 6,300 229,700
Compensation for stock options and certain warrants 146,900 209,900 759,900
Increase in prepaid expenses and other current assets (212,200) (62,100) (284,100)
Decrease (increase) in deposits and other assets (1,131,800) 1,041,600 (152,700)
Increase (decrease) in accrued expenses (55,100) (263,400) 234,200
Increase in accrued rent -- 18,100 18,100
-------------- -------------- --------------
Net cash used in operating activities (3,690,700) (2,520,500) (8,739,200)
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of business (481,200) -- (481,200)
Intangible assets (253,300) (56,000) (317,000)
Purchase of property, equipment and leasehold improvements (934,800) (3,250,100) (4,516,300)
Purchase of investments held to maturity (10,351,900) (4,333,700) (14,685,600)
Proceeds from sale of investments held to maturity 7,323,600 6,664,700 13,988,300
-------------- -------------- --------------
Net cash used in investing activities (4,697,600) (975,100) (6,011,800)
-------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 16,161,000 400 18,047,900
Deferred offering costs -- -- (349,300)
Proceeds from notes payable 710,000 147,500 2,252,500
Payments on notes payable (2,105,000) (63,900) (2,168,900)
Payments on capital lease obligations (103,800) (18,600) (182,400)
-------------- -------------- --------------
Net cash provided by financing activities 14,662,200 65,400 17,599,800
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 6,273,900 (3,430,200) 2,848,800
Cash and cash equivalents, beginning of period 5,100 6,279,000 --
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 6,279,000 2,848,800 2,848,800
============== ============== ==============
Supplemental disclosure of cash flow information - cash
paid during the period for interest $ 207,400 18,500 243,300
Supplemental disclosure of noncash transactions:
Equipment acquired under capital lease -- 16,900 221,900
Warrants issued in connection with debt 94,300 -- 195,800
Detail of acquisition:
Patents acquired 105,300 -- 105,300
Liabilities assumed (22,000) -- (22,000)
Return of equity to IHI shareholders 397,900 -- 397,900
-------------- -------------- --------------
Cash paid for acquisition $ 481,200 -- 481,200
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
(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 the Company's acquisition of
Insta-Heat, Inc. (IHI) in March 1998 (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.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of Ontro, Inc. and its wholly owned subsidiary
Insta-Heat, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) CASH EQUIVALENTS
Cash equivalents consist of money market funds and U.S. Treasury
securities with an initial term of less than 3 months. For
purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(c) INVESTMENT SECURITIES
Investment securities at December 31, 1999 consist of debentures
and commercial paper. The Company classifies its debt securities
as held-to-maturity. Held-to-maturity securities are securities in
which the Company has the ability and intent to hold the security
until maturity. All held-to-maturity securities at December 31,
1999 mature in 2000 and are recorded at amortized cost. At
December 31, 1998 and 1999, the estimated fair value of each
investment approximated its amortized cost and, therefore, there
were no significant unrealized gains or losses. Interest income is
recognized when earned.
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Equipment acquired
under capital lease is recorded at the present value of the future
minimum lease payments. Depreciation and amortization of property
and equipment are calculated using the straight-line method over
the estimated useful lives of such assets, which range from 3 to
10 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.
(e) INTANGIBLE ASSETS
Intangible assets consist principally of patents and are carried
at cost less accumulated amortization. Costs are amortized on a
straight-line basis over the estimated useful life of each patent,
which ranges from 4 to 16 years. Accumulated amortization at
December 31, 1998 and 1999 was $17,700 and $33,000, respectively.
(f) STOCK-BASED COMPENSATION
The Company's stock option plan is accounted for under Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and the Company makes pro forma footnote disclosures
of the Company's operating results as if the Company had adopted
the fair value method under Statement of Financial Accounting
Standards Board (SFAS) No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION.
(g) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period
incurred.
26
<PAGE>
(h) 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 passed 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. 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.
(i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
Long-lived assets and certain identifiable intangibles are
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.
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investments
held-to-maturity and accrued expenses approximate fair values due
to the short-term nature of these instruments. The carrying amount
of the notes payable at December 31, 1999 is a reasonable estimate
of fair value as terms of these instruments are substantially
similar to terms which could be obtained by the Company from
similar parties.
(k) NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128,
EARNINGS PER SHARE. Basic earnings per share (EPS) excludes the
dilutive effects of options, warrants and other potentially
dilutive instruments. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of the Company.
Options, warrants, and other potentially dilutive instruments are
excluded from the computation of diluted EPS if their effect is
antidilutive.
27
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Numerator:
Net loss $ (2,691,700) (4,216,100)
============== ==============
Denominator:
Denominator for basic and diluted EPS -
weighted-average shares outstanding 5,259,889 6,511,763
============== ==============
Basic and diluted net loss per share $ (0.51) (0.65)
============== ==============
</TABLE>
Options and warrants totaling 5,576,252 and 6,166,967 shares were
excluded from the computations of net loss per share for the years
ended December 31, 1998 and 1999, respectively, as their effect is
antidilutive.
(l) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and
expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(m) RECLASSIFICATIONS
Certain reclassifications have been made to certain prior year
balances in order to conform with current year presentation.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Machinery and equipment $ 506,800 3,039,300
Molds 175,900 324,500
Office equipment 69,200 243,700
Leasehold improvements 708,800 1,120,200
Transportation equipment 10,500 10,500
-------------- --------------
1,471,200 4,738,200
Less accumulated depreciation and amortization (224,500) (947,700)
-------------- --------------
$ 1,246,700 3,790,500
============== ==============
</TABLE>
Assets recorded under capital leases had a total cost of $205,000, less
accumulated amortization of $88,900 as of December 31, 1998 and $221,900,
less accumulated amortization of $135,800 as of December 31, 1999, and
are included in property and equipment in the accompanying balance sheet.
28
<PAGE>
(4) INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1999 differs
from the amount computed by applying the Federal statutory rate of 34% as
follows:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Computed at Federal statutory rate $ (915,200) (1,433,500)
State tax (223,600) (337,200)
Change in the valuation allowance 1,165,400 2,176,900
Research & development credits -- (395,000)
Nondeductible expenses 11,200 25,200
Other, net (37,800) (36,400)
-------------- --------------
$ -- --
============== ==============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Accrued rent $ -- 7,700
Property and equipment due to
differences in depreciation -- 18,900
Deferred financing costs 26,100 26,100
Compensation expense 85,300 169,500
Accrued vacation 22,800 20,000
Deferred compensation 18,000 18,000
Net operating loss carryforwards 2,125,700 3,775,000
Research & development credits -- 395,000
-------------- --------------
Total gross deferred tax assets 2,277,900 4,430,200
Valuation allowance (2,226,700) (4,403,600)
-------------- --------------
Net deferred tax assets 51,200 26,600
-------------- --------------
Deferred tax liabilities:
Property and equipment due to differences in
depreciation 21,200 --
Software development costs 26,600 26,600
Other 3,400 --
-------------- --------------
Total deferred tax liabilities 51,200 26,600
-------------- --------------
Net deferred income taxes $ -- --
============== ==============
</TABLE>
29
<PAGE>
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 the uncertainty of the 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, 1999, the Company had available net operating loss
carryforwards of approximately $8,807,000 for Federal income tax
reporting purposes which expire from 2011 to 2019. The net operating loss
carryforwards for state purposes which expire from 2001 to 2004,
approximate Federal net operating loss carryforwards.
In accordance with Internal Revenue Code Section 382, the annual
utilization of net operating loss carryforwards and credits existing
prior to a change in control is limited.
(5) LEASES
The Company leases office and plant facilities in Poway, California and
office and plant equipment under noncancelable operating lease agreements
that expire at various dates during the next five years. The Company also
maintains capital leases on equipment.
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
Year ending December 31, LEASE LEASE
------------------------ -------------- --------------
<S> <C> <C>
2000 $ 29,300 343,900
2001 4,100 353,300
2002 4,100 363,000
2003 4,100 373,100
2004 1,100 --
-------------- --------------
Total minimum lease commitments 42,700 $ 1,433,300
==============
Less amount representing interest (at rates
ranging from 9.9% to 19.0%) (3,200)
--------------
Present value of future minimum capital lease
obligations
39,500
Less current portion of capital lease obligations (28,000)
--------------
Capital lease obligations, excluding current
portion $ 11,500
==============
</TABLE>
Rent expense was $81,400 and $357,900 for the years ended December 31,
1998 and 1999, respectively.
30
<PAGE>
In February, 1999, the Company entered into a sub-lease agreement,
whereby the Company sublet a portion of its main facility. Future minimum
lease income to be received under this agreement approximates $100,000
through March 2001. Total rent revenue received for the fiscal year ended
December 31, 1999 was $44,000.
(6) NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS
During 1996 and 1997, the Company obtained loans from bridge lenders
(Bridge Loans) with an interest rate of 10% per annum and accrued
principal and interest due at the earlier of 5 days after the completion
of an initial public offering (IPO) by the Company or 24 months. Attached
to these loans were warrants to purchase 230,000 shares of common stock
of the Company at a price of $1.00 per share (Note 8). One loan for
$55,000 from a related party also included a provision which allowed 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 was 50% of the IPO price.
During 1997 and 1998, the Company borrowed a total of $860,000 from
investors. These loans included interest rates ranging from 10% to 12%
per annum with accrued principal and interest due the earlier of 120 days
or 5 days after the completion of an IPO by the Company.
In May 1998, with proceeds from the Company's IPO (Note 8), the Company
repaid all of the above debts outstanding including principal and
interest.
The Company obtained a bank line of credit for $177,500 to secure a
letter of credit which collateralizes the Company's office and plant
facility lease. The line of credit is due on demand, bears interest at
8.75% payable monthly, and expires in September 2000. No amount has been
drawn on this line.
(7) SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized for
issuance with no par value. No shares have been issued.
(b) PUBLIC OFFERING
In May 1998, the Company completed an IPO of 3,400,000 units
consisting of one share of common stock and a warrant to purchase
one share of common stock of the Company at an IPO price of $5.50
per unit. Prior to the IPO, there was no public market for the
Company's common stock. The net proceeds of the offering, after
deducting applicable underwriting discounts and offering expenses,
were approximately $15.8 million. The Company used approximately
$2.1 million of the net proceeds to repay outstanding debt.
(c) STOCK INCENTIVE PLANS
During the year ended December 31, 1996, the Board of Directors
adopted an equity 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
vest evenly over 0 to 4 years from the date of grant. Options
expire 5 to 10 years after the date of grant, or at the employee's
termination date, if earlier. The number of shares authorized for
the Plan is 1,045,400. At December 31, 1999, there were 294,850
shares available for grant under the Plan.
31
<PAGE>
The following is a summary of the Plan's activity for the years ended
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
-------------- --------------
<S> <C> <C>
Outstanding at January 1, 1998 113,000 $ 1.09
Granted 333,050 1.88
-------------- --------------
Outstanding at December 31, 1998 446,050 1.68
Granted 304,500 2.13
-------------- --------------
Outstanding at December 31, 1999 750,550 $ 1.86
============== ==============
Exercisable at December 31, 1999 328,848 $ 1.69
============== ==============
</TABLE>
The range of exercise prices and weighted-average remaining contractual
life for options outstanding as of December 31, 1999 was $1.00 - $3.00
and approximately 6 years, respectively.
In September 1998 the Company adopted an Executive Performance Bonus Plan
under which 190,000 performance share awards were granted to officers and
certain key employees. On July 1, 1999, 143,050 of these share awards
vested in accordance with specified performance criteria. The remaining
46,950 performance shares were cancelled. The Company recorded $106,600
compensation expense related to the performance shares during 1999.
In August 1999, the Company adopted an Executive Performance Bonus Plan
under which 228,000 performance share awards were granted to officers and
certain key employees. All of the performance awards remained outstanding
as of December 31, 1999. These performance awards vest on July 1, 2000
upon the attainment of performance goals as described in the Executive
Performance Bonus Plan. The performance shares are earned if certain
manufacturing, licensing and cash retention objectives are attained. No
compensation expense has been recorded to date related to these awards as
the Company does not expect to meet the performance criteria.
The Company applies APB Opinion No. 25 in accounting for its stock option
grants to employees and directors of the Company and, accordingly, no
compensation cost has been recognized in the financial statements for
such options. Using the Black-Scholes option-pricing model, the Company
determined that the per share weighted-average fair value on the dates of
grant of stock options granted under the Plan during 1998 was $1.62 and
during 1999 was $1.19. The following weighted-average assumptions were
included in this method: 1998 - no expected dividend yield, volatility
rate of 142.9%, risk-free interest rate of 4.66%, and an expected life of
4 years; 1999 - no expected dividend yield, volatility rate of 66.9%,
risk-free interest rate of 6.0%, and an expected life of 4 years. 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
for the years ended December 31, 1998 and 1999 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Net loss, as reported $ (2,691,700) (4,216,100)
Pro forma net loss (2,866,300) (4,626,900)
Pro forma basic and diluted net loss per share (0.54) (0.71)
</TABLE>
32
<PAGE>
(d) NON-QUALIFIED STOCK OPTIONS
During the year ended December 31, 1998, the Board of Directors
granted 290,000 stock options outside the Plan at a price range of
$1.50 - $3.38 with vesting terms ranging from immediate to 20% per
year to a nonemployee and certain directors. The Company
recognized $146,900 of compensation expense to nonemployees
related to all options previously granted during the year ended
December 31, 1998. Using the Black-Scholes option-pricing model,
the Company determined that the per share weighted-average fair
value of nonemployee options granted during the year ended
December 31, 1998 was $1.37 on the date of grant. The following
weighted average assumptions were included in this method for
1998: no expected dividend yield, volatility rate of 104.6%, risk
free interest rate of 4.66%, and an expected life of 4 years.
During the year ended December 31, 1999, the Board of Directors
granted 150,000 stock options outside the Plan at a price of $2.00
with vesting terms of 20% per year to certain directors. Using the
Black-Scholes option-pricing model, the Company determined that
the per share weighted-average fair value of nonemployee options
granted during the year ended December 31, 1999 was $1.11 on the
date of grant. The following weighted average assumptions were
included in this method for 1999: no expected dividend yield,
volatility rate of 66.9%, risk free interest rate of 6.0%, and an
expected life of 4 years.
The following is a summary of nonqualified stock option activity
for the year ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
-------------- --------------
<S> <C> <C>
Outstanding at January 1, 1998 722,665 $ 0.69
Cancelled (10,000) 5.00
Granted 290,000 2.34
-------------- --------------
Outstanding at December 31, 1998 1,002,665 1.13
Exercised (46,835) 0.001
Granted 150,000 2.00
-------------- --------------
Outstanding at December 31, 1999 1,105,830 $ 1.30
============== ==============
</TABLE>
The following table summarizes information about nonqualified stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -------------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 1999 LIFE PRICE DECEMBER 31, 1999 PRICE
---------------- ------------------- ----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.001 490,830 2 years $ 0.001 490,830 $ 0.001
1.50 - 2.50 490,000 4 years 1.76 240,000 2.03
3.00 - 3.38 125,000 5 years 3.30 32,500 3.23
------------------- -------------------
Total 1,105,830 763,830
=================== ===================
</TABLE>
33
<PAGE>
(e) WARRANTS
In conjunction with obtaining bridge loan financing during 1996
and 1997 (Note 6), the Company granted warrants to purchase 20,000
and 210,000 shares of common stock, respectively, at an exercise
price of $1.00 per share. Using a prescribed valuation method of
SFAS No. 123, the Company determined, based upon an independent
appraisal, that the per share weighted-average value of the
warrants granted during 1996 was $0.35 on the date of grant and
these warrants were deemed to have an aggregate fair value of
$7,000. Using a prescribed valuation method of SFAS No. 123, the
Company determined that the per share weighted-average value of
the warrants granted during 1997 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 model 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 2 years.
In February and March of 1998, the bridge loan lenders agreed to
modifications in their loan agreements including an increase in
the exercise price of the attached bridge loan warrants from $1.00
to $3.00 and an extension of the exercise period. The Company
determined, using a prescribed valuation method of SFAS No. 123,
that the incremental value of the bridge loan warrants resulting
from the modification of the terms was $94,300. The Black-Scholes
option pricing model used to value the modified warrants assumed
the following: no expected dividend yield, volatility rate 37.5%,
risk free interest rate of 5.97%, and an expected life of 2 years.
The Company had recorded the value ascribed to the warrants of
$195,800 as deferred financing costs and was amortizing the amount
over the life of the Bridge Loans. Amortization of such costs for
the years ended December 31, 1998 and 1999 was $155,400 and $0,
respectively.
In May 1997, in connection with the issuance of 222,222 shares of
common stock, the Company issued warrants to purchase 100,000
shares of common stock for $3.00 per share for total consideration
for $500,000. The warrants expire in May 2000 and are all
exercisable.
In connection with the October 1997 issuance of units consisting
of 1 share of common stock and a warrant to purchase 1 share of
common stock of the Company, 70,587 warrants were issued. The
warrants have an exercise price of $8.25, are all exercisable and
expire in May 2001.
In February 1998, a stockholder, option holder and consultant of
the Company agreed to terminate its consulting agreement and to
forfeit any accrued consulting fees. In addition, their option to
purchase 543,841 shares of common stock of the Company expired
unexercised in January 1998.
In connection with the Company's IPO in May 1998, 3,400,000
warrants were issued with an exercise price of $8.25 per share.
The warrants expire in May 2001. The Company has the option to
redeem the warrants at $0.05 per warrant if the closing price of
the Company's common stock equals or exceeds $11.00 for 20
consecutive days, subject to certain restrictions.
In July 1998, the Company received net proceeds of approximately
$47,000 from the sale of 510,000 warrants. These warrants
represent the exercise of the overallotment option by the
underwriters of the Company's IPO.
34
<PAGE>
(8) IHI ACQUISITION
The Company was party to a license agreement with IHI, an affiliated
company through common ownership. This agreement granted the Company an
exclusive worldwide license in perpetuity with respect to the patents and
technology developed by IHI. The Company was obligated to prosecute
infringement claims regarding the IHI technology and to defend any
infringement claims brought against IHI or the Company. The license
agreement required 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. The Company recognized the minimum royalty liability to
IHI of $25,000 and $50,000 during 1996 and 1997, respectively.
In March 1998, the Company entered into agreements with the IHI
shareholders to utilize a portion of the proceeds of the IPO to purchase
all of their shares of IHI common stock for $25 per share. The IHI
shareholders also agreed to the termination of the license agreement and
waived any royalties due.
In May 1998, the Company acquired IHI. In accordance with Staff
Accounting Bulletin No. 48, the acquisition has been accounted for as an
acquisition of net assets recorded at historical cost and a return of
equity to IHI shareholders of $397,900 for the difference between the
amount paid and the historical cost of the net assets acquired. The net
assets acquired by the Company consisted primarily of intellectual
property related to the Company's integrated thermal technology. If IHI
had been acquired on January 1, 1997 or 1998, the acquisition would not
have had a material impact on the Company's consolidated results of
operations for any of the periods presented.
Net assets acquired are as follows:
Patents $ 105,300
Liabilities assumed (22,000)
Return of equity to IHI shareholders 397,900
---------------
Purchase price $ 481,200
===============
(9) RELATED PARTY TRANSACTIONS
The Company had previously entered into agreements with various
consultants who were members of its Advisory Board. During 1999 all such
agreements expired. In the future the Company intends to pay for such
consulting services at a daily rate on an as needed basis.
During 1998 and 1999, the Board of Directors authorized the issuance of
and granted to members of its Advisory Board and Board of Directors
290,000 and 150,000 nonqualified stock options (outside the Plan),
respectively, at prices ranging from $1.50 - $3.38 and $2.00,
respectively (Note 7).
During 1998, L.L. Knickerbocker Company, Inc. (Knickerbocker), a
shareholder of the Company, paid $10,400 for services on the Company's
behalf which was charged to operations.
(10) EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company sponsored a salary reduction
simplified employee pension plan. Full time employees who have completed
3 months of service and are 21 years of age 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 1998 or
1999.
35
<PAGE>
(11) LIQUIDITY
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
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 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 12 months
at its anticipated level of operations, however, the Company believes it
could implement cost saving measures in order to meet the Company's cash
requirements for the next 18 months. The Company will seek additional
funding during the next 18 months and may 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. 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.
(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 5-year
period in the event of a change of control, as defined in their
employment agreements.
The Company and one of its officers are defendants in a lawsuit filed by
an individual (Timothy J. Lyons) in the Superior Court of the State of
California for the County of San Diego. The complaint alleges that the
Company agreed to guarantee Mr. Lyons a fixed allocation of the units
sold by the underwriters in the IPO, and the Company breached this
obligation when the underwriters sold Mr. Lyons a lesser amount.
Subsequent to year end, Mr. Lyons dropped the lawsuit as part of a
settlement agreement with the Company.
36
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Name Age Position with the Company
- ---- --- -------------------------
James L. Berntsen 43 Executive Vice President and Director
Danae M. Brooker 33 Vice President of Sales and Marketing
Robert F. Coston 67 Director
Ann T. Davern 47 Vice President of Manufacturing
Kevin A. Hainley 43 Chief Financial Officer and Secretary
Douglas W. Moul 64 Director
James A. Scudder 43 President, Chief Executive Officer and Director
Carroll E. Taylor 59 Director
James L. Berntsen, a co-founder of the Company has been a director of the
Company since its inception in November, 1994. He currently serves as Executive
Vice President.
Danae M. Brooker joined the Company in February 1999 as director of marketing
and was made Vice President of Sales and Marketing in May 1999. From November
1997 to February 1999 she worked in various marketing positions with Hewlett
Packard. Ms. Brooker was a marketing consultant from February 1997 to November
1997 and from July 1995 to February 1997 she was an associate product manager at
Gillette.
Robert F. Coston has been a director since October, 1997. Mr. Coston has been a
self-employed consultant since 1990, specializing in production and distribution
of various food products. Mr. Coston holds a Bachelor of Science in Civil
Engineering from Lehigh University.
Ann T. Davern has been Vice President of Manufacturing since 1995. Prior to
joining the Company Ms. Davern provided consulting services for the selection
and installation of manufacturing equipment.
Kevin A. Hainley was hired as Chief Financial Officer in December 1996. Prior to
that he was Corporate Controller for HomeTown Buffet, Inc. from 1992 to 1996.
Douglas W. Moul has been a director since December, 1997. Mr. Moul is a director
for the following companies: Morgan Foods Inc. of Austin, Indiana; Shorr
Packaging of Aurora, Illinois; and National Fruit Product Company of Winchester,
Virginia. He holds a Bachelor of Science in Mechanical Engineering from the
University of British Columbia. Mr. Moul has been a consultant for the last five
years.
James A. Scudder, a co-founder of the Company has been a director of the Company
since its inception in November, 1994. He currently serves as Chairman of the
Board, President and Chief Executive Officer.
Carroll E. Taylor has been a director since September, 1998. He holds a Bachelor
of Science in Chemical Engineering from the University of Southern California
and an MBA from the University of Cincinnati. He is a private investor.
37
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth for the years indicated certain compensation of
the Company's Chief Executive Officer and each of the other four (4) most
highly-compensated of the Company's executive officers who earned or who were
paid more than $100,000 in compensation in such years ("Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
No. of shares
Name and underlying Other Annual
Principal Position Year Salary Bonus Options Compensation
- --------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
James L. Berntsen 1999 $ 155,600 $ 20,000 20,000 $ 1,000
Executive Vice President 1998 175,900 -- 40,000 1,000
1997 97,200 -- --
Ann T. Davern 1999 128,700 11,225 24,050
Vice President of Manufacturing 1998 121,080 -- 31,000
1997 68,300 -- --
Kevin A. Hainley 1999 129,900 -- 46,500
Chief Financial Officer 1998 127,200 -- 31,000
1997 96,100 -- --
Allan C. Mayer, Jr. 1999 24,500 6,000 24,000
Vice President of Marketing 1998 119,400 -- 24,000
1997 96,000 -- --
James A. Scudder 1999 181,600 20,000 20,000 1,800
Chief Executive Officer 1998 170,500 -- 40,000 1,800
and President 1997 97,200 -- --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning stock option grants made to
the Company's Chief Executive Officer and each of the other Named Executive
Officers during the fiscal year ended December 31, 1999. No stock appreciation
rights were granted or exercised during such fiscal year.
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted Exercise or
Options To Employees Base Price
Name Granted (1) In Fiscal Year per Share Expiration
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James L. Berntsen 40,000 13.1% $2.00 2004
Ann T. Davern 31,000 10.3% $2.00 2004
Kevin A. Hainley 31,000 16.3% $2.00 2004
James A. Scudder 40,000 10.1% $2.00 2004
</TABLE>
(1) Represents a performance-based option grant which vest either 100% or some
prorata amount based on the percentage of accomplishment of predetermined
performance goals on July 1, 2000.
38
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
The following table sets forth information concerning exercises of options and
the fiscal year end option values during the fiscal year ended December 31, 1999
with respect to the Company's Chief Executive Officer and each of the other
Named Executive Officers. No options or stock appreciation rights were exercised
or outstanding during such fiscal year.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options At 12-31-99 Options At 12-31-99
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James L. Berntsen 40,000 20,000 $ 14,800 $ 7,400
Ann T. Davern 39,550 15,500 14,600 5,700
Kevin A. Hainley 82,500 27,500 62,200 20,700
Allan C. Mayer, Jr. 84,000 24,000 73,300 19,400
James A. Scudder 40,000 20,000 14,800 7,400
</TABLE>
The Company has employment agreements with Messrs. Scudder and Berntsen. Mr.
Scudder's employment agreement provides for his employment by the Company as its
President, Chief Executive Officer and Chairman of the Board at a current salary
of $181,600. Mr. Berntsen's employment agreement provides for his employment by
the Company as its Executive Vice President at a current salary of $155,600.
Messrs. Scudder and Berntsen are party to agreements providing for an initial
term expiring on August 31, 1999 and such agreements were extended by the Board
of Directors for a term ending August 31, 2002. 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 five year period in the event of a
change of control as defined in their employment agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Set forth below is certain information concerning the ownership of the Company's
Common Stock as of March 22, 2000, by (i) all persons known to the Company to be
beneficial owners of more than 5% of the outstanding Common Stock, (ii) each
director of the Company, (iii) each executive officer of the Company, and (iv)
all executive officers and directors of the Company as a group. Except as
otherwise indicated, and subject to applicable community property and similar
laws, the persons named have sole voting and investment power with respect to
the securities owned by them.
39
<PAGE>
Name and Address Number of Shares Percent of
of Shareholder (1) Beneficially Owned Outstanding Shares
- ------------------ ------------------ ------------------
James L. Berntsen 500,590 (2) 7.6%
Danae M. Brooker 11,666 (3) *
Robert F. Coston 25,000 (4) *
Ann T. Davern 53,196 (5) *
Kevin A. Hainley 123,167 (6) 1.9%
Douglas W. Moul 20,263 (7) *
James A. Scudder 607,941 (8) 9.2%
Carroll E. Taylor 16,833 (9) *
L.L. Knickerbocker Co., Inc. 630,073 9.6%
30005 Comercio
Rancho Santa Margarita, CA 92688
William D. Corneliuson 587,500 (10) (11) 8.4%
777 East Wisconsin Ave., Suite 3020
Milwaukee, WI 53202
All Directors and Executive 1,358,656 (12) 17.2%
Officers as a Group (8 Persons)
* Less than 1%
(1) The address for all directors and executive officers is 13250 Gregg
Street, Poway, California, 92064.
(2) Includes 46,667 shares subject to stock options exercisable within 60
days of March 22, 2000.
(3) Includes 6,666 shares subject to stock options exercisable within 60
days of March 22, 2000.
(4) Includes 25,000 shares subject to stock options exercisable within 60
days of March 22, 2000.
(5) Includes 17,166 shares subject to stock options exercisable within 60
days of March 22, 2000.
(6) Includes 103,167 shares subject to stock options exercisable within 60
days of March 22, 2000.
(7) Includes 15,000 shares subject to stock options exercisable within 60
days of March 22, 2000.
(8) Includes 46,667 shares subject to stock options exercisable within 60
days of March 22, 2000.
(9) Includes 15,000 shares subject to stock options exercisable within 60
days of March 22, 2000.
(10) Includes 420,500 publicly traded warrants exercisable within 60 days of
March 22, 2000.
(11) As reported on Form 13-G filed December 31, 1999.
(12) Includes 275,333 shares subject to stock options exercisable within 60
days of March 22, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT TITLE
NO. -----
---
<S> <C>
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 Options. (1)
4.3 Warrant Agreement between the Company and ChaseMellon Shareholder Services. (1)
4.4 Form of Common Stock Certificate. (1)
9.1 Voting Trust Agreement between the Company, James Scudder as Trustee, and Manhattan West, Inc. (1)
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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)
10.24 Form of Employee Proprietary Information Agreements. (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. (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 KPMG Peat Marwick LLP, Independent Public Accountants.
24.1 Form of Power of Attorney. (1)
27 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference from exhibits filed with the Company's
Registration Statement on Form S- B2 (File No. 333-39253) declared effective
by the Securities Exchange Commission on May 11, 1998.
REPORTS ON FORM 8-K.
NONE
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ONTRO, INC
Registrant
By: /s/ JAMES A. SCUDDER March 30, 2000
--------------------------------------
James A. Scudder
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ KEVIN A. HAINLEY March 30, 2000
-------------------------------------
Kevin A. Hainley
Chief Financial Officer
(Principal Financial and Accounting
Officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JAMES L. BERNTSEN Director March 30, 2000
- ---------------------------------------
James L. Berntsen
/s/ ROBERT F. COSTON Director March 30, 2000
- ---------------------------------------
Robert F. Coston
/s/ DOUGLAS W. MOUL Director March 30, 2000
- ---------------------------------------
Douglas W. Moul
/s/ JAMES A. SCUDDER Director March 30, 2000
- ---------------------------------------
James A. Scudder
/s/ CARROLL E. TAYLOR Director March 30, 2000
- ---------------------------------------
Carroll E. Taylor
42
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
Ontro, Inc.:
We consent to incorporation by reference in registration statement No. 333-78817
on Form S-8 of Ontro, Inc. of our report dated February 18, 2000, relating to
the consolidated balance sheets of Ontro, Inc. and subsidiary as of December 31,
1998 and 1999, and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for the years then ended and for
the period from November 8, 1994 (inception) to December 31, 1999, which report
appears in the December 31, 1999 annual report on Form 10-KSB of Ontro, Inc.
\s\ KPMG LLP
San Diego, California
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,848,800
<SECURITIES> 698,300
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,831,200
<PP&E> 4,738,200
<DEPRECIATION> 947,700
<TOTAL-ASSETS> 8,163,700
<CURRENT-LIABILITIES> 367,900
<BONDS> 0
0
0
<COMMON> 17,478,300
<OTHER-SE> 9,712,000
<TOTAL-LIABILITY-AND-EQUITY> 8,163,700
<SALES> 0
<TOTAL-REVENUES> 43,100
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,533,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,500
<INCOME-PRETAX> (4,216,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,216,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,216,100)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
